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



For the quarterly period ended September 30, 2005



| ̈ | 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 000-51358



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Kenexa Corporation

(Exact Name of Registrant as Specified in Its Charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Pennsylvania                                                   |  | 23-3024013                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|650 East Swedesford Road Wayne, PA                             |  | 19087                                  
|(Address of Principal Executive Offices)                       |  | (Zip Code)                             



Registrants
Telephone Number, Including Area Code: (610) 971-9171



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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 an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).    Yes ̈No  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



On November 1, 2005, 17,444,174 shares of the
registrants Common Stock, $0.01 par value, were outstanding.



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##### Table of Contents

Kenexa Corporation and Subsidiaries

FORM 10-Q

Quarter Ended September 30, 2005

Table of Contents



|                               |  |                                                                                           |  |                                                                                                       |  |                                               |  |                                                                                                           |  |   
|------------------------------ |  | ----------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------- |  | --------------------------------------------- |  | --------------------------------------------------------------------------------------------------------- |  | --
|PART I  FINANCIAL INFORMATION |  |                                                                                          
|                               |  | Item 1:
Financial Statements (unaudited)                                                  |  |                                                                                                      
|                               |  |                                                                                           |  | Consolidated Balance sheets as of September 30, 2005, and December 31, 2004                           |  | 3                                            
|                               |  |                                                                                           |  | Consolidated Statements of Operations for the three and nine months ended September 30, 2005 and 2004 |  | 5                                            
|                               |  |                                                                                           |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2005, and 2004          |  | 6                                            
|                               |  |                                                                                           |  | Notes to Consolidated Financial Statements                                                            |  |                                              
|                               |  |                                                                                           |  |                                                                                                       |  | 1. Organization                               |  | 8                                                                                                        
|                               |  |                                                                                           |  |                                                                                                       |  | 2. Summary of Significant Accounting Policies |  | 8                                                                                                        
|                               |  |                                                                                           |  |                                                                                                       |  | 3. Property, Equipment and Software           |  | 12                                                                                                       
|                               |  |                                                                                           |  |                                                                                                       |  | 4. Other Accrued Liabilities                  |  | 13                                                                                                       
|                               |  |                                                                                           |  |                                                                                                       |  | 5. Line of Credit                             |  | 13                                                                                                       
|                               |  |                                                                                           |  |                                                                                                       |  | 6. Commitments and Contingencies              |  | 13                                                                                                       
|                               |  |                                                                                           |  |                                                                                                       |  | 7. Equity                                     |  | 14                                                                                                       
|                               |  |                                                                                           |  |                                                                                                       |  | 8. Related Party                              |  | 14                                                                                                       
|                               |  |                                                                                           |  |                                                                                                       |  | 9. Acquisition                                |  | 14                                                                                                       
|                               |  | Item 2:
Managements Discussion and Analysis of Financial Concern and Risks of Operations |  |                                                                                                      
|                               |  |                                                                                           |  |                                                                                                       |  | 1. Overview                                   |  | 15                                                                                                       
|                               |  |                                                                                           |  |                                                                                                       |  | 2. Recent Events                              |  | 16                                                                                                       
|                               |  |                                                                                           |  |                                                                                                       |  | 3. Sources of Revenue                         |  | 16                                                                                                       
|                               |  |                                                                                           |  |                                                                                                       |  | 4. Key Performance Indicators                 |  | 17                                                                                                       
|                               |  |                                                                                           |  |                                                                                                       |  | 5. Results of Operations:                     |  |                                                                                                          
|                               |  |                                                                                           |  |                                                                                                       |  |                                               |  | Three and nine months ended September 30, 2005 compared to three and nine months ended September 30, 2004 |  | 18
|                               |  |                                                                                           |  |                                                                                                       |  | 6. Liquidity and Capital Resources            |  | 20                                                                                                       
|                               |  | Item 3:
Quantitative and Qualitative Disclosures about Market Research                    |  | 24                                                                                                   
|                               |  | Item 4:
Controls and Procedures                                                           |  | 25                                                                                                   
|PART 2: OTHER INFORMATION      |  | 26                                                                                       
|                               |  | Item 1:
Legal Proceedings                                                                 |  | 26                                                                                                   
|                               |  | Item 2:
Unregistered Sales of Equity Securities and Use of proceeds                       |  | 26                                                                                                   
|                               |  | Item 3:
Defaults upon senior Securities                                                   |  | 27                                                                                                   
|                               |  | Item 4:
Submission of matters to a vote of security holders                               |  | 27                                                                                                   
|                               |  | Item 5:
Other Information                                                                 |  | 27                                                                                                   
|                               |  | Item 6:
Exhibits                                                                          |  | 27                                                                                                   
|Signatures                     |  | 28                                                                                       
|Exhibit Index                  |  | 29                                                                                       



2



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##### Table of Contents

PART I FINANCIAL INFORMATION



Item 1: Financial Statements



Kenexa Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(unaudited)



|                                                                             |  |                   |        |                  |   |       
|---------------------------------------------------------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                                                                             |  | September 30,2005 |        | December 31,2004
|Assets                                                                       |  |                   |        |                  |   |       
|                                                                             |  |                  
|Current assets                                                               |  |                   |        |                  |   |       
|Cash and cash equivalents                                                    |  | $                 | 39,093 |                  | $ | 9,494 
|Accounts receivable, net of allowance for doubtful accounts of $412 and $288 |  |                   | 10,426 |                  |   | 7,948 
|Unbilled receivables                                                         |  |                   | 903    |                  |   | 541   
|Deferred income taxes                                                        |  |                   | 2,016  |                  |   | 1,023 
|Prepaid expenses and other current assets                                    |  |                   | 2,245  |                  |   | 1,345 
|                                                                             |  |                   |        |                  |   |       
|Total current assets                                                         |  |                   | 54,683 |                  |   | 20,351
|                                                                             |  |                  
|Property and equipment, net of accumulated depreciation                      |  |                   | 4,396  |                  |   | 2,469 
|Software, net of accumulated depreciation                                    |  |                   | 765    |                  |   | 1,206 
|Goodwill                                                                     |  |                   | 8,811  |                  |   | 8,535 
|Intangible assets, net of accumulated amortization                           |  |                   | 139    |                  |   | 52    
|Deferred financing costs, net of accumulated amortization                    |  |                   | 73     |                  |   | 126   
|Other assets                                                                 |  |                   | 462    |                  |   | 549   
|                                                                             |  |                   |        |                  |   |       
|Total assets                                                                 |  | $                 | 69,329 |                  | $ | 33,288
|                                                                             |  |                   |        |                  |   |       



See accompanying notes to the
consolidated financial statements



3



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##### Table of Contents

Kenexa Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(unaudited)



|                                                                                                                                                                                                                                                            |  |                   |         |   |                  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                                                                                                            |  | September 30,2005 |         |   | December 31,2004 |  
|Liabilities and Shareholders Equity / (Deficiency)                                                                                                                                                                                                         |  |                   |         |   |                  |   |         |  
|                                                                                                                                                                                                                                                            |  |                  
|Current liabilities                                                                                                                                                                                                                                         |  |                   |         |   |                  |   |         |  
|Accounts payable                                                                                                                                                                                                                                            |  | $                 | 2,993   |   |                  | $ | 1,664   |  
|Note payable                                                                                                                                                                                                                                                |  |                   | 93      |   |                  |   |         |  
|Commissions payable                                                                                                                                                                                                                                         |  |                   | 807     |   |                  |   | 569     |  
|Other accrued liabilities                                                                                                                                                                                                                                   |  |                   | 2,456   |   |                  |   | 1,377   |  
|Accrued compensation and benefits                                                                                                                                                                                                                           |  |                   | 3,795   |   |                  |   | 3,487   |  
|Deferred revenue                                                                                                                                                                                                                                            |  |                   | 11,031  |   |                  |   | 6,650   |  
|Capital lease obligations                                                                                                                                                                                                                                   |  |                   | 211     |   |                  |   | 199     |  
|                                                                                                                                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Total current liabilities                                                                                                                                                                                                                                   |  |                   | 21,386  |   |                  |   | 13,946  |  
|                                                                                                                                                                                                                                                            |  |                  
|Capital lease obligations, less current portion                                                                                                                                                                                                             |  |                   | 215     |   |                  |   | 277     |  
|Note payables, less current portion                                                                                                                                                                                                                         |  |                   | 132     |   |                  |   |         |  
|Other liabilities                                                                                                                                                                                                                                           |  |                   | 66      |   |                  |   | 101     |  
|Shares subject to mandatory redemption                                                                                                                                                                                                                      |  |                   |         |   |                  |   |         |  
|Series A preferred stock, stated value $1,000; no shares authorized, issued, or outstanding at September 30, 2005; 30,000 shares authorized
and 29,953 shares issued and outstanding at December 31, 2004; redemption value of $0 and $45,601, respectively |  |                   |        |   |                  |   | 41,727  |  
|Series B preferred stock, stated value $1,000; no shares authorized, issued, or outstanding at September 30, 2005 and 12,042 shares
authorized, issued and outstanding at December 3, 2004; redemption value of $0 and $19,471, respectively                |  |                   |        |   |                  |   | 17,178  |  
|                                                                                                                                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Total liabilities                                                                                                                                                                                                                                           |  |                   | 21,799  |   |                  |   | 73,229  |  
|                                                                                                                                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Commitments and contingencies                                                                                                                                                                                                                               |  |                   |         |   |                  |   |         |  
|Redeemable class B common stock, par value $0.01; no shares authorized, issued, or outstanding at September 30, 2005; 200,000 shares
authorized and 54,479 shares issued and outstanding at December 31, 2004                                               |  |                   |        |   |                  |   | 5,291   |  
|Redeemable class C common stock, par value $0.01; no shares authorized, issued, or outstanding at September 30, 2005; 2,000,000 shares
authorized and 1,526,813 shares issued and outstanding at December 31, 2004                                          |  |                   |        |   |                  |   | 4,571   |  
|                                                                                                                                                                                                                                                            |  |                  
|Shareholders equity (deficiency)                                                                                                                                                                                                                           |  |                   |         |   |                  |   |         |  
|Preferred stock, par value $0.01; 100,000 shares authorized; no shares issued or outstanding                                                                                                                                                                |  |                   |        |   |                  |   |        |  
|Common stock, $0.01 par value; 100,000,000 shares authorized; 17,444,174 and 7,982,628 shares issued, respectively                                                                                                                                          |  |                   | 174     |   |                  |   | 79      |  
|Additional paid-in capital                                                                                                                                                                                                                                  |  |                   | 97,088  |   |                  |   | 3,682   |  
|Deferred stock compensation                                                                                                                                                                                                                                 |  |                   | (1,160  | ) |                  |   |        |  
|Notes receivable for Common stock                                                                                                                                                                                                                           |  |                   | (208    | ) |                  |   | (519    | )
|Treasury stock, shares Common stock, none and 2,410,138, respectively, at cost                                                                                                                                                                              |  |                   |        |   |                  |   | (8,772  | )
|Accumulated other comprehensive income                                                                                                                                                                                                                      |  |                   | 35      |   |                  |   | 95      |  
|Accumulated deficit                                                                                                                                                                                                                                         |  |                   | (48,399 | ) |                  |   | (44,368 | )
|                                                                                                                                                                                                                                                            |  |                   |         |   |                  |   |         |  
|Total shareholders equity / (deficiency)                                                                                                                                                                                                                   |  |                   | 47,530  |   |                  |   | (49,803 | )
|Total liabilities and shareholders equity / (deficiency)                                                                                                                                                                                                   |  | $                 | 69,329  |   |                  | $ | 33,288  |  
|                                                                                                                                                                                                                                                            |  |                   |         |   |                  |   |         |  



See accompanying notes to the
consolidated financial statements.



4



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Kenexa Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(Unaudited)



|                                                                                                            |  |                                 |            |   |                                |   |           |      |  |   |           |   |  |   |           |  
|----------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------ | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                                                            |  | Three months EndedSeptember 30, |            |   | Nine Months EndedSeptember 30, |  
|                                                                                                            |  | 2005                            |            |   | 2004                           |   |           | 2005 |  |   | 2004      |  
|Revenue                                                                                                     |  |                                 |            |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Subscription revenue                                                                                        |  | $                               | 13,377     |   |                                | $ | 9,347     |      |  | $ | 36,370    |   |  | $ | 26,451    |  
|Other revenue                                                                                               |  |                                 | 3,857      |   |                                |   | 2,559     |      |  |   | 11,201    |   |  |   | 6,881     |  
|                                                                                                            |  |                                 |            |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Total revenue                                                                                               |  |                                 | 17,234     |   |                                |   | 11,906    |      |  |   | 47,571    |   |  |   | 33,332    |  
|                                                                                                            |  |                                 |            |  
|Cost of revenue (exclusive of depreciation, show separately below)                                          |  |                                 | 4,935      |   |                                |   | 3,495     |      |  |   | 13,592    |   |  |   | 8,535     |  
|                                                                                                            |  |                                 |            |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Gross profit                                                                                                |  |                                 | 12,299     |   |                                |   | 8,411     |      |  |   | 33,979    |   |  |   | 24,797    |  
|                                                                                                            |  |                                 |            |  
|Operating expenses:                                                                                         |  |                                 |            |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Sales and marketing                                                                                         |  |                                 | 4,218      |   |                                |   | 3,212     |      |  |   | 11,748    |   |  |   | 9,901     |  
|General and administrative                                                                                  |  |                                 | 4,036      |   |                                |   | 2,516     |      |  |   | 10,912    |   |  |   | 7,197     |  
|Research and development                                                                                    |  |                                 | 961        |   |                                |   | 1,107     |      |  |   | 3,038     |   |  |   | 3,234     |  
|Depreciation and amortization                                                                               |  |                                 | 498        |   |                                |   | 638       |      |  |   | 1,555     |   |  |   | 1,814     |  
|                                                                                                            |  |                                 |            |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Total operating expenses                                                                                    |  |                                 | 9,713      |   |                                |   | 7,473     |      |  |   | 27,253    |   |  |   | 22,146    |  
|                                                                                                            |  |                                 |            |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Income from operations before income taxes and interest expense                                             |  |                                 | 2,586      |   |                                |   | 938       |      |  |   | 6,726     |   |  |   | 2,651     |  
|                                                                                                            |  |                                 |            |  
|Interest (income) expense                                                                                   |  |                                 | (220       | ) |                                |   | 43        |      |  |   | (222      | ) |  |   | 138       |  
|                                                                                                            |  |                                 |            |  
|Interest on mandatory redeemable shares                                                                     |  |                                 | 0          |   |                                |   | 2,109     |      |  |   | 3,396     |   |  |   | 6,262     |  
|                                                                                                            |  |                                 |            |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Income (loss) from operations before income tax                                                             |  |                                 | 2,806      |   |                                |   | (1,214    | )    |  |   | 3,552     |   |  |   | (3,749    | )
|                                                                                                            |  |                                 |            |  
|Income tax expense on operations                                                                            |  |                                 | 219        |   |                                |   | 81        |      |  |   | 477       |   |  |   | 143       |  
|                                                                                                            |  |                                 |            |  
|Net income (loss)                                                                                           |  |                                 | 2,587      |   |                                |   | (1,295    | )    |  |   | 3,075     |   |  |   | (3,892    | )
|                                                                                                            |  |                                 |            |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Accretion of redeemable class B common shares and class C common shares                                     |  |                                 | 0          |   |                                |   | (255      | )    |  |   | (41,488   | ) |  |   | (765      | )
|                                                                                                            |  |                                 |            |  
|Net income (loss) available to common shareholders                                                          |  | $                               | 2,587      |   |                                | $ | (1,550    | )    |  | $ | (38,413   | ) |  | $ | (4,657    | )
|                                                                                                            |  |                                 |            |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Basic net income (loss) per share to common shareholders                                                    |  | $                               | 0.15       |   |                                | $ | (0.26     | )    |  | $ | (4.02     | ) |  | $ | (0.77     | )
|                                                                                                            |  |                                 |            |  
|Weighted average shares used to compute net income (loss) to common shareholders per common share  basic   |  |                                 | 17,436,026 |   |                                |   | 6,033,834 |      |  |   | 9,558,486 |   |  |   | 6,033,834 |  
|                                                                                                            |  |                                 |            |  
|Diluted net income (loss) per share to common shareholders                                                  |  | $                               | 0.15       |   |                                | $ | (0.26     | )    |  | $ | (4.02     | ) |  | $ | (0.77     | )
|                                                                                                            |  |                                 |            |  
|Weighted average shares used to compute net income (loss) to common shareholders per common share  diluted |  |                                 | 17,851,098 |   |                                |   | 6,033,834 |      |  |   | 9,558,486 |   |  |   | 6,033,834 |  



See accompanying notes to the
consolidated financial statements.



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##### Table of Contents

Kenexa Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                        |  |                                |        |   |      |   |        |  
|--------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                                                                        |  | Nine Months endedSeptember 30, |       
|                                                                                        |  | 2005                           |        |   | 2004 |  
|Cash flows from operating activities                                                    |  |                                |        |   |      |   |        |  
|Net income (loss)                                                                       |  | $                              | 3,075  |   |      | $ | (3,892 | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities |  |                                |        |   |      |   |        |  
|Depreciation and amortization                                                           |  |                                | 1,555  |   |      |   | 1,814  |  
|Amortization of deferred financing fees                                                 |  |                                | 69     |   |      |   | 62     |  
|Bad debt expense                                                                        |  |                                | 154    |   |      |   | 252    |  
|Accrued interest on mandatory redeemable preferred stock                                |  |                                | 3,396  |   |      |   | 6,261  |  
|Changes in assets and liabilities                                                       |  |                                |        |   |      |   |        |  
|Accounts and unbilled receivables                                                       |  |                                | (2,994 | ) |      |   | (1,992 | )
|Deferred income taxes                                                                   |  |                                | (993   | ) |      |   |       |  
|Prepaid expenses and other current assets                                               |  |                                | (896   | ) |      |   | (271   | )
|Other assets                                                                            |  |                                | 87     |   |      |   | (149   | )
|Accounts payable                                                                        |  |                                | 1,107  |   |      |   | (245   | )
|Accrued compensation and other accrued liabilities                                      |  |                                | 2,279  |   |      |   | 574    |  
|Commissions payable                                                                     |  |                                | 237    |   |      |   | 33     |  
|Deferred revenue                                                                        |  |                                | 4,331  |   |      |   | 2,348  |  
|Other liabilities                                                                       |  |                                | (35    | ) |      |   | (29    | )
|                                                                                        |  |                                |        |   |      |   |        |  
|Net cash provided by operating activities                                               |  |                                | 11,372 |   |      |   | 4,766  |  
|                                                                                        |  |                                |        |   |      |   |        |  
|Cash flows from investing activities                                                    |  |                                |        |   |      |   |        |  
|Capital expenditures                                                                    |  |                                | (2,840 | ) |      |   | (949   | )
|Acquisition, net of cash acquired                                                       |  |                                | (164   | ) |      |   |       |  
|                                                                                        |  |                                |        |   |      |   |        |  
|Net cash used in investing activities                                                   |  |                                | (3,004 | ) |      |   | (949   | )
|                                                                                        |  |                                |        |   |      |   |        |  



See accompanying notes to the
consolidated financial statements.



6



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##### Table of Contents

Kenexa Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS  (Continued)

(In thousands)

(Unaudited)



|                                                                        |  |                                |         |   |      |   |        |  
|----------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------ | -
|                                                                        |  | Nine Months EndedSeptember 30, |        
|                                                                        |  | 2005                           |         |   | 2004 |  
|Cash flows from financing activities                                    |  |                                |         |   |      |   |        |  
|Net repayments under line of credit agreement                           |  |                                |        |   |      |   | (1,558 | )
|Repayments of notes payable                                             |  |                                | (16     | ) |      |   |       |  
|Repurchase of common shares                                             |  |                                | (515    | ) |      |   |       |  
|Collections of notes receivable                                         |  |                                | 160     |   |      |   |       |  
|Net proceeds from initial public offering of Common stock               |  |                                | 61,840  |   |      |   |       |  
|Redemption of series A and B preferred stock                            |  |                                | (40,000 | ) |      |   |       |  
|Deferred financing costs                                                |  |                                | (16     | ) |      |   | (5     | )
|Repayments of capital lease obligations                                 |  |                                | (171    | ) |      |   | (269   | )
|                                                                        |  |                                |         |   |      |   |        |  
|Net cash provided by (used in) financing activities                     |  |                                | 21,282  |   |      |   | (1,832 | )
|                                                                        |  |                                |         |   |      |   |        |  
|Effect of exchange rate changes on cash and cash equivalents            |  |                                | (51     | ) |      |   | 40     |  
|                                                                        |  |                               
|Net increase in cash and cash equivalents                               |  |                                | 29,599  |   |      |   | 2,025  |  
|                                                                        |  |                               
|Cash and cash equivalents at beginning of period                        |  |                                | 9,494   |   |      |   | 3,078  |  
|                                                                        |  |                                |         |   |      |   |        |  
|Cash and cash equivalents at end of period                              |  | $                              | 39,093  |   |      | $ | 5,103  |  
|                                                                        |  |                                |         |   |      |   |        |  
|Supplemental disclosures of cash flow information                       |  |                                |         |   |      |   |        |  
|                                                                        |  |                               
|Cash paid (received) during the period for:                             |  |                                |         |   |      |   |        |  
|Interest                                                                |  | $                              | (272    | ) |      | $ | 94     |  
|                                                                        |  |                                |         |   |      |   |        |  
|Income taxes                                                            |  | $                              | 360     |   |      | $ | 227    |  
|                                                                        |  |                                |         |   |      |   |        |  
|Non-cash investing and financing activities                             |  |                                |         |   |      |   |        |  
|                                                                        |  |                               
|Accretion of class B and class C common stock to redemption value       |  |                                | 41,448  |   |      |   | 765    |  
|Redemption and conversion of class B and C common stock to Common stock |  |                                | 51,351  |   |      |   |       |  
|                                                                        |  |                               
|Notes receivable for Common stock applied against accrued bonus         |  |                                | 151     |   |      |   |       |  
|                                                                        |  |                                |         |   |      |   |        |  



See accompanying notes to the
consolidated financial statements.



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##### Table of Contents

Kenexa Corporation and Subsidiaries

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)



All amounts are in thousands, except share and per share amounts, unless
noted otherwise.



1. Organization



Kenexa Corporation, and its
subsidiaries (collectively the Company), commenced operations in 1987 as a provider of recruiting services to a wide variety of industries. In 1993, the Company offered its first automated talent management system. Between 1994 and 1998,
the Company acquired 15 businesses that enabled it to offer comprehensive human capital management, or HCM, services integrated with web-based technology. Currently, the Company transacts business primarily through its wholly owned subsidiary,
Kenexa Technology, Inc. The Company operates in one segment.



2. Summary of Significant Accounting Policies - Unaudited Interim Results.



The accompanying financial statements for the three and nine months ended September 30, 2005 and 2004 have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial position and the results of operations and cash flows for the three and nine months ended September 30, 2005 and 2004 have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or eliminated. The results for the three and nine months ended September 30, 2005 are
not necessarily indicative of the results to be expected for the year ending December 31, 2005 or for any other interim period.



Principles of Consolidation



The consolidated financial statements of the Company include the accounts of Kenexa Corporation and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.



Cash and Cash
Equivalents



Cash and cash equivalents consist of highly liquid
investments with remaining maturities of three months or less at the time of purchase.



Prepaid Expenses and Other Assets



Prepaid expenses and other
current assets consist primarily of prepaid software maintenance agreements, deferred implementation costs, insurance and other current assets. Deferred implementation costs represent internal payroll and other costs incurred in connection with the
customization of the sites associated with the internet hosting arrangements. These costs are deferred over the implementation period, typically three to four months, and are expensed ratably over the subscription period, typically one to three
years. These amounts aggregated $612 and $897 at December 31, 2004 and September 30, 2005, respectively. The current portion of these deferred costs of $447 and $816 at December 31, 2004 and September 30, 2005, respectively, are included in other
current assets and the noncurrent portion of $165 and $81 at December 31, 2004 and September 30, 2005, respectively, are included in other assets in the accompanying consolidated balance sheets.



Software Developed for Service Transactions



In accordance with EITF 00-3, Application of AICPA Statement of Position 97-2 to
Arrangements That Include the Right to Use Software Stored on Another Entitys Hardware, the Company applies AICPA Statement of Position No. 98-1,Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. The costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, will be capitalized until the software is
substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will
result in additional functionality. Maintenance and training cost are expensed as incurred. Internal use software is amortized on a straight-line basis over its estimated useful life, generally three years. Management evaluates the useful lives of
these assets on an annual basis and tests for impairments whenever events or changes in circumstances occur that could impact the recoverability of these assets. There were no impairments to internal software in any of the periods covered in this
report.



The Company capitalized software costs for the three and nine months
ended September 30, 2005 of $321 and $585, respectively. Amortization of capitalized internal-use software costs for the three and nine months ended September 30, 2005 were $154 and $511, respectively.



8



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##### Table of Contents

Revenue Recognition



The Company derives its revenue from two sources: (1) subscription revenue for solutions, which is comprised of subscription fees from clients accessing our on-demand
software, consulting services, outsourcing services and proprietary content, and from clients purchasing additional support beyond the standard support that is included in the basic subscription fee; and (2) other fees for discrete professional
services. Because the Company provides its solutions as a service, the Company follows the provisions of Securities and Exchange Commission Staff Accounting Bulletin No. 101,Revenue Recognition in Financial Statements, as amended by Staff
Accounting Bulletin No. 104,Revenue Recognition. On August 1, 2003, the Company adopted Emerging Issues Task Force Issue No. 00-21,Revenue Arrangements with Multiple Deliverables. The Company recognizes revenue when all of the
following conditions are met:



| |  |  | There is persuasive evidence of an arrangement;
| | - |  | -----------------------------------------------



| |  |  | The service has been provided to the client;
| | - |  | --------------------------------------------



| |  |  | The collection of the fees is probable; and
| | - |  | -------------------------------------------



| |  |  | The amount of fees to be paid by the client is fixed or determinable.
| | - |  | ---------------------------------------------------------------------



Subscription fees and support revenues are recognized on a monthly basis over the terms of the contracts. Amounts that have been invoiced are recorded in accounts
receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.



Discrete professional services and other revenues, when sold with subscription and support offerings, are accounted for separately since these services have value to the
customer on a stand-alone basis and there is objective and reliable evidence of fair value of the delivered elements. The Companys arrangements do not contain general rights of return. Additionally, when professional services are sold with
other elements, the consideration from the revenue arrangement is allocated among the separate elements based upon the relative fair value. Professional services and other revenues are recorded as follows: Consulting revenues are recognized upon
completion of the contracts that are of short duration (generally less than 60 days) and as the services are rendered for contracts of longer duration.



In determining whether revenues from professional services can be accounted for separately from subscription revenue, the Company considers the following factors for each
agreement: availability from other vendors, whether objective and reliable evidence of fair value exists of the undelivered elements, the nature and the timing of when the agreement was signed in comparison to the subscription agreement start date
and the contractual dependence of the subscription service on the clients satisfaction with the other services. If the professional service does not qualify for separate accounting, the Company recognizes the revenue ratably over the remaining
term of the subscription contract. In these situations the Company defers the direct and incremental costs of the professional service over the same period as the revenue is recognized.



Deferred revenue represents payments received or accounts receivable from the Companys clients for amounts billed in advance of
subscription services being provided.



The Company records
Out-of-Pocket Expenses Incurred (EITF 01-14), which requires that reimbursements received for out-of-pocket expenses be classified as revenues and not as cost reductions. Before the effective date of EITF 01-14,
out-of-pocket reimbursements from clients were netted with the applicable costs. These items primarily include travel, meals and certain telecommunication costs. For the three and nine months ended September 30, 2005, reimbursed expenses totaled
$387 and $1,071, respectively.



Self-Insurance



The Company is self-insured for the majority of its health insurance costs, including claims
filed and claims incurred but not reported subject to certain stop loss provisions. The Company estimated the liability based upon managements judgment and historical experience. At December 31, 2004 and September 30, 2005, self-insurance
accruals totaled $205 and $249, respectively. Management continuously reviews the adequacy of the Companys stop loss insurance coverage. Material differences may result in the amount and timing of insurance expense if actual experience differs
significantly from managements estimates.



9



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##### Table of Contents

Concentration of Credit Risk



Financial instruments which potentially expose the Company to concentration of credit risk consist primarily of accounts receivable. Credit
risk arising from receivables is mitigated due to the large number of clients comprising the Companys client base and their dispersion across various industries. The clients are concentrated primarily in the Companys U.S. market area. At
September 30, 2005, the Company had one client that represented more than 10% of the net accounts receivable balance. There were no clients that individually exceeded 10% of the Companys revenues.



Cash balances are maintained at several banks. Accounts located in the United States are
insured by the Federal Deposit Insurance Corporation (FDIC) up to $100. Certain operating cash accounts may exceed the FDIC limits.



Earnings (Loss) Per Share



The Company follows SFAS 128, Earnings Per Share. Under SFAS 128, companies that are publicly held or have complex capital structures are required to present
basic and diluted earnings per share on the face of the statement of operations. Earnings (loss) per share are based on the weighted average number of shares and common stock equivalents outstanding during the period. In the calculation of diluted
earnings per share, shares outstanding are adjusted to assume conversion of the Companys non-interest bearing convertible stock and the exercise of options and warrants if they are dilutive. In the calculation of basic earnings per share,
weighted average numbers of shares outstanding are used as the denominator. For the three months ended September 30, 2005, where the Company had net income, both basic and diluted earnings per share are presented. For the three months ended
September 30, 2004 and for the nine months ended September 30, 2005 and 2004 the Company had a net loss. As a result, the common stock equivalents of stock options, warrants and convertible securities issued and outstanding for these periods were
not included in the computation of diluted earnings per share for the periods then ended as they were antidilutive.



|                                                                                                                     |  |                                 |            |      |                                |           |      |  |   |           |   |  |   |           |  
|-------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | ---- | ------------------------------ | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                                                                     |  | Three Months EndedSeptember 30, |            |      | Nine Months EndedSeptember 30, |          
|                                                                                                                     |  | 2005                            |            | 2004 |                                |           | 2005 |  |   | 2004      |  
|Net income (loss)                                                                                                    |  | $                               | 2,587      |      | $                              | (1,295    | )    |  | $ | 3,075     |   |  | $ | (3,892    | )
|Accretion of redeemable class B common stock and redeemable class C common stock                                     |  |                                 |           |      |                                | (255      | )    |  |   | (41,488   | ) |  |   | (765      | )
|                                                                                                                     |  |                                 |            |      |                                |           |      |  |   |           |   |  |   |           |  
|Net income (loss) available to common shareholders                                                                   |  | $                               | 2,587      |      | $                              | (1,550    | )    |  | $ | (38,413   | ) |  | $ | (4,657    | )
|                                                                                                                     |  |                                 |            |      |                                |           |      |  |   |           |   |  |   |           |  
|Weighted average shares used to compute net income (loss) available to common shareholders per common sharebasic    |  |                                 | 17,436,026 |      |                                | 6,033,834 |      |  |   | 9,558,486 |   |  |   | 6,033,834 |  
|                                                                                                                     |  |                                 |            |      |                                |           |      |  |   |           |   |  |   |           |  
|Effect of dilutive stock options and awards                                                                          |  |                                 | 415,072    |      |                                |          |      |  |   |          |   |  |   |          |  
|                                                                                                                     |  |                                 |            |      |                                |           |      |  |   |           |   |  |   |           |  
|Weighted average shares used to compute net income (loss) available to common shareholders per common share diluted |  |                                 | 17,851,098 |      |                                | 6,033,834 |      |  |   | 9,558,486 |   |  |   | 6,033,834 |  
|                                                                                                                     |  |                                 |            |      |                                |           |      |  |   |           |   |  |   |           |  
|Basic net income (loss) per share to common shareholder                                                              |  | $                               | 0.15       |      | $                              | (0.26     | )    |  | $ | (4.02     | ) |  | $ | (0.77     | )
|                                                                                                                     |  |                                 |            |     
|Diluted net income (loss) per share to common shareholder                                                            |  | $                               | 0.15       |      | $                              | (0.26     | )    |  | $ | (4.02     | ) |  | $ | (0.77     | )



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##### Table of Contents

Stock-Based Compensation



The Company has adopted the disclosure only provisions of SFAS No. 123,Accounting for Stock-Based Compensation (SFAS 123). SFAS 123 encourages, but
does not require, companies to record compensation cost for stock-based compensation plans at fair value. The Company has elected to continue to account for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees and related interpretations, as permitted by SFAS 123. Compensation expense for stock options is measured as the excess, if any, of the fair value of the Companys common stock over the amount an
employee or director must pay to acquire this stock. Compensation for equity instruments, such as stock options, granted to non-employees is expensed when issued based on the fair value of the equity instruments issued or the consideration received,
whichever is more reliably measured.



The fair value of each option grant is
estimated on the date of grant using the Black-Scholes pricing model, with a risk-free interest rate of 4.5% and a volatility of 51.3% for the nine months ended September 30, 2005, no expected dividend yield and using the expected life of the
option.



|                                                                                                                          |  |                                         |       |      |                                        |        |      |  |   |         |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ----- | ---- | -------------------------------------- | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                                                                          |  | For the Three Months EndedSeptember 30, |       |      | For the Nine Months EndedSeptember 30, |       
|                                                                                                                          |  | 2005                                    |       | 2004 |                                        |        | 2005 |  |   | 2004    |  
|Net income (loss) as reported                                                                                             |  | $                                       | 2,587 |      | $                                      | (1,295 | )    |  | $ | 3,075   |   |  | $ | (3,892 | )
|Add: stock based employee compensation expense included in reported net income, net of tax                                |  |                                         | 119   |      |                                        | 57     |      |  |   | 514     |   |  |   | 170    |  
|Deduct: total stock-based compensation expense determined under fair value based method for all awards, net of tax        |  |                                         | 608   |      |                                        | 87     |      |  |   | 756     |   |  |   | 152    |  
|                                                                                                                          |  |                                         |       |      |                                        |        |      |  |   |         |   |  |   |        |  
|Pro forma net income (loss)                                                                                               |  | $                                       | 2,098 |      | $                                      | (1,325 | )    |  | $ | 2,833   |   |  | $ | (3,874 | )
|                                                                                                                          |  |                                         |       |      |                                        |        |      |  |   |         |   |  |   |        |  
|Accretion of redeemable class B common stock, class C common stock, series A preferred stock and series B preferred stock |  | $                                       |      |      | $                                      | (255   | )    |  | $ | (41,488 | ) |  | $ | (765   | )
|                                                                                                                          |  |                                         |       |      |                                        |        |      |  |   |         |   |  |   |        |  
|Net income (loss) available to common shareholders                                                                        |  | $                                       | 2,098 |      | $                                      | (1,580 | )    |  | $ | (38,655 | ) |  | $ | (4,639 | )
|                                                                                                                          |  |                                         |       |     
|Basic net income (loss) per share to common shareholder as reported:                                                      |  | $                                       | 0.15  |      | $                                      | (0.26  | )    |  | $ | (4.02   | ) |  | $ | (0.77  | )
|Basic net income (loss) per share to common shareholder, pro forma                                                        |  | $                                       | 0.12  |      | $                                      | (0.26  | )    |  | $ | (4.04   | ) |  | $ | (0.77  | )
|                                                                                                                          |  |                                         |       |     
|Diluted net income (loss) per share to common shareholder, as reported                                                    |  | $                                       | 0.15  |      | $                                      | (0.26  | )    |  | $ | (4.02   | ) |  | $ | (0.77  | )
|Diluted net income (loss) per share to common shareholder, pro forma                                                      |  | $                                       | 0.12  |      | $                                      | (0.26  | )    |  | $ | (4.04   | ) |  | $ | (0.77  | )



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 amounts of assets and liabilities, disclosure of contingent assets and 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.



Fair Value of Financial Instruments



The carrying amounts of the Companys financial assets and liabilities, including cash, accounts receivable and accounts payable at September 30, 2005 and December
31, 2004 approximate fair value of these instruments. Redeemable preferred stock is carried at fair value, based upon redemption requirements.



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##### Table of Contents

Recent Accounting Pronouncements



In May 2005, FASB issued SFAS 154, Accounting Changes and Error Correctionsa replacement of APB Opinion No. 20 and FASB
Statement No. 3. SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle, and applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. This statement requires retrospective application to prior periods financial statements of changes in accounting principle, unless it
is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. We do not expect that adoption of this
statement will have a material impact on our results of operations or financial condition



In March 2005, the Financial Accounting Standards Board (the FASB) issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of SFAS No. 143, Accounting for
Asset Retirement Obligations. This Interpretation clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liabilitys fair value can be reasonably
estimated. The provisions of this pronouncement are effective for fiscal years ending after December 15, 2005. The Company does not expect the adoption of Interpretation No. 47 to have any material financial statement impact.



In December 2004, the FASB issued FAS No. 123(R), Share-Based Payment, an
amendment of FASB Statements No. 123 and 95. FAS No. 123(R) replaces FAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. This statement requires
companies to recognize the fair value of stock options and other stock-based compensation to employees effective as of the beginning of its next fiscal year that begins after June 15, 2005. This means that the Company will be required to implement
FAS No. 123(R) no later than the quarter beginning January 1, 2006. The Company currently measures stock-based compensation in accordance with APB Opinion No. 25 as discussed above. The Company anticipates adopting the modified prospective method of
FAS No. 123(R) on January 1, 2006. Based on the stock options outstanding as of December 31, 2004, the Company expects to recognize compensation expense, net of taxes, in future Consolidated Statements of Income of approximately $73 and $45 in the
years ending December 31, 2006 and 2007, respectively. The impact on the Companys financial condition or results of operations will depend on the number and terms of stock options outstanding on the date of change, as well as future options
that may be granted. See Stock-Based Compensation earlier in this Note for the pro forma impact that the fair value method would have had on the Companys net income for the three and nine month periods ended September 30, 2005 and
2004.



3. Property, Equipment and Software



A summary of
property, equipment and software and related accumulated depreciation as of September 30, 2005 and December 31, 2004 is as follows:



|                              |  |                   |        |                  |   |       
|----------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                              |  | September 30,2005 |        | December 31,2004
|Equipment                     |  | $                 | 7,242  |                  | $ | 7,451 
|Software                      |  |                   | 6,570  |                  |   | 6,692 
|Office furniture and fixtures |  |                   | 1,223  |                  |   | 1,034 
|Leasehold improvements        |  |                   | 763    |                  |   | 639   
|Land                          |  |                   | 578    |                  |   |      
|Software in development       |  |                   | 687    |                  |   | 170   
|                              |  |                   |        |                  |   |       
|Total                         |  |                   | 17,063 |                  |   | 15,986
|Less accumulated depreciation |  |                   | 11,902 |                  |   | 12,311
|                              |  |                   |        |                  |   |       
|Net                           |  | $                 | 5,161  |                  | $ | 3,675 
|                              |  |                   |        |                  |   |       



Equipment, office furniture and
fixtures included capital leases totaling $2,241 and $3,634 at September 30, 2005 and December 31, 2004, respectively. Depreciation expense, including assets under capital leases, was $1,539 and $2,534 for the nine months ended September 30, 2005
and year ended December 31, 2004, respectively.



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##### Table of Contents

4. Other Accrued Liabilities



Other accrued
liabilities consist of the following:



|                                     |  |                   |       |                  |   |      
|------------------------------------ |  | ----------------- | ----- | ---------------- | - | -----
|                                     |  | September 30,2005 |       | December 31,2004
|Accrual for discontinued operations* |  | $                 | 98    |                  |   | 178  
|Accrued professional fees            |  |                   | 304   |                  |   | 306  
|Straight line rent accrual           |  |                   | 191   |                  |   | 166  
|Other taxes payable (non-income tax) |  |                   | 48    |                  |   | 82   
|Income taxes payable                 |  |                   | 1,452 |                  |   | 235  
|Other liabilities                    |  |                   | 363   |                  |   | 410  
|                                     |  |                   |       |                  |   |      
|Total other accrued liabilities      |  | $                 | 2,456 |                  | $ | 1,377

---

|* | In 2003, management decided to discontinue the operations of its Technology Solutions Group due to a change in business strategy.
|- | ---------------------------------------------------------------------------------------------------------------------------------



This accrual represents an accrual for future lease obligations as well as expected future
losses related to the Technology Solutions Group.



5. Line of Credit



On July 15, 2003, the Company
refinanced its line of credit agreement by entering into a revolving credit and security agreement (the Revolver) with a new lender. Maximum available borrowings under the Revolver represent the lesser of $10,000 or the Borrowing Base,
which is defined as 85% of the amount of Eligible Receivables and 75% of the amount of Unbilled Receivables. Based upon these criteria, maximum available borrowings on December 31, 2004 and September 30, 2005 were $3,727 and $3,624, respectively.
Amounts outstanding on the line of credit were zero on December 31, 2004 and September 30, 2005.



The Revolver bears interest at the Revolving Interest Rate, as defined by the agreement, plus the applicable margin. The Revolver provides for payment of a quarterly commitment fee of 0.25% per annum on the unused
portion of the maximum commitment of $10,000.



Borrowings under the Revolver
are collateralized by all the Companys assets, including a pledge of the capital stock of certain of its subsidiaries. Repayment of amounts outstanding under certain notes payable and all issued or issuable shares of common and preferred stock
are subordinated to the rights of the lender under terms of the Revolver. The Revolver contains various terms and covenants that provide for restrictions on capital expenditures, payment of dividends, dispositions of assets, investments and
acquisitions and require the Company, among other things, to maintain minimum levels of tangible net worth, net income and fixed charge coverage.



6. Commitments and Contingencies



Litigation



On October 31, 2000, Gallup, Inc., which conducts
its business under the name The Gallup Organization, filed suit against us in United States District Court for the Eastern District of Pennsylvania seeking unspecified damages and injunctive relief, alleging that we unlawfully raided Gallups
employees and tortiously interfered with Gallups relationships with former employees and customers, infringed on Gallups copyrighted survey language and falsely advertised aspects of our employee survey services. In November 2001, the
District Court granted our motion to dismiss Gallups claim that we conducted an unlawful raid of Gallups employees. In December 2002, the District Court granted our motion for summary judgment on the false advertising claim. In January
2003, the District Court granted our motion for summary judgment on the claims regarding our alleged tortious interference with Gallups relationships with its former employees and its customers. Gallup did not appeal any of these rulings.



In November 2004, the District Court granted our motion for summary judgment
on the copyright claim. Gallup appealed that ruling to the United States Court of Appeals for the Third Circuit. The United States Court of Appeals has reversed the Judges summary judgment grant in Kenexas favor. Trial is now scheduled
to commence in this case on December 6, 2005.



Although we believe that our
ownership of the survey language at issue in this case is an important intellectual property asset to our business, we do not believe that an adverse ruling on the copyright claim would have a material adverse effect on our results of operation or
financial position.



The Company is a party to certain legal actions arising in
the ordinary course of business. While it is not possible to determine with certainty the outcome of these matters, in the opinion of management the eventual resolution of these claims and actions outstanding will not have a material adverse effect
on the Companys consolidated financial position, results of operations or liquidity.



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##### Table of Contents

7. Equity



On June 29, 2005, the Company
completed its initial public offering, (the IPO) of 5,000,000 shares of its common stock at $12.00 per share. Net proceeds to the Company aggregated approximately $13,500 after payment of all current offering fees and shareholders
payment (net of the preferred shareholders payment of $40,000 and underwriting commission and offering expenses of $6,500). Current unpaid offering expenses were $222 at September 30, 2005. Upon the closing of the offering, 9,439,942 shares of
common stock were issued from the conversion of class A, B and C common shares, 1,858,376 shares of common stock were issued in connection with the redemption of the series A and series B preferred stock and 396,195 shares of common stock were
issued in connection with the exercise of warrants held by certain of our principal shareholders. Additionally, pursuant to ratification from our Board of Directors, 2,821,908 of our treasury shares with a cost of $9,287 were restored to authorized
but unissued Common stock. On July 1, 2005 the Underwriters exercised their over-allotment option under the terms of the underwriting agreement and acquired 750,000 additional shares of common stock. Net proceeds to the Company following the sale of
the over-allotment shares were $8,370.



8. Related Party



The Companys CEO served
on the Board of Directors of a software development consulting company that provided services to the Company for the year ended December 31, 2004 in connection with software being developed for sale. In 2004, the Companys CEO resigned from the
Board of Directors for this company. Payment for these services aggregated $47 for the nine months ended September 30, 2004, and is included in software or construction in progress in property and equipment and in prepaid expense in the accompanying
consolidated balance sheets. In 2003, the Company terminated its agreement with the software development consulting company. The Company paid $215 for perpetual licenses in accordance with the termination agreement. This amount is being amortized
over three years. The Companys CEO did not receive any cash compensation during 2003 or 2004 for his participation on the Board of Directors of the software development consulting company.



One of the Companys directors, Barry M. Abelson, is a partner in the law firm of Pepper
Hamilton LLP. This firm has represented the Company since 1997. The Company paid Pepper Hamilton LLP, net of insurance coverage, $994 and $33 for the nine months ended September 30, 2005 and 2004, respectively, for costs associated with the
Companys initial public offering and other general legal matters.



9. Acquisition



On July 29, 2005 the Company
entered into an Asset Purchase Agreement with Scottworks Solutions, Inc., a business-intelligence and management consulting firm based in Toronto Canada. Pursuant to the agreement, the Company purchased all of Scottworks assets and assumed
selected liabilities for $425, payable as follows: $170 at closing and $9 per month, payable in 30 equal installments beginning on August 1, 2005. The amounts allocated to goodwill and identified intangibles are approximately $ 272 and $ 102,
respectively. The agreement also includes contingent payments based upon the achievement of certain revenue targets which will be recorded as goodwill when earned.



14



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##### Table of Contents

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



This Quarterly Report on Form 10-Q, including the following Managements Discussion and Analysis of Financial Condition and Results of Operations, contains
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, that involve a number
of risks and uncertainties. Such statements are based on current expectations of future events that involve a number of risks and uncertainties that may cause the actual events to differ materially from those discussed herein. In addition, such
forward-looking statements are necessarily dependent upon assumptions, estimates and dates that may be incorrect or imprecise and involve known and unknown risks and other factors. Accordingly, any forward-looking statements included herein do not
purport to be predictions of future events or circumstances and may not be realized. Forward-looking statements can be identified by, among other things, the use of forward-looking terminology such as believes, expects,
may, could, will, should, seeks, pro forma, potential, anticipates, predicts, plans, estimates, or
intends, or the negative of any thereof, or other variations thereon or comparable terminology, or by discussions of strategy or intentions. Given these uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements. Forward-looking statements should be considered in light of various important factors, including those set forth in this report under the caption Risk Factors in Kenexa Corporations Registration
Statement on Form S-1 (Registration Statement No. 333-124028), as amended and filed with the Securities and Exchange Commission. All forward-looking statements, and reasons why results may differ, that are included in this report are made as of the
date of this report, and except as required by law, we disclaim any obligations to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein or reasons why results might
differ to reflect future events or developments. References herein to Kenexa, we, our, and us collectively refer to Kenexa Corporation, a Pennsylvania corporation, and all of its direct and indirect
U.S., U.K., Canada and India subsidiaries.



1. Overview



We provide software, services and
proprietary content that enable organizations to more effectively recruit and retain employees. Our solutions are built around a suite of easily configurable software applications that automate talent acquisition and employee performance management
best practices. We offer the software applications that form the core of our solutions on an on-demand basis, which materially reduces the costs and risks associated with deploying traditional enterprise applications. We complement our software
applications with tailored combinations of outsourcing services, consulting services and proprietary content based on our 18 years of experience assisting clients in addressing their human resource requirements. Together, our software applications
and services form solutions that we believe enable our clients to improve the effectiveness of their talent acquisition programs, increase employee productivity and retention, measure key HR metrics and make their talent acquisition and employee
performance management programs more efficient.



Since 1999, we have focused on
providing talent acquisition and employee performance management solutions on a subscription basis and currently generate a significant portion of our revenue from these subscriptions. For the nine months ended September 30, 2005 and 2004, revenue
from these subscriptions comprised approximately 76.5% and 79.4%, respectively, of our total revenue. We generate the remainder of our revenue from discrete professional services that are not provided as part of an integrated solution on a
subscription basis. These subscription-based solutions provide us with a recurring revenue stream and we believe represent a more compelling opportunity in terms of growth and profitability than discrete professional services. As a result, since
1999 discrete professional services have represented a consistently decreasing percentage of our revenue. We expect that trend to continue.



We sell our solutions to large- and medium-sized organizations through our direct sales force. As of September 30, 2005, we had a client base of approximately 2,200
companies, including approximately 90 companies on the Fortune 500 list published in April 2005. Our client base includes companies that we billed for services during the nine months ended September 30, 2005 and does not necessarily indicate an
ongoing relationship with each such client. Our top 80 clients contributed approximately $33 million, or 71.1%, of our revenue for the nine months ended September 30, 2005.



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2. Recent Events



On June 29, 2005, we
completed our initial public offering (IPO) of 5,000,000 shares of our common stock at $12.00 per share. Net proceeds aggregated approximately $13.5 million after payment of all current offering fees and shareholders payment of $6.5 million
and $40 million, respectively. Current unpaid offering expenses were $0.2 million at September 30, 2005. Upon the closing of the IPO 9,439,942 shares of common stock were issued from the conversion of class A, B and C common shares, 1,858,376
shares of common stock were issued in connection with the redemption of the series A and series B preferred stock and 396,195 shares of common stock were issued in connection with the exercise of warrants held by certain of our principal
shareholders. Additionally, pursuant to ratification from our Board of Directors, 2,821,908 of our treasury shares with a cost of $9,287 were restored to authorized but unissued Common stock. On July 1, 2005 the underwriters exercised their
over-allotment option under the terms of the underwriting agreement and acquired 750,000 additional shares of common stock. Net proceeds to the Company following the sale of the over-allotment shares were $8.4 million.



In connection with the redemption and conversion transactions described above, we incurred a
charge of $32.6 million due to the accretion on the class B common stock, class C common stock, series A preferred stock and series B preferred stock, and a charge of $0.9 million due to accrued dividends on the series A preferred stock and series B
preferred stock.



3. Sources of Revenue



We derive revenue
primarily from two sources: (1) subscription revenue for our solutions, which is comprised of subscription fees from clients accessing our on-demand software, consulting services, outsourcing services and proprietary content, and from clients
purchasing additional support that is not included in the basic subscription fee; and (2) fees for discrete professional services.



Our clients primarily purchase renewable subscriptions for our solutions. The typical term is one to three years, with some terms extending up to five years. The majority
of our subscription agreements are not cancelable for convenience although our clients have the right to terminate their contracts for cause if we fail to provide the agreed upon services or otherwise breach the agreement. A client does not
generally have a right to a refund of any advance payments if the contract is cancelled. We expect that we will maintain our renewal rate of approximately 89.6% of the aggregate contract value up for renewal for the year ended December 31, 2004
in each of 2005, 2006 and 2007. The revenue derived from subscription fees is recognized ratably over the term of the subscription agreement. We generally invoice our clients in advance in monthly or quarterly installments and typical payment terms
provide that our clients pay us within 30 days of invoice. Amounts that have been invoiced are recorded in accounts receivable prior to the receipt of payment and in deferred revenue to the extent revenue recognition criteria have not been met. As
the subscription component of our revenue has grown and clients willingness to pay us in advance for their subscriptions has increased, the amount of deferred revenue on our balance sheet has grown at a higher rate than our revenue. As of
September 30, 2005, deferred revenue increased to $11.0 million. We generally price our solutions based on the number of software applications and services included and the number of client employees. Accordingly, subscription fees are
generally greater for larger organizations and for those that subscribe for a broader array of software applications and services.



A small portion of our clients purchase discrete professional services. These services primarily consist of consulting and training services. In addition, we recognize a
small amount of revenue from sales of perpetual software licenses. The revenue from these services and licenses is recognized differently depending on the type of service or license provided as described in greater detail below under Critical
Accounting Policies and Estimates.



We generate substantially all of our
revenue from within the United States. For the three and nine months ended September 30, 2005, approximately 91.1% and 90.4% of our revenue, respectively, was derived from sales in the United States. Although, we derive a small amount of our
revenue from areas outside the United States, we believe that the global markets represent a significant opportunity and we intend to expand the international distribution and sale of our solutions. For the three and nine months ended
September 30, 2005, approximately, 5.9%, and 5.4%, respectively, of our revenue were derived from Europe.



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##### Table of Contents

4. Key Performance Indicators



The following tables summarize the key performance indicators that we consider to be material in managing our business:



|                                                              |  |                                         |        |   |                                        |   |        |                     |  |   |        |   |  |   |        |  
|------------------------------------------------------------- |  | --------------------------------------- | ------ | - | -------------------------------------- | - | ------ | ------------------- |  | - | ------ | - |  | - | ------ | -
|                                                              |  | For the Three Months EndedSeptember 30, |        |   | For the Nine Months EndedSeptember 30, |  
|                                                              |  | 2005                                    |        |   | 2004                                   |   |        | 2005                |  |   | 2004   |  
|                                                              |  | (in thousands, except for percentages)  |       
|Total Revenue                                                 |  | $                                       | 17,234 |   |                                        | $ | 11,906 |                     |  | $ | 47,571 |   |  | $ | 33,332 |  
|Subscription revenue as a percentage of total revenue         |  |                                         | 77.6   | % |                                        |   | 78.5   | %                   |  |   | 76.5   | % |  |   | 79.4   | %
|Income from operations before income tax and interest expense |  | $                                       | 2,586  |   |                                        | $ | 938    |                     |  | $ | 6,726  |   |  | $ | 2,651  |  
|                                                              |  |                                         |        |   |                                        |   |        |                     |  |   |        |   |  |   |        |  
|Net cash provided by operating activities                     |  | $                                       | 8,414  |   |                                        | $ | 3,321  |                     |  | $ | 11,372 |   |  | $ | 4,765  |  
|                                                              |  |                                         |        |   |                                        |   |        |                     |  |   |        |   |  |   |        |  
|                                                              |  |                                         |       
|                                                              |  |                                         |        |   |                                        |   |        | As of September 30, | 
|                                                              |  |                                         |        |   |                                        |   |        | 2005                |  |   | 2004   |  
|Deferred revenue                                              |  |                                         |        |   |                                        |   |        |                     |  | $ | 11,031 |   |  | $ | 6,650  |  



The following is a discussion of some
of the terms used in the tables above.



Subscription revenue as a
percentage of total revenue. Subscription revenue as a percentage of total revenue can be derived from our consolidated statement of operations. This performance indicator illustrates the evolution of our business towards
subscription-based solutions, which provide us with a recurring revenue stream and which we believe to be a more compelling revenue growth and profitability opportunity. We expect the percentage of subscription revenue to be in the range of 74-80%
of our total revenues.



Net cash provided by operating
activities. Net cash provided by operating activities is taken from our consolidated statement of cash flows and represents the amount of cash generated by our operations that is available for investing and financing activities.
Historically, our net cash provided by operating activities has exceeded our net income primarily due to the positive impact of deferred revenue. We expect this trend to continue because of the advance payment structure of our subscription
agreements and because as our sales increase, we expect incremental costs to decline.



Deferred revenue. We generate revenue primarily from multi-year subscriptions for our on-demand talent acquisition and employee performance management solutions. We recognize revenue from these subscription agreements
ratably over the term of the contract, which are typically one to three years. We generally invoice our clients in quarterly or monthly installments in advance. Deferred revenue, which is included in our consolidated balance sheets, is the amount of
invoiced subscriptions in excess of the amount recognized as revenue. Deferred revenue represents, in part, the amount that we will record as revenue in our consolidated statements of operations in future periods. As the subscription component of
our revenue has grown and customer willingness to pay us in advance for their subscriptions has increased, the amount of deferred revenue on our balance sheet has grown at a higher rate than our revenue growth rate. We expect this trend to continue.



The following table reconciles beginning and
ending deferred revenue for each of the periods shown:



|                                                |  |                                |         |   |                                         |   |         |                                        |  |   |             |   |  |             |        |   |             |   |         |   |  |   |         |  
|----------------------------------------------- |  | ------------------------------ | ------- | - | --------------------------------------- | - | ------- | -------------------------------------- |  | - | ----------- | - |  | ----------- | ------ | - | ----------- | - | ------- | - |  | - | ------- | -
|                                                |  | For the Year EndedDecember 31, |         |   | For the Three MonthsEnded September 30, |   |         | For the Nine MonthsEnded September 30, | 
|                                                |  | 2004                           |         |   | 2003                                    |   |         | 2005                                   |  |   | 2004        |   |  | 2005        |        |   | 2004        |  
|                                                |  |                                |         |   |                                         |   |         | (unaudited)                            |  |   | (unaudited) |   |  | (unaudited) |        |   | (unaudited) |  
|                                                |  | (in thousands)                 |        
|Deferred revenue at the beginning of the period |  | $                              | 3,260   |   |                                         | $ | 2,577   |                                        |  | $ | 8,655       |   |  | $           | 3,676  |   |             | $ | 6,650   |   |  | $ | 3,260   |  
|Total invoiced subscriptions during period      |  |                                | 39,738  |   |                                         |   | 26,193  |                                        |  |   | 15,753      |   |  |             | 11,279 |   |             |   | 40,751  |   |  |   | 28,799  |  
|Subscription revenue recognized during period   |  |                                | (36,348 | ) |                                         |   | (25,510 | )                                      |  |   | (13,377     | ) |  |             | (9,347 | ) |             |   | (36,370 | ) |  |   | (26,451 | )
|Deferred revenue at end of period               |  | $                              | 6,650 0 |   |                                         | $ | 3,260   |                                        |  | $ | 11,031      |   |  | $           | 5,608  |   |             | $ | 11,031  |   |  | $ | 5,608   |  



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##### Table of Contents

5. RESULTS OF OPERATIONS



Three and Nine Months Ended September 30, 2005 Compared to Three and Nine Months Ended September 30, 2004



The following table sets forth for the periods indicated, the amount and percentage of total revenues represented by certain items reflected in our unaudited consolidated
statements of operations:



Kenexa Corporation Unaudited
Consolidated Statement of Operations

(In thousands)



|                                                                   |  |                                          |        |   |                                         |       |    |        |   |        |                    |  |       |        |  |   |                    |   |  |        |    |  |                    |        |   |  |       |   
|------------------------------------------------------------------ |  | ---------------------------------------- | ------ | - | --------------------------------------- | ----- | -- | ------ | - | ------ | ------------------ |  | ----- | ------ |  | - | ------------------ | - |  | ------ | -- |  | ------------------ | ------ | - |  | ----- | --
|                                                                   |  | For the Three Months Ended September 30, |        |   | For the Nine Months Ended September 30, |      
|                                                                   |  | 2005                                     |        |   | 2004                                    |       |    | 2005   |   |        | 2004               | 
|                                                                   |  | Amount                                   |        |   | Percent ofRevenues                      |       |    | Amount |   |        | Percent ofRevenues |  |       | Amount |  |   | Percent ofRevenues |   |  | Amount |    |  | Percent ofRevenues |       
|Revenue:                                                           |  |                                          |        |   |                                         |       |    |        |   |        |                    |  |       |        |  |   |                    |   |  |        |    |  |                    |        |   |  |       |   
|Subscription revenue                                               |  | $                                        | 13,377 |   |                                         | 77.6  | %  |        | $ | 9,347  |                    |  | 78.5  | %      |  | $ | 36,370             |   |  | 76.5   | %  |  | $                  | 26,451 |   |  | 79.4  | % 
|Other revenue                                                      |  |                                          | 3,857  |   |                                         | 22.4  | %  |        |   | 2,559  |                    |  | 21.5  | %      |  |   | 11,201             |   |  | 23.5   | %  |  |                    | 6,881  |   |  | 20.6  | % 
|                                                                   |  |                                          |        |   |                                         |       |    |        |   |        |                    |  |       |        |  |   |                    |   |  |        |    |  |                    |        |   |  |       |   
|Total revenue                                                      |  |                                          | 17,234 |   |                                         | 100.0 | %  |        |   | 11,906 |                    |  | 100.0 | %      |  |   | 47,571             |   |  | 100.0  | %  |  |                    | 33,332 |   |  | 100.0 | % 
|Cost of revenue                                                    |  |                                          | 4,935  |   |                                         | 28.6  | %  |        |   | 3,495  |                    |  | 29.4  | %      |  |   | 13,592             |   |  | 28.6   | %  |  |                    | 8,535  |   |  | 25.6  | % 
|                                                                   |  |                                          |        |   |                                         |       |    |        |   |        |                    |  |       |        |  |   |                    |   |  |        |    |  |                    |        |   |  |       |   
|Gross profit                                                       |  |                                          | 12,299 |   |                                         | 71.4  | %  |        |   | 8,411  |                    |  | 70.6  | %      |  |   | 33,979             |   |  | 71.4   | %  |  |                    | 24,797 |   |  | 74.4  | % 
|                                                                   |  |                                          |        |   |                                         |       |    |        |   |        |                    |  |       |        |  |   |                    |   |  |        |    |  |                    |        |   |  |       |   
|Operating expenses:                                                |  |                                          |        |   |                                         |       |    |        |   |        |                    |  |       |        |  |   |                    |   |  |        |    |  |                    |        |   |  |       |   
|Sales and marketing                                                |  |                                          | 4,218  |   |                                         | 24.5  | %  |        |   | 3,212  |                    |  | 27.0  | %      |  |   | 11,748             |   |  | 24.7   | %  |  |                    | 9,901  |   |  | 29.7  | % 
|General and administrative                                         |  |                                          | 4,036  |   |                                         | 23.4  | %  |        |   | 2,516  |                    |  | 21.1  | %      |  |   | 10,912             |   |  | 22.9   | %  |  |                    | 7,197  |   |  | 21.6  | % 
|Research and development                                           |  |                                          | 961    |   |                                         | 5.6   | %  |        |   | 1,107  |                    |  | 9.3   | %      |  |   | 3,038              |   |  | 6.4    | %  |  |                    | 3,234  |   |  | 9.7   | % 
|Depreciation and amortization                                      |  |                                          | 498    |   |                                         | 2.9   | %  |        |   | 638    |                    |  | 5.4   | %      |  |   | 1,555              |   |  | 3.3    | %  |  |                    | 1,814  |   |  | 5.4   | % 
|                                                                   |  |                                          |        |   |                                         |       |    |        |   |        |                    |  |       |        |  |   |                    |   |  |        |    |  |                    |        |   |  |       |   
|Total operating expenses                                           |  |                                          | 9,713  |   |                                         | 56.4  | %  |        |   | 7,473  |                    |  | 62.8  | %      |  |   | 27,253             |   |  | 57.3   | %  |  |                    | 22,146 |   |  | 66.4  | % 
|                                                                   |  |                                          |        |   |                                         |       |    |        |   |        |                    |  |       |        |  |   |                    |   |  |        |    |  |                    |        |   |  |       |   
|Income from operations before income tax and interest expense      |  |                                          | 2,586  |   |                                         | 15.0  | %  |        |   | 938    |                    |  | 7.9   | %      |  |   | 6,726              |   |  | 14.1   | %  |  |                    | 2,651  |   |  | 8.0   | % 
|                                                                   |  |                                          |        |   |                                         |       |    |        |   |        |                    |  |       |        |  |   |                    |   |  |        |    |  |                    |        |   |  |       |   
|Interest (income) expense                                          |  |                                          | (220   | ) |                                         | (1.3  | )% |        |   | 43     |                    |  | 0.4   | %      |  |   | (222               | ) |  | (0.5   | )% |  |                    | 138    |   |  | 0.4   | % 
|Interest (income) expense on mandatory redeemable preferred shares |  |                                          | 0      |   |                                         | 0     | %  |        |   | 2,109  |                    |  | 17.7  | %      |  |   | 3,396              |   |  | 7.1    | %  |  |                    | 6,262  |   |  | 18.8  | % 
|                                                                   |  |                                          |        |   |                                         |       |    |        |   |        |                    |  |       |        |  |   |                    |   |  |        |    |  |                    |        |   |  |       |   
|Income (loss) from operations before income tax                    |  |                                          | 2,806  |   |                                         | 16.3  | %  |        |   | (1,214 | )                  |  | (10.2 | )%     |  |   | 3,552              |   |  | 7.5    | %  |  |                    | (3,749 | ) |  | (11.2 | )%
|Income tax expense from continuing operations                      |  |                                          | 219    |   |                                         | 1.3   | %  |        |   | 81     |                    |  | 0.7   | %      |  |   | 477                |   |  | 1.0    | %  |  |                    | 143    |   |  | 0.4   | % 
|                                                                   |  |                                          |        |   |                                         |       |    |        |   |        |                    |  |       |        |  |   |                    |   |  |        |    |  |                    |        |   |  |       |   
|Net income (loss)                                                  |  |                                          | 2,587  |   |                                         | 15.0  | %  |        |   | (1,295 | )                  |  | (10.9 | )%     |  |   | 3,075              |   |  | 6.5    | %  |  |                    | (3,892 | ) |  | (11.7 | )%
|                                                                   |  |                                          |        |   |                                         |       |    |        |   |        |                    |  |       |        |  |   |                    |   |  |        |    |  |                    |        |   |  |       |   
|Accretion of redeemable class B common shares and C commons shares |  |                                          | 0      |   |                                         | 0     | %  |        |   | (255   | )                  |  | (2.1  | )%     |  |   | (41,488            | ) |  | (87.2  | )% |  |                    | (765   | ) |  | (2.3  | )%
|Net income (loss) available to common shareholders                 |  | $                                        | 2,587  |   |                                         | 15.0  | %  |        | $ | (1,550 | )                  |  | (13.0 | )%     |  | $ | (38,413            | ) |  | (80.7  | )% |  | $                  | (4,657 | ) |  | (14.0 | )%
|                                                                   |  |                                          |        |   |                                         |       |    |        |   |        |                    |  |       |        |  |   |                    |   |  |        |    |  |                    |        |   |  |       |   



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##### Table of Contents

Three and Nine Months Ended September 30, 2005 Compared to Three and Nine Months Ended September 30, 2004



Revenues



Total revenue increased $5.3 million or 45% and $14.2 million or 43% to $17.2 million and
$47.6 million during the three and nine months ended September 30, 2005, respectively, compared to the same periods in 2004. Our subscription revenue increased by $4.0 million or 43% and $9.9 million or 37% to $13.4 million and $36.4 million
during the three and nine months ended September 30, 2005, respectively, compared to the same periods in 2004. Subscription revenue represented approximately 78% of our revenues for each of the three and nine months ended September 30,
2005. This increase is attributable to increasing sales of our talent acquisition and employee performance management solutions primarily due to the increasing adoption of our on-demand model for software generally and talent acquisition and
employee performance management solutions in particular. Our other revenue increased by $1.3 million or 51% and $4.3 million or 63% to $3.9 million and $11.2 million for the three and nine months ended September 30, 2005, respectively, compared
to the same periods in 2004. This increase was due to an increase in demand for our consulting services which resulted from an increase in our subscription based revenues. For the remainder of the year we expect subscription based and other revenues
to increase from the prior year due to customer acquisitions and additional sales to existing customers.



Cost of Revenue



Our cost of
revenue primarily consists of compensation, employee benefits and travel-related expenses for our employees and independent contractors who provide consulting or other professional services to our clients. Additionally, our application hosting
costs, amortization of third-party license royalty costs, technical support personnel costs, allocated overhead and reimbursed expenses are also recorded as cost of revenue. Many factors affect our cost of revenue, including changes in the mix of
products and services, pricing trends, changes in the amount of reimbursed expenses and fluctuations in our client base. Because cost as a percentage of revenue is higher for professional services than for software products, an increase in the
services component of our solutions or an increase in discrete professional services as a percentage of our total revenue would reduce gross profit as a percentage of total revenue. As our business expands, we expect that third-party license royalty
costs and personnel costs associated with the delivery of our solutions will continue to fall within a range of approximately 26% to 30% of revenues.



Cost of revenue increased by $1.4 million or 41% and $5.1 million or 59% to $4.9 million and $13.6 million for the three and nine months ended September 30, 2005,
respectively, compared to the same periods in 2004. As a percentage of revenue cost of revenue increased by 3% to 28.6% for the nine months ended September 30, 2005, compared to the same periods in 2004. The increase in the cost of revenue was
primarily due to our increased revenue. The increase in the cost of revenue as a percentage of revenue was caused by a change in the mix of our sales, specifically by an increase in consulting revenues, which have more costs as a percentage of
revenues than our subscription based revenues.



Sales and Marketing
(S&M) expense



S&M expenses primarily consist of
personnel and related costs for employees engaged in sales and marketing, including salaries, commissions and other variable compensation, travel expenses and costs associated with trade shows, advertising and other marketing efforts and allocated
overhead. We expense our sales commissions at the time the related revenue is recognized, and we recognize revenue from our subscription agreements ratably over the term of the agreements. Investment in sales and marketing commencing in 2003
resulted in significant revenue growth during 2003 and 2004. We intend to continue to invest in sales and marketing to pursue new clients and expand relationships with existing clients. As a result, we expect S&M expense to increase however we
do not expect sales and marketing expense to increase significantly as a percentage of revenue.



S&M expense increased $1 million or 31% and $1.8 million or 19% to $4.2 million and $11.7 million for the three and nine months ended September 30, 2005, respectively, compared to the same periods in 2004.
Increased salary and performance bonus, marketing, and bad debt expense contributed $0.8 million, $0.1 million and $0.1million, respectively, to the increase in S&M expense during the quarter ended September 30, 2005 from the prior year.
Increased salary and performance bonus, travel, marketing and bad debt expense of $1.4 million, $0.2 million and $0.2 million, respectively, contributed to the increase in S&M expense for the nine months ended September 30, 2005 from the
prior year. As a percentage of revenues, S&M expense decreased from 27.0% to 24.5%, and 29.7% to 24.7%, respectively, for the three and nine months ended September 30, 2005, compared to the same periods in 2004 due to increased revenues.



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##### Table of Contents

General and Administrative (G&A) expense



G&A expenses primarily consist of personnel and related costs for our executive,
finance, human resources and administrative personnel, professional fees and other corporate expenses and allocated overhead. As we expand our business and incur additional expenses associated with being a public company, including the costs of
compliance with the Sarbanes-Oxley Act of 2002 and other regulations governing public companies, we believe that G&A expenses will increase in dollar amount and may increase as a percentage of revenue in 2005 and future periods.



G&A expenses increased by $1.5 million or 60% and $3.7 million or 52% to $4.0 and $10.9
million for the three and nine months ended September 30, 2005, respectively, compared to the same periods in 2004. The $1.5 million increase for the quarter ended September 30, 2005 was primarily due to an increase in salaries, due to the
addition of 12 employees, and performance bonuses for our G&A staff. The increase in G&A for the three months ended September 30, 2005 versus the comparable quarter in the prior year was due to an increase in performance bonuses of $0.6
million, an increase in salary, professional fees and insurance expense of $0.2 million, $0.2 million and $0.1 million, respectively, and increases in other G&A infrastructure costs totaling $0.4 million. The $3.7 million increase for the nine
months ended September 30, 2005 was primarily due to an increase in staff related expense of $0.5 million, due to the addition of 24 employees, an increase in performance bonuses for our executives and management of $1.7 million, an increase in
professional fees of $0.3 million and other G&A infrastructure expenses totaling $1.2 million. As a percentage of revenues, G&A expense increased from 21.1% to 23.4%, and 21.6% to 22.9%, respectively, for the three and nine months ended
September 30, 2005, compared to the same periods in 2004 due to increased expense.



Research and Development (R&D) expense



R&D expenses primarily consist of personnel and related costs, including salaries and employee benefits for software engineers, quality assurance engineers, product managers, technical sales engineers and management information systems
personnel. Our R&D efforts have been devoted primarily to new product offerings and incidental enhancements and upgrades to our existing products. Historically, we have capitalized a small percentage of our R&D expenses. Capitalized R&D
expenses totaled $1.6 million, $0.7 million and $0.4 million for the years ended December 31, 2002, 2003 and 2004, respectively. The remaining R&D expenses have been expensed as incurred. We expect R&D expenses to increase in the future
as we employ more personnel to support enhancements of our solutions and new solutions offerings. However, we expect R&D expenses to decrease as a percentage of revenue primarily due to increased efficiencies from our global development center.



R&D expense decreased $0.1 million or 13% and $0.2 million or 6% for the
three and nine months ended September 30, 2005, respectively, compared to the same period in 2004. The $0.1 million and $0.2 million decrease in R&D for the three and nine months ended September 30, 2005 was due to the transition of
our development effort to India. As a percentage of revenues, R&D expense decreased from 9.3% to 5.6%, and 9.7% to 6.4%, respectively, for the three and nine months ended September 30, 2005 compared to the same periods in 2004 due to
increased revenues.



Depreciation and Amortization



Depreciation and amortization expense decreased $0.1 million or
approximately 22% and $0.3 million or approximately 14% for the three and nine months ended September 30, 2005 compared to the prior year, respectively. For the nine months ended September 30, 2005 versus the prior period in 2004, the $0.3
million decrease was due to an early version of our applicant tracking system becoming fully depreciated. In the future we expect depreciation and amortization expense to increase due to recent capital purchases.



6. LIQUIDITY AND CAPITAL RESOURCES



Since we were
formed in 1987, we have financed our operations primarily through internally generated cash flows, our line of credit and the issuance of preferred and common stock. As of September 30, 2005, we had cash and cash equivalents of $39.1 million
and accounts receivable of $10.4 million. In addition, we had $0.2 million of debt and less than $0.5 million in capital equipment leases.



Our cash provided from operations was $11.4 million and $4.8 million for the nine months ended September 30, 2005 and 2004, respectively. Cash used in investing
activities was $3.0 million and $0.9 million for the nine months ended September 30, 2005 and 2004, respectively. While cash provided by financing activities was $21.3 million for the nine months ended September 30, 2005, cash used in
financing activities was $1.8 million for the nine months ended September 30, 2004. Our net increase in cash and cash equivalents was $29.6 million and $2.0 million for the nine months ended September 30, 2005 and 2004, respectively. We
expect this positive cash flow to continue in future periods.



We have a $10
million line of credit with PNC Bank, National Association that is collateralized by all of our assets, including a pledge of capital stock of certain of our subsidiaries. Our maximum available borrowing under the line is subject to a borrowing base
which is 85% of eligible receivables and 75% of unbilled receivables. As of September 30, 2005, the maximum available borrowing amount was $3.6 million.



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Operating Activities



Net cash provided by operating activities was $11.4 million for the nine months ended September 30, 2005 and $4.8 million for the nine
months ended September 30, 2004. Net cash provided by operating activities for the nine months ended September 30, 2005 primarily resulted from non-cash charges to net income of $5.2 million, an increase in deferred revenue of $4.3 million
and net income of approximately $3.1 million offset by changes in working capital of $1.2 million. Net cash provided by operating activities for the nine months ended September 30, 2004 primarily resulted from non-cash charges to net income of
$8.4 million and an increase in deferred revenue of $2.3 million offset by a net loss of $3.9 million and working capital changes of $2.0 million. For the nine months ended September 30, 2005 and 2004, non-cash charges include $3.4 million and
$6.3 million of interest expense from the redeemable preferred stock, respectively. In connection with our initial public offering we redeemed all of our preferred stock and will no longer have this interest expense in the future.



Investing Activities



Net cash used in investing activities was $3.0 million for the nine months ended
September 30, 2005 and $0.9 million for the nine months ended September 30, 2004. Capital expenditures for the nine months ended September 30, 2005 was related to a $0.6 million purchase of land in India for future expansion of
business operations, $0.2 million for small acquisition located in Canada and $2.2 million for capitalized software activities and purchases of computer hardware. Capital expenditures for the nine months ended September 30, 2004 was entirely
related to capitalized software activities and purchases of computer hardware. In the future we expect our capital expenditure to increase as revenues increase and business needs arise.



Financing Activities



Net cash provided by and (used in) financing activities was $21.3 million for the nine months ended September 30, 2005, and ($1.8) million for the nine months ended
September 30, 2004. For the nine months ended September 30, 2005, net cash provided by financing activity consisted of net proceeds from our initial public offering of $61.8 million and the collection of notes receivable of $0.2 million
offset by the redemption of our series A and B preferred shares of $40.0 million, the repurchase of shares of our common stock owned by certain of our former employees of $0.5 million and repayments of capital lease obligations of $0.2 million. For
the nine months ended September 30, 2004, net cash used in financing activities consisted of repayments under our line of credit of $1.6 million and repayments of capital lease obligations of $0.2 million.



We believe that our cash and cash equivalent balances and cash flows from operations will be
sufficient to satisfy our working capital and capital expenditure requirements for at least the next 12 months. Our available borrowing under our line of credit on September 30, 2005 was $3.6 million. We intend to continue to invest our cash in
excess of current operating requirements in interest-bearing, investment-grade securities. Changes in our operating plans, lower than anticipated revenue, increased expenses or other events, may cause us to seek additional debt or equity financing.
Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could negatively impact our growth plans and our financial condition and consolidated results of operations. Additional equity financing
would be dilutive to the holders of our common stock, and debt financing, if available, may involve significant cash payment obligations and covenants or financial ratios that restrict our ability to operate our business.



Critical Accounting Policies and Estimates



Our discussion and analysis of our financial condition and consolidated results of
operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of our consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to
uncollectible accounts receivable and accrued expenses. We base these estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates.



We believe that the following critical accounting policies affect our more significant estimates and judgments used in the preparation of our consolidated financial
statements:



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Revenue Recognition



We derive our revenue from two sources: (1) subscription revenues for solutions, which are comprised of subscription fees from clients
accessing our on-demand software, consulting services, outsourcing services and proprietary content, and from clients purchasing additional support beyond the standard support that is included in the basic subscription fee; and (2) other fees
for discrete professional services. Because we provide our solutions as a service, we follow the provisions of Securities and Exchange Commission Staff Accounting Bulletin No. 101,Revenue Recognition in Financial Statements, as amended
by Staff Accounting Bulletin No. 104,Revenue Recognition. On August 1, 2003, we adopted Emerging Issues Task Force Issue No. 00-21,Revenue Arrangements with Multiple Deliverables. We recognize revenue when all of the
following conditions are met:



| |  |  | There is persuasive evidence of an arrangement;
| | - |  | -----------------------------------------------



| |  |  | The service has been provided to the client;
| | - |  | --------------------------------------------



| |  |  | The collection of the fees is probable; and
| | - |  | -------------------------------------------



| |  |  | The amount of fees to be paid by the customer is fixed or determinable.
| | - |  | -----------------------------------------------------------------------



Subscription fees and support revenues are recognized on a monthly basis over the terms of the contracts. Amounts that have been invoiced are recorded in accounts
receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.



Discrete professional services and other revenues, when sold with subscription and support offerings, are accounted for separately since these services have value to the
customer on a stand-alone basis and there is objective and reliable evidence of fair value of the delivered elements. Our arrangements do not contain general rights of return. Additionally, when professional services are sold with other elements,
the consideration from the revenue arrangement is allocated among the separate elements based upon the relative fair value. Professional services and other revenues are recorded as follows: Consulting revenues are recognized upon completion of the
contracts that are of short duration (generally less than 60 days) and as the services are rendered for contracts of a longer duration.



In determining whether revenues from professional services can be accounted for separately from subscription revenue, we consider the following factors for each
agreement: availability of professional services from other vendors, whether objective and reliable evidence of the fair value exists of the undelivered elements, the nature and the timing of the agreement execution in comparison to the subscription
agreement start date and the contractual dependence of the subscription service on the customers satisfaction with the other services. If the professional service does not qualify for separate accounting, we recognize the revenue ratably over
the remaining term of the subscription contract. In these situations we defer the direct and incremental costs of the professional service over the same period as the revenue is recognized.



We record out-of-pocket expenses incurred in accordance with EITF issue 01-14, Income
Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred, which requires that reimbursements received for out-of-pocket expenses be classified as revenue and not as cost reductions. Before the
December 15, 2001 effective date of EITF Issue 01-14, out-of-pocket reimbursements from clients were netted with the applicable costs.



Allowance for Doubtful Accounts



We maintain an allowance for doubtful accounts for estimated losses resulting from clients inability to pay us. The provision is based on our historical experience
and for specific clients that, in our opinion, are likely to default on our receivables from them. In order to identify these clients, we perform ongoing reviews of all clients 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 number of clients, and we have less payment history to rely upon with these
clients. 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 clients and evaluate these clients over time. To the extent that our future collections
differ from our assumptions based on historical experience, the amount of our bad debt and allowance recorded may be different.



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Capitalized Software Research and Development Costs



In accordance with EITF Issue 00-3, Application of AICPA Statement of Position 97-2 to
Arrangements That Include the Right to Use Software Stored on Another Entitys Hardware, we apply AICPA Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The costs
incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, will be capitalized until the software is substantially
complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional
functionality. Maintenance and training cost are expensed as incurred. Internal use software is amortized on a straight-line basis over its estimated useful life, generally three years. Management evaluates the useful lives of these assets on an
annual basis and tests for impairments whenever events or changes in circumstances occur that could impact the recoverability of these assets. There were no impairments to internal software in any of the periods covered in this report.



Goodwill and Other Identified Intangible Asset Impairment



On January 1, 2002, we adopted SFAS No. 142,Goodwill and Other Intangible
Assets which superseded Accounting Board Opinion No. 17,Intangible Assets. Upon adoption of SFAS No. 142, we ceased amortization of existing goodwill and are required to review the carrying value of goodwill for impairment. If
goodwill becomes impaired, some or all of the goodwill could be written off as a charge to operations. This comparison is performed annually or more frequently if circumstances indicate that the carrying value may not be recoverable. We have
reviewed the carrying values of goodwill of each business unit by comparing the carrying values to the estimated fair values of the business components. The fair value is based on managements estimate of the future discounted cash flows to be
generated by the respective business components and comparable company multiples. Such cash flows consider factors such as future operating income, historical trends, as well as demand and competition. Comparable company multiples are based upon
public companies in sectors relevant to our business based on our knowledge of the industry. Changes in the underlying business could affect these estimates, which in turn could affect the recoverability of goodwill. Through June 30, 2005 we
have not observed any changes to our business units which would lead us to believe that our goodwill or other identified intangibles carrying value exceeds their fair values.



Accounting for Stock-Based Compensation



Stock-based compensation is measured in accordance with Accounting Principles Board Opinion, APB, No. 25. We measure compensation
expenses for our employee and director stock-based compensation plans using the intrinsic value method. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair value of our common stock at the date of grant
over the amount an employee must pay to exercise the option. Until recently there was no public market for our stock, therefore we consider internal and external factors to assist in our determination of the fair value of our common stock. Internal
factors include the success of our sales efforts, client retention and overall profitability. External factors consist of market conditions and comparable public companies. We made assumptions and estimates in the preparation of our valuation,
including assumptions and estimates related to projected cash flows, discount rates, comparable market value multiples, the value of preferences associated with our preferred stock, the effect that those preferences have on the value of our common
stock, and the likelihood at various points in time of certain transactions taking place such as a public offering, sale of our company, raising additional private financing or liquidation. If we had made different estimates and assumptions our
conclusions and the related stock-based compensation recorded may have been different.



See Recent Accounting Pronouncements in note 2 of our consolidated financial statements for a discussion of Financial Accounting Standards Board, or FASB, Statement of Financial Accounting Standards, or SFAS, No. 123(R),
Share-Based Payment, which will require a change in our method of accounting for stock based compensation in the first quarter of 2006. SFAS No. 123(R) will require us to record compensation expense based on the fair value of the awards as the
grant date and will result in increased expenses. However, we do not expect this to have a material effect on our financial statements.



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Accounting for 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. The
factors used to assess the likelihood of realization are the forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. We have used tax-planning strategies to realize or
renew net deferred tax assets in order to avoid the potential loss of future tax benefits.



In addition, we operate within multiple taxing jurisdictions and are subject to audit in each jurisdiction. These audits can involve complex issues that may require an extended period of time to resolve. In our
opinion, adequate provisions for income taxes have been made for all periods.



Self-Insurance



We are self-insured for the majority of
our health insurance costs, including claims filed and claims incurred but not reported subject to certain stop loss provisions. We estimate our liability based upon managements judgment and historical experience. We also rely on the advice of
consulting administrators in determining an adequate liability for self-insurance claims. For the nine months ended September 30, 2005 our self-insurance accrual totaled $0.3 million. We continuously review the adequacy of our insurance
coverage. Material differences may result in the amount and timing of insurance expense if actual experience differs significantly from managements estimates.



Item 3: Quantitative and Qualitative Disclosures about Market Risk



Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest
rates and foreign currency exchange rates. We do not hold or issue financial instruments for trading purposes.



Foreign Currency Exchange Risk



For the nine months ended September 30, 2005, approximately 90.4% of our total revenue was comprised of sales to clients in the United States. A key component of our business strategy is to expand our international sales efforts, which
will expose us to foreign currency exchange rate fluctuations. A 10% change in the value of the U.S. dollar relative to each of the currencies of our non-U.S-generated sales would not have resulted in a material change to our results. As of
September 30, 2005, we were not engaged in any foreign currency hedging activities.



The financial position and operating results of our United Kingdom and India operations are consolidated using the local currency as the functional currency. Local currency assets and liabilities are translated at the
rate of exchange to the U.S. dollar on the balance sheet date, and the local currency revenue and expenses are translated at average rates of exchange to the U.S. dollar during the period. The related translation adjustments was less than $0.1
million at September 30, 2005, and is included in accumulated other comprehensive income. The foreign currency translation adjustment is not adjusted for income taxes as it relates to an indefinite investment in a non-U.S. subsidiary.



Interest Rate Risk



The primary objective of our investment activities is to preserve principal while maximizing
income without significantly increasing risk. Some of the securities in which we invest may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize
this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and certificates of
deposit. Our cash equivalents, which consist solely of money market funds, are not subject to market risk because the interest paid on these funds fluctuates with the prevailing interest rate. We do not believe that a 10% change in interest rates
would have a significant effect on our interest income.



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Item 4: Controls and Procedures



Under the
supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report, or the Evaluation Date. Based upon the evaluation, our principal executive officer and principal
financial officer concluded that our disclosure controls and procedures were effective as of the Evaluation Date. Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports
filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. Disclosure controls include controls and procedures designed to reasonably ensure
that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.



In connection with this evaluation, our management identified no changes in our internal
control over financial reporting that occurred during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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##### Table of Contents

PART II: OTHER INFORMATION



Item 1: Legal Proceedings



In November 2004, the
District Court granted our motion for summary judgment on the copyright claim. Gallup has appealed that ruling to the United States Court of Appeals for the Third Circuit. The United States Court of Appeals has reversed the Judges summary
judgment grant in Kenexas favor. Trial is now scheduled to commence in this case on December 6, 2005.



On October 31, 2000, Gallup, Inc., which conducts its business under the name The Gallup Organization, filed suit against us in United States District Court for the
Eastern District of Pennsylvania seeking unspecified damages and injunctive relief, alleging that we unlawfully raided Gallups employees and tortiously interfered with Gallups relationships with former employees and customers, infringed
on Gallups copyrighted survey language and falsely advertised aspects of our employee survey services. In November 2001, the District Court granted our motion to dismiss Gallups claim that we conducted an unlawful raid of Gallups
employees. In December 2002, the District Court granted our motion for summary judgment on the false advertising claim. In January 2003, the District Court granted our motion for summary judgment on the claims regarding our alleged tortious
interference with Gallups relationships with its former employees and its customers. Gallup did not appeal any of these rulings.



Although we believe that our ownership of the survey language at issue in this case is an important intellectual property asset to our business, we do not believe that an
adverse ruling on the copyright claim would have a material adverse effect on our results of operation or financial position.



Item 2: Unregistered Sales of Equity Securities and Use of Proceeds



On June 23, 2005, our registration statement on Form S-1 covering the offering of 5,000,000 shares of our common stock, commission file number 333-124028, was declared effective. The offering closed on
June 29, 2005 and did not terminate before any securities were sold. The underwriters exercised an over-allotment option to purchase an additional 750,000 shares of the Companys common stock on July 1, 2005. The total price to the
public for the shares offered and sold by the Company, including the over-allotment, was $69,000,000. As of the date of filing this report the offering has terminated and all of the securities registered pursuant to the offering have been sold.



The amount of expenses (in thousands)
incurred for the Companys account in connection with the offering is as follows:



|                                         |  |   |      
|---------------------------------------- |  | - | -----
|Underwriting discounts and commissions   |  | $ | 4,830
|Finders Fees                             |  |   |     
|Expenses paid to or for our underwriters |  |   |     
|Other expenses                           |  |   | 2,552
|Total expenses                           |  | $ | 7,382



All of the foregoing expenses were
direct or indirect payments to persons other than (i) directors, officers or their associates; (ii) persons owning ten (10%) or more of the Companys common stock; or (iii) affiliates of the Company except for $735 that was
paid to Pepper Hamilton LLP. One of our directors, Barry M. Abelson, is a partner in the law firm of Pepper Hamilton LLP. We believe that the services performed by Pepper Hamilton LLP in connection with the above offering were provided on terms no
more or less favorable than those with unrelated parties.



The aggregate net
proceeds (in thousands) of the offering including the over-allotment option, to the Company after deducting underwriting discounts and commissions and paying offering expenses were approximately $61,618. From the effective date of the registration
statement to September 30, 2005, the net proceeds have been used for the following purposes:



|                                                                                          |  |   |       
|----------------------------------------------------------------------------------------- |  | - | ------
|Redemption of all outstanding shares of series A redeemable participating preferred stock |  | $ | 11,375
|Redemption of all outstanding shares of series B redeemable participating preferred stock |  |   | 28,625
|Purchase and installation of machinery and equipment                                      |  |   |      
|Purchase of land                                                                          |  |   | 577   
|Acquisition of other business                                                             |  |   | 164   
|Temporary investments, including cash and cash equivalents                                |  |   | 20,877
|Total                                                                                     |  | $ | 61,618



There has been no material change in
the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b).



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Item 3: Defaults Upon Senior Securities



Not
applicable.



Item 4: Submission of Matters to a Vote of Security Holders



Not applicable.



Item 5: Other Information



Not applicable.



Item 6: Exhibits



The following exhibits are filed herewith:



|31.1 | Certification by Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).
|---- | ------------------------------------------------------------------------------



|31.2 | Certification by Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).
|---- | ------------------------------------------------------------------------------



|32.1 | Certification Furnished Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|---- | --------------------------------------------------------------------------------------------------------------------------------



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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.



November 3, 2005

Kenexa Corporation



|                                                 
|-------------------------------------------------
|/s/ Nooruddin S. Karsan                          
|Nooruddin S. Karsan                              
|Chairman of the Board and Chief Executive Officer
|                                                 
|/s/ Donald F. Volk                               
|Donald F. Volk                                   
|Chief Financial Officer                          



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EXHIBIT INDEX



|                               |  |                                                                                                                                 
|------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number and Description
|Exhibit 31.1                   |  | Certification by Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).                                                  
|                               | 
|Exhibit 31.2                   |  | Certification by Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).                                                  
|                               | 
|Exhibit 32.1                   |  | Certification Furnished Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



29