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. These forward-looking statements include, but are not limited to, plans, objectives, expectations and intentions and other statements contained herein that are not historical facts and statements identified by words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" or words of similar meaning. These statements may contain, among other things, guidance as to future revenue and earnings, operations, prospects of the business generally, intellectual property and the development of products. These statements are based on our current beliefs or expectations and are inherently subject to various risks and uncertainties, including those set forth under the caption "Risk Factors" in our most recent Annual Report on Form 10-K as filed with the Securities and Exchange Commission, as amended and supplemented under the caption "Risk Factors" in our subsequent Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission, including this Quarterly Report on Form 10-Q. Actual results may differ materially from these expectations due to changes in global political, economic, business, competitive, market and regulatory factors, our ability to implement business and acquisition strategies or to complete or integrate acquisitions. We do not undertake any obligation to update any forward-looking statements contained herein as a result of new information, future events or otherwise. 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, India, and other foreign 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 21 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, 2008 and 2007, revenue from these subscriptions comprised approximately 79.3% and 81.9%, 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.

We sell our solutions to large and medium-sized organizations through our direct sales force. As of December 31, 2007, we had a client base of approximately 4,000 companies, including approximately 199 companies on the Fortune 500 list published in April 2007. Our client base includes companies that we billed for services during the year ended December 31, 2007 and does not necessarily indicate an ongoing relationship with each such client. Our top 80 clients by revenue contributed approximately $87.8 million, or 55.3%, of our total revenue for the nine months ended September 30, 2008.

2. Recent Events

On September 10, 2008 we reduced our revenue guidance for the remainder of 2008 due to the challenging macroeconomic environment and strengthening U.S. dollar as a number of project implementations have slowed or been delayed. Following this announcement, on November 3, 2008, due to the widespread deterioration in our business climate, we announced a restructuring program involving staff reductions of approximately 12% which included one-time severance and outplacement benefits in the range of $2.0 to $2.5 million. We expect to complete our program in the fourth quarter of 2008.

On April 2, 2008, we acquired Quorum International Holdings Limited ("Quorum"), a provider of recruitment process outsourcing services based in London, England, for a purchase price of approximately $27.9 million, in cash. The total cost of the acquisition, including legal, accounting, and other professional fees of $0.6 million, was approximately $28.5 million. We expect that the acquisition of Quorum will broaden our presence in the global recruitment market.

On February 20, 2008, our board of directors authorized a stock repurchase plan providing for the repurchase of up to 3,000,000 shares of our common stock, of which 1,056,293 shares were repurchased at an aggregate cost of $20.0 million as of September 30, 2008. These shares were restored to original status and accordingly are presented as authorized but not issued. The timing, price and volume of repurchases were based on market conditions, relevant securities laws and other factors. As of September 30, 2008, the number of shares available for repurchase under the stock repurchase plan was 1,943,707.

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. Although our renewal rate for the quarter ended September 20, 2008 dropped slightly, the decrease was predominantly due to the postponement of a renewal by a single client that has been delayed for several months and which we expect will eventually be renewed, we continue to expect that we will maintain our historical renewal rate of approximately 90.0% of the aggregate contract value up for renewal for calendar year 2008. 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 the invoice date. 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 of September 30, 2008, deferred revenue increased to $37.0 million from $35.1 million as of December 31, 2007. 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 a majority of our revenue within the United States. Approximately 71.8% and 74.7% of our total revenue was derived from sales in the United States for the three and nine months ended September 30, 2008, respectively. We expect that the international portion of our business relative to our United States based business will remain consistent as a percentage of our total revenues. Approximately 10.0% and 8.2% of our total revenue was generated from clients in Canada, Germany and the Netherlands for the three and nine months ended September 30, 2008, respectively. Approximately 7.7% and 8.9% of our total revenue was generated from clients in United Kingdom for the three and nine months ended September 30, 2008, respectively. Approximately 10.5% and 8.2% of our total revenue was derived from sales in other countries for the three and nine months ended September 30, 2008, respectively.

4. Key Performance Indicators

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

                                          For the three months ended              For the nine months ended
                                                 September 30,                          September 30,
                                           2008                2007               2008                2007
                                        (unaudited)         (unaudited)        (unaudited)         (unaudited)
Total Revenue                          $      54,026       $      46,797      $     158,674       $     134,178
Subscription revenue as a
percentage of total revenue                     79.6 %              81.7 %             79.3 %              81.9 %
Income from operations                 $       7,525       $       7,665      $      21,902       $      22,726
Net cash provided by operating
activities                             $       8,667       $      10,811      $      25,094       $      23,001

                                                                                     As of September 30,
                                                                                  2008                2007
                                                                               (unaudited)         (unaudited)
Deferred revenue                                                              $      36,996       $      33,259


The following is a discussion of significant 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 statements of
operations. This performance indicator illustrates the continued 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 that the percentage of
subscription revenue will be in the range of 75% to 80% of our total revenues
through at least 2008. Subscription revenue as a percentage of total revenue may
be impacted by the nature of the revenue earned by entities that we acquire.

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. Generally, on a cumulative basis, our net cash
provided by operating activities has exceeded our operating 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 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

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

                                          For the
                                         year ended           For the three months ended             For the nine months ended
                                        December 31,                September 30,                          September 30,
                                            2007               2008                2007              2008                2007
                                                           (unaudited)          (unaudited)       (unaudited)         (unaudited)
Deferred revenue at the beginning of
the period                             $       31,251     $       38,741       $      32,007     $      35,076       $      31,251
Total invoiced subscriptions during
period                                        152,367             41,286              39,392           127,775             111,817
Deferred revenue from acquisitions                120                 -                   93                -                  120
Subscription revenue recognized
during period                                (148,662 )          (43,031 )           (38,233 )        (125,855 )          (109,929 )

Deferred revenue at end of period      $       35,076     $       36,996       $      33,259     $      36,996       $      33,259

5. Results of Operations

Three and nine months ended September 30, 2008 compared to three and nine months ended September 30, 2007

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: