This Form 10-Q including "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, and
Section 21E of the Securities Exchange Act of 1934, as amended. These statements identify prospective information, particularly statements referencing our expectations regarding revenue and operating expenses, cost of revenue, tax and accounting estimates, cash, cash equivalents and cash provided by operating activities, the demand and expansion opportunities for our products, our customer base, our competitive position, and the impact of the current economic environment on our business. In some cases, forward-looking statements can be identified by the use of words such as "may," "could," "would," "might," "will," "should," "expect," "forecast," "predict," "potential," "continue," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "is scheduled for," "targeted," and variations of such words and similar expressions. Such forward-looking statements are based on current expectations, estimates, and projections about our industry, management's beliefs, and assumptions made by management. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results and outcomes may differ materially from what is expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include those set forth herein under "Risk Factors" or included elsewhere in this Quarterly Report on Form 10-Q, and in our Annual Report on Form 10-K for the year ended December 31, 2008. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.

Restatement of Condensed Consolidated Financial Statements

We have restated our audited condensed consolidated balance sheet as of December 31, 2008, the unaudited condensed consolidated balance sheet as of June 30, 2009, the unaudited condensed consolidated statements of operations for the three and six month periods ended June 30, 2009 and 2008 and the unaudited condensed consolidated statements of cash flows for the six months ended June 30, 2009 and 2008, including applicable notes as reflected in this Form 10-Q/A to reflect our restatement. For additional information about the restatement, please see the Explanatory Note Regarding Restatement immediately preceding Part I, Item 1 of this Amendment and Note 2 to the Condensed Consolidated Financial Statements, "Restatement of Condensed Consolidated Financial Statements" in Part I, Item 1 of this Amendment.

The following discussion and analysis of our financial condition and results of operations incorporates the restated amounts.

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.

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, standalone 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 of our financial condition 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 purchasing trends for software applications across industries and geographies, input from current and prospective customers relating to product functionality and general economic data. We use the financial and non-financial data described above to assess our historic performance, and also to plan our future strategy. We continue to believe that our strategy and our ability to execute that strategy may enable us to improve our relative competitive position in a difficult economic environment and may provide long-term growth opportunities given the cost saving benefits of our solutions and the business requirements our solutions address.

However, if general economic conditions worsen or fail to improve, we will likely continue to experience the conditions that began in the first quarter of 2008 of increased delays in our sales cycles and increased pressure from prospective customers to offer discounts higher than our historical practices. Additionally, while our renewal rates on a dollar-for-dollar basis in the first half of 2009 were strong, we may experience increased pressure from existing customers to renew expiring software subscriptions agreements at lower rates, and certain of our customers may attempt to negotiate lower software subscription fees for existing arrangements because of downturns in their businesses. Additionally, certain of our customers have become or may become bankrupt or insolvent as a result of the current economic downturn. To date, we have not been negatively impacted in a material way by customer bankruptcies but if a significant customer were to declare bankruptcy, we could lose all revenue from such customer or payments might be delayed during bankruptcy proceedings.

In July 2008, we acquired Vurv Technology, Inc. ("Vurv"), a provider of on demand talent management software. The Vurv acquisition provided new customer relationships and intellectual property. This acquisition also had a significant impact on revenue and expenses.

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 application, 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 was 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. As a result, Taleo Contingent time and expense processing activity declined in 2007 and ended during the three months ended June 30, 2008.

The term of our application agreements signed with new customers purchasing Taleo Enterprise Edition in the second quarters of 2009 and 2008 was typically three or more years. The term of application agreements for new customers purchasing Taleo Business Edition in the second quarters of 2009 and 2008 was typically one year. Application agreements entered into during the three and six months ended June 30, 2009 and 2008 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. 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 the customer's receipt 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, depreciation expense associated with computer equipment and amortization of intangibles from acquisitions. We allocate overhead such as rent and occupancy charges, information system cost, 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 ten data centers that host the applications for all of our customers. In the second half of 2009, we expect to consolidate two of our data centers into existing data centers to reduce future cost.

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, allocated overhead and amortization of intangibles from acquisitions. 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.

Research and Development

Research and development expenses consist primarily of salaries and related expenses, allocated overhead, and third-party consulting fees. Our expenses are net of the tax credits we receive from Revenue Quebec and the Canada Revenue Agency. 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.

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, foreign exchange gains / (losses) and allocated overhead.

In our "Results of Operations" below, we have included two types of tables:
period over period changes in income statement line items, and summaries of the key changes in expenses by natural category for each expense line item.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these unaudited condensed 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. Our management has reviewed these critical accounting policies, our use of estimates and the related disclosures with our audit committee.

There have been no significant changes in our critical accounting policies and estimates during the first six months of 2009 as compared to the critical accounting policies and estimates disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2008.

Results of Operations

The following tables set forth certain unaudited condensed 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.

                                                 Three Months Ended             Six Months Ended
                                                      June 30,                      June 30,
                                               2009             2008           2009           2008
Condensed Consolidated Statement of
Operations Data:
Revenue:
Application                                        87 %             81 %          87 %           83 %
Consulting                                         13 %             19 %          13 %           17 %

Total revenue                                     100 %            100 %         100 %          100 %
Cost of revenue (as a percent of related
revenue):
Application                                        25 %             21 %          24 %           21 %
Consulting                                        102 %             78 %          96 %           88 %

Total cost of revenue                              34 %             32 %          34 %           33 %

Gross profit                                       66 %             68 %          66 %           67 %
Operating expenses:
Sales and marketing                                35 %             31 %          34 %           31 %
Research and development                           18 %             20 %          18 %           20 %
General and administrative                         16 %             19 %          18 %           19 %
Restructuring and severance expense                 0 %              1 %           0 %            0 %

Total operating expenses                           69 %             71 %          70 %           70 %

Operating loss                                     -3 %             -3 %          -4 %           -3 %
Other income (expense):
Interest income                                     0 %              1 %           0 %            2 %
Interest expense                                    0 %              0 %           0 %            0 %

Total other income, net                             0 %              1 %           0 %            2 %

Income / (loss) before provision /
(benefit) for income taxes                         -3 %             -2 %          -4 %           -1 %
Provision / (benefit) for income taxes             -3 %              0 %          -1 %           -1 %

Net income / (loss)                                 0 %             -2 %          -3 %            0 %

Comparison of the Three and Six Months Ended June 30, 2009 and 2008

Revenue



                                     Three Months Ended                                   Six Months Ended
                                          June 30,                           %                June 30,                       %
                                      2009         2008     $ change       change         2009        2008     $ change    change
                                       (In thousands)                                      (In thousands)
Application revenue                $    42,914   $ 30,730   $  12,184          40 %     $  84,118   $ 60,893   $  23,225       38 %
Consulting revenue                       6,179      7,172        (993 )       (14 )%       13,058     12,839         219        2 %

Total revenue                      $    49,093   $ 37,902   $  11,191          30 %     $  97,176   $ 73,732   $  23,444       32 %

Application revenue increased due to successful renewals of existing customers, sales to new customers, sales of additional applications and broader roll out of our applications by existing customers, and the addition of customers through our acquisition of Vurv on July 1, 2008. Application revenue for our larger more complex organizations increased by $10.3 million and $19.4 million for the three and six months ended June 30, 2009, respectively. Application revenue for small business product lines increased by $1.9 million and $3.8 million for the three and six months ended June 30, 2009, respectively. The product line revenue changes above include revenue from legacy Vurv product lines of $6.5 million and $13.3 million for three and six months ended June 30, 2009, respectively, which we acquired as a result of our acquisition of Vurv. During the six months ended June 30, 2009, new sales of our product lines for smaller, less complex organizations were more negatively affected by the economic downturn than new sales of our product lines for larger, more complex organizations. Our list prices for application services have remained relatively consistent on a year-over-year basis, and renewals of application services for larger more complex organization, on a dollar-for-dollar basis, remained strong at greater than 95%. For the remainder of 2009, we expect to see renewals in the same range, but unexpected events, such as bankruptcy filings within our customer base, may negatively impact our renewal trends. We expect application revenue to increase over the remainder of 2009.

Our consulting revenue comes from two kinds of engagements: standalone consulting engagements which are not associated with new product implementations and bundled consulting engagements which are associated with new product implementations. Standalone consulting engagement revenue is generally recognized when the services are performed, while bundled consulting engagement revenue is generally recognized ratably over the term of the associated application services term with a significant portion of revenue deferred to periods beyond the period in which services were performed. For the three month period ended June 30, 2009, consulting revenue decreased due to a reduction in standalone consulting engagements and also due to a decrease in revenue from previously deferred bundled consulting engagements as compared to the same period in 2008. The increase in consulting revenue for the six month period ended June 30, 2009 was due to an increase in revenue from previously deferred bundled consulting engagements compared to the same period in 2008. We expect total consulting revenue to decrease over the remainder of the year.

Cost of Revenue



                                       Three Months Ended                            Six Months Ended
                                            June 30,                                     June 30,
                                        2009         2008      $ change    %         2009        2008      $ change    %
                                         (In thousands)                               (In thousands)
Cost of revenue-application          $    10,617   $  6,377   $    4,240   66 %    $  20,302   $ 12,656   $    7,646   60 %
Cost of revenue-consulting                 6,281      5,615          666   12 %       12,555     11,362        1,193   10 %

Cost of revenue-total                $    16,898   $ 11,992   $    4,906   41 %    $  32,857   $ 24,018   $    8,839   37 %

Cost of revenue-application-summary of changes

                                              Change from 2008 to 2009
                                      Three Months Ended      Six Months Ended
                                           June 30,               June 30,
      Employee related costs          $             1,114    $            2,094
      Hosting facility cost                         1,532                 2,711
      Depreciation and amortization                   795                 1,565
      Various other expense                           799                 1,276

                                      $             4,240    $            7,646

During the three and six months ended June 30, 2009, the increases in cost of application revenue was primarily driven by an increase in hosting facility expenses, employee related cost and depreciation and amortization expense. We incurred additional hosting facility costs related to legacy Vurv applications (including third party software costs, internet bandwidth costs, depreciation and other costs associated with legacy Vurv hosting facilities added July 1, 2008). We also incurred additional hosting expenses related to the opening of our production data center in Amsterdam in the fourth quarter of 2008. Our net headcount increased by 82 persons (62 customer service and 20 production) as compared to the same quarter in the prior year (including the addition of 47 former Vurv employees (40 customer service and 7 production) as we continued to focus on improving customer service by adding technical support headcount to meet our customer needs. Additionally, we incurred additional amortization expenses attributable to the amortization of intangible assets obtained from the acquisition of Vurv. We expect cost of application revenue to remain flat in terms of absolute dollars for the remainder of the year.

Cost of revenue-consulting-summary of changes

                                           Change from 2008 to 2009
                                   Three Months Ended       Six Months Ended
                                        June 30,                June 30,
       Employee related costs     $                334     $              933
       Professional services                        97                     74
       Travel and entertainment                     54                   (162 )
       Various other expense                       181                    348

                                  $                666     $            1,193

During the three and six months ended June 30, 2009, the increase in cost of consulting revenue was primarily driven by an increase in employee related costs related to a net headcount increase of 30 persons as compared to the same period in the prior year (including the addition of 31 former Vurv employees on July 1, 2008). The net increase in professional services cost resulted from an increase in costs associated with outsourcing the conversion of Vurv legacy small business customers to Taleo products. Additionally, various other expenses increased as a result of the acquisition of Vurv and the overall expansion of our operations. We expect cost of consulting revenue to remain flat in absolute dollars for the remainder of the year.

Gross Profit and Gross Profit Percentage



                                        Three Months Ended                                 Six Months Ended
                                             June 30,                                          June 30,
                                        2009           2008     $ change        %          2009        2008     $ change        %
                                          (In thousands)                                    (In thousands)
Gross profit
Gross profit-application              $  32,297      $ 24,353   $   7,944        33 %    $  63,816   $ 48,237   $  15,579       32 %
Gross profit-consulting                    (102 )       1,557      (1,659 )    -107 %          503      1,477        (974 )    -66 %

Gross profit-total                    $  32,195      $ 25,910   $   6,285        24 %    $  64,319   $ 49,714   $  14,605       29 %

                                         Three Months Ended                      Six Months Ended
                                              June 30,                               June 30,
                                        2009            2008          %         2009          2008        % change
Gross profit percentage
Gross profit percentage-application         75 %            79 %      -4 %         76 %          79 %           -3 %
Gross profit percentage-consulting          -2 %            22 %     -24 %          4 %          12 %           -8 %

Gross profit percentage-total               66 %            68 %      -2 %         66 %          67 %           -1 %

Gross profit-application

The lower gross profit percentage on application revenue during the three and six months ended June 30, 2009 compared to the same periods in 2008 was driven predominantly by incremental hosting costs as a result of the Vurv acquisition and higher hosting costs associated with increasing the scalability of the existing Taleo hosting environment. Additionally, Vurv's gross profit percentage on application revenue was lower than Taleo's on a standalone basis and as a result negatively impacted the consolidated gross profit percentage on application revenue for the three month and six months ended June 30, . . .