The following discussion should be read in conjunction with our Item 8 - Financial Statements and Supplementary Data.

Overview

We are a leading provider of on-demand, talent management software solutions. We offer recruiting, performance management, internal mobility and other talent management solutions that help our customers attract and retain high quality talent, more effectively match workers' skills to business needs, reduce the time and costs associated with manual and inconsistent processes, ease the burden of regulatory compliance, and increase workforce productivity through better alignment of workers' goals and career plans with corporate objectives. Our performance management solution became generally available in February 2008 and accordingly did not contribute to net revenues in 2007 or prior years.

We offer two suites of talent management solutions: Taleo Enterprise Edition and Taleo Business Edition. Taleo Enterprise Edition is designed for larger, more complex organizations. Taleo Business Edition is designed for smaller, less complex organizations, stand-alone departments and divisions of larger organizations, and staffing companies. Our revenue is primarily earned through subscription fees charged for accessing and using these solutions. Our customers generally pay us in advance for their use of our solutions, and we use these cash receipts to fund our operations. Our customers generally pay us on a quarterly or annual basis.

We focus our evaluation of our operating results and financial condition on certain key metrics, as well as certain non-financial aspects of our business. Included in our evaluation are our revenue composition and growth, net income, and our overall liquidity that is primarily comprised of our cash and accounts receivable balances. Non-financial data is also evaluated, including, for example, purchasing trends for software applications across

industries and geographies, input from current and prospective customers relating to product functionality and general economic data relating to employment and workforce mix between professional, hourly and contingent workers. We use this aggregated information to assess our historic performance, and also to plan our future strategy.

On June 26, 2007, we entered into an asset purchase agreement (the "Wetfeet Asset Purchase Agreement") by and among us, Universum Communications Holdings, Inc, Wetfeet, Inc. ("Wetfeet") and U.S. Bank National Association as escrow agent, for the acquisition by us of certain assets of Wetfeet relating to Wetfeet's hiring management solutions business (the "Wetfeet Transaction"). The Wetfeet Transaction closed on July 3, 2007. The net cash amount paid by us at closing in connection with the acquisition was approximately $0.3 million in cash, of which approximately $0.1 million was placed into escrow for one year following the closing, to be held as partial security for certain losses that may be incurred by us in the event of certain breaches of the representations and warranties covered in the asset purchase agreement or certain other events. The Wetfeet Asset Purchase Agreement provides for additional payments of up to approximately $1.3 million to be made to Wetfeet in July 2008 upon the achievement of certain milestones by the first anniversary of the closing date ("Second Payment"). As of December 31, 2007, such milestones had been substantially achieved. As in the case of the payment placed in escrow, the Second Payment is subject to adjustment for certain breaches of the representations and warranties covered in the asset purchase agreement or certain other events. The total cost of the acquisition including legal, accounting, valuation and other professional fees will be $1.7 million. Under the terms of the Wetfeet Transaction, we acquired a portion of Wetfeet's intellectual property, technology and customer contracts. We have substantially converted the Wetfeet customers to our products, and plan to discontinue the Wetfeet product in 2008. As such, we retained certain Wetfeet services and development personnel on a contractual basis. In addition, we assumed certain liabilities relating to the purchased assets.

On March 2, 2007, we entered into an asset purchase agreement (the "JobFlash Asset Purchase Agreement") by and among us, JobFlash, Inc. ("JobFlash") and U.S. Bank National Association as escrow agent, for the acquisition by us of certain assets of JobFlash relating to JobFlash's talent management and human resources solutions business (the "JobFlash Transaction"). The JobFlash Transaction closed on March 7, 2007. The total consideration paid by us in connection with the JobFlash Transaction was approximately $3.1 million, of which $0.5 million was placed into escrow for one year following the closing to be held as partial security for certain losses that may be incurred by us in the event of certain breaches of the representations and warranties covered in the JobFlash Asset Purchase Agreement or certain other events. The total cost of the acquisition including legal, accounting, valuation and other professional fees was $3.3 million. Under the terms of the JobFlash Transaction, we acquired substantially all of JobFlash's intellectual property, technology, and customer contracts. We hired the majority of JobFlash's sales, services, and development personnel. In addition, we assumed certain liabilities relating to the purchased assets. JobFlash provides a telephone interactive voice response solution for job applicants and interview scheduling solutions. As of December 31, 2007, assets acquired in the JobFlash transaction have provided the basis for our Taleo Scheduling Center solution and hourly hiring management tools for our Taleo Business Edition solution.

During the first quarter of 2007, we decided to discontinue the time and expense processing services related to our Taleo Contingent solution. There are approximately 38 full time positions that may be terminated as part of this transition, which is targeted to be completed in 2008. As of December 31, 2007, 15 positions had been terminated and 4 employees had been reassigned to other departments. The total estimated liability for exit packages is expected to be $0.7 million.

Sources of Revenue

We derive our revenue from two sources: application revenue and consulting revenue.

Application Revenue

Application revenue is generally comprised of subscription fees from customers accessing our applications, which includes the use of the application, application and data hosting, and maintenance of the application. The majority of our application subscription revenue is recognized monthly over the life of the application agreement, based on a stated, fixed-dollar amount. Revenue associated with our Taleo Contingent solution is recognized based

on a fixed contract percentage of the dollar amount invoiced for contingent labor through use of the application. Effective March 2007, we ceased entering into agreements to provide time and expense processing as a component of our Taleo Contingent solution and, accordingly, our revenue model based on a percentage of spend from such processing services will end. We are servicing our current customers to which we provide such time and expense processing services through the expiration of their current agreements with us. We expect revenue from time and expense processing for these customers to continue to decline and ultimately end in 2008. The term of our application agreements for Taleo Enterprise Edition signed with new customers in 2007, 2006, and 2005 was typically three or more years. The term of application agreements for Taleo Business Edition is typically one year. Our customer renewals on a dollar basis have historically been greater than 95%.

Application agreements entered into during 2007, 2006, and 2005 are generally non-cancelable, or contain significant penalties for early cancellation, although customers typically have the right to terminate their contracts for cause, if we fail to perform our material obligations.

Consulting Revenue

Consulting revenue consists primarily of fees associated with application configuration, integration, business process re-engineering, change management, and education and training services. Our consulting engagements are typically billed on a time and materials basis, although we may sell consulting services under milestone or fixed fee contracts, and in such cases, recognize consulting revenues on a percentage-of-completion basis. From time to time, certain of our consulting projects are subcontracted to third parties. Our customers may also elect to use unrelated third parties for the types of consulting services that we offer. Our typical consulting contract provides for payment within 30 to 60 days of invoice.

Cost of Revenue and Operating Expenses

Cost of Revenue

Cost of application revenue primarily consists of expenses related to hosting our application and providing support, including employee related costs and depreciation expense associated with computer equipment. We allocate overhead such as rent and occupancy charges, employee benefit costs and depreciation expense to all departments based on employee count. As such, overhead expenses are reflected in each cost of revenue and operating expense category. We currently deliver our solutions from two primary data centers that host the applications for all of our customers, though we plan to open one or more additional data centers in 2008.

Cost of consulting revenue consists primarily of employee related costs associated with these services and allocated overhead. The cost associated with providing consulting services is significantly higher as a percentage of revenue than for our application revenue, primarily due to labor costs. We also subcontract to third parties for a portion of our consulting business. To the extent that our customer base grows, we intend to continue to invest additional resources in our consulting services. The timing of these additional expenses could affect our cost of revenue, both in dollar amount and as a percentage of revenue, in a particular quarterly or annual period.

Sales and Marketing

Sales and marketing expenses consist primarily of salaries and related expenses for our sales and marketing staff, including commissions, marketing programs, and allocated overhead. Marketing programs include advertising, events, corporate communications, and other brand building and product marketing expenses. As our business grows, we plan to continue to increase our investment in sales and marketing by adding personnel, building our relationships with partners, expanding our domestic and international selling and marketing activities, building brand awareness, and sponsoring additional marketing events. We expect that our sales and marketing expenses will increase in dollar terms as a result of these investments, however the overall sales and marketing expense as a percentage of revenue is expected to stay consistent.

Research and Development

Research and development expenses consist primarily of salaries and related expenses and allocated overhead , and third-party consulting fees. Our expenses are net of the tax credits we receive from the Government of Quebec. We focus our research and development efforts on increasing the functionality and enhancing the ease of use and quality of our applications, as well as developing new products and enhancing our infrastructure. We expect that the amount of research and development expenses will increase in dollar terms and as a percentage of revenue as we upgrade our existing applications and develop new technologies.

General and Administrative

General and administrative expenses consist of salaries and related expenses for executive, finance and accounting, human resource, legal, operations and management information systems personnel, professional fees, board compensation and expenses, expenses related to potential mergers and acquisitions, other corporate expenses, and allocated overhead. We expect that the amount of general and administrative expenses will slightly increase in dollar terms as we add personnel over the next year, however as a percentage of revenue are expected to stay consistent.

Employee Benefits

Effective January 1, 2008, we instituted a 401(k) matching program with the following specifics: (i) for employee contributions to the our 401(k) plan of up to 4% of the each employee's base salary, we will match such employee contributions at a rate of $0.50 for every $1.00 contributed by the employee; and (ii) our 401(k) matching program has a three year vesting period with one third of the employer contribution match vesting each year over the three year period. We expect to incur additional employee related costs in 2008 as a result of the adoption of this program.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application, while in other cases, management's judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates. Our management has reviewed these critical accounting policies, our use of estimates and the related disclosures with our audit committee.

Revenue Recognition

We derive revenue primarily from fixed subscription fees for access to and use of our on-demand solutions, which fees are collectively reflected as application revenue, and secondarily from professional services, which are reflected as consulting revenue.

In addition to fixed subscription fees arrangements, on limited occasions, we have entered into arrangements including a perpetual license with hosting services to be provided over a fixed term. For hosted arrangements, revenues are recognized under the provisions of Emerging Issues Task Force or EITF No. 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.

Our application revenue is recognized when all of the following conditions have been satisfied:

• persuasive evidence of an agreement exists;

• delivery has occurred;

• fees are fixed or determinable; and

• the collection of fees is considered probable.

We utilize the provisions of EITF No. 00-21, "Revenue Arrangements with Multiple Deliverables" to determine whether our arrangements containing multiple deliverables contain more than one unit of accounting. Multiple element arrangements require the delivery or performance of multiple products, services and/or rights to use assets. Typically, we measure and allocate the total arrangement fee among each of the elements based on their fair value.

Application Revenue

The majority of our application revenue is recognized monthly over the life of the application agreement, based on stated, fixed-dollar amount contracts with our customers and consists of:

• fees paid for subscription services

• amortization of any related set-up fees

• amortization of fees paid for hosting services and software maintenance services under certain software license arrangements; and

• amortization of related consulting fees in certain multiple element subscription arrangements where VSOE does not exist for an undelivered element

Our revenue associated with the time and expense processing functionality of our Taleo Contingent solution is recognized based on a fixed, contracted percentage of the dollar amount invoiced for contingent labor through use of the application, and is recorded on a net basis under the provisions of EITF No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent" as we are not the primary obligor under the arrangements, the percentage earned by us is typically fixed, and we do not take credit risk.

Consulting Revenue

Consulting revenue consists primarily of fees associated with application configuration, integration, business process re-engineering, change management, and education and training services. Our consulting engagements are typically billed and recognized on a time-and-materials basis, although in some instances we sell consulting services under milestone or fixed-fee contracts and, in those cases, we recognize consulting revenues on the lower of the milestone or a percentage of completion basis.

In arrangements that include both subscription and consulting services we recognize consulting services as they are performed if the consulting services qualify as a separate unit of accounting in the multiple element arrangement. Consulting services qualify as a separate unit of accounting when they have stand alone value and when fair value has been established. If the consulting services do not qualify as a separate unit of accounting, the related consulting revenues are combined with the subscription revenues and recognized ratably over the subscription term.

Research and Development

We account for software development costs under the provisions of Statement of Financial Accounting Standards, or SFAS No. 86 "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Accordingly, we capitalize certain software development costs after technological feasibility of the

product has been established. Such costs have been immaterial to date, and accordingly, no costs were capitalized during the years ended December 31, 2007 and 2006.

Stock-based Compensation

We adopted SFAS 123(R) "Share-Based Payment" effective January 1, 2006. Under the provisions of SFAS 123(R), we recognize the fair value of stock-based compensation in financial statements over the requisite service period of the individual grants, which generally equals a four year vesting period. We have elected the modified prospective transition method for adopting SFAS 123(R), under which the provisions of SFAS 123(R) apply to all awards granted or modified after the date of adoption. The unrecognized expense of awards not yet vested at the date of adoption is recognized in our financial statements in the periods after the date of adoption using the same value determined under the original provisions of SFAS 123, "Accounting for Stock-Based Compensation," as disclosed in previous filings. We recognize compensation expense for the stock option awards granted subsequent to December 31, 2005 on a straight-line basis over the requisite service period, see Note 2 - Summary of Significant Accounting Policies Stock-Based Compensation in our notes to consolidated financial statements. Estimates are used in determining the fair value of such awards. Changes in these estimates could result in changes to our compensation charges.

Goodwill, Other Intangible Assets and Long-Lived Assets

In accordance with SFAS 142, "Goodwill and Other Intangible Assets," we conduct a test for the impairment of goodwill on at least an annual basis. We adopted October 1 as the date of the annual impairment test and, therefore, we performed our first annual impairment test on October 1, 2004. The impairment test compares the fair value of reporting units to their carrying amount, including goodwill, to assess whether impairment is present. Based on our most recent assessment test, we do not have impairment as of October 1, 2007. We will assess the impairment of goodwill annually on October 1, or sooner if indicators of impairment arise.

SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," requires the review of the carrying value of long-lived assets when impairment indicators arise. The review of these long-lived assets is based on factors including estimates of the future operating cash flows of our business. These future estimates are based on historical results, adjusted to reflect our best estimates of future market and operating conditions, and are continuously reviewed. Actual results may vary materially from our estimates, and accordingly may cause a full impairment of our long-lived assets.

Income Taxes

We are subject to income taxes in both the United States and foreign jurisdictions and we use estimates in determining our provision for income taxes. Deferred tax assets, related valuation allowances and deferred tax liabilities are determined separately by tax jurisdiction. This process involves estimating actual current tax liabilities together with assessing temporary differences of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities which are recorded on the balance sheet. Our deferred tax assets consist primarily of net operating loss carry forwards. We assess the likelihood that deferred tax assets will be recovered from future taxable income and a valuation allowance is recorded if it is deemed more likely than not some portion of the deferred tax assets will not be recognized. In 2006, we reversed our Canadian subsidiary's valuation allowances by approximately $1.3 million since it was determined more likely than not these assets would be realized. At December 31, 2007, we reversed valuation allowances in our remaining foreign subsidiaries which resulted in a tax provision benefit of approximately $0.4 million. We continue to maintain a full valuation allowance against our deferred tax assets. A portion of our valuation allowance relates to deferred tax assets established in connection with prior acquisitions. To the extent this portion of the valuation allowance is reversed in the future, goodwill will be adjusted. Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgment that could become subject to audit by tax authorities in the ordinary course of business.

Compliance with income tax regulations requires us to make decisions relating to the transfer pricing of revenue and expenses between each of our legal entities that are located in several countries. Our determinations

include many decisions based on our knowledge of the underlying assets of the business, the legal ownership of these assets, and the ultimate transactions conducted with customers and other third-parties. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in multiple tax jurisdictions. We are periodically reviewed by domestic and foreign tax authorities regarding the amount of taxes due. These reviews include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the exposure associated with various filing positions, we record estimated reserves for probable exposures. Such estimates are subject to change.

Results of Operations

The following tables set forth certain consolidated statements of operations data expressed as a percentage of total revenue for the periods indicated. Period-to-period comparisons of our financial results are not necessarily meaningful and you should not rely on them as an indication of future performance.

                                                            Year Ended December 31,
                                                          2007          2006       2005

Consolidated Statement of Operations Data:
Revenue:
Application                                                   82 %         82 %       81 %
Consulting                                                    18           18         19

Total revenue                                                100          100        100
Cost of revenue (as a percent of related revenue):
Application                                                   22           24         26
Consulting                                                    79           71         73

Total cost of revenue (as a percent of total revenue)         32           33         35

Gross profit                                                  68           67         65
Operating expenses:
Sales and marketing                                           29           30         29
Research and development                                      18           20         21
General and administrative                                    18           22         14
Restructuring                                                  -            -          1

Total operating expenses                                      65           72         65

Operating income (loss)                                        3           (5 )        -
Other income (expense):
Interest income                                                2            3          1
Interest expense                                               -            -         (5 )

Total other income (expense), net                              2            3         (4 )

Net income (loss) before provision for income taxes            5           (3 )       (3 )
Provision (benefit) for income taxes                           2            -          -

Net income (loss)                                              3 %         (3 )%      (3 )%

Comparison of the Years Ended December 31, 2007 and 2006

Dollar amounts in tables are shown in thousands.

Revenue


                                      Year Ended
                                     December 31,
                                  2007          2006       $ Change       % Change
                                                  (In thousands)

          Application revenue   $ 105,092     $ 79,137     $  25,955             33 %
          Consulting revenue       22,849       17,906         4,943             28 %

          Total revenue         $ 127,941     $ 97,043     $  30,898             32 %
. . .