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, our proposed public offering of shares of our Class A common stock, 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, as amended, for the fiscal 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 statement of operations for the three and nine months ended September 30, 2008, and the unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2008, including applicable notes as reflected in this Form 10-Q to reflect our restatement. For additional information about the restatement, please see Note 2 to the Condensed Consolidated Financial Statements, "Restatement of Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q.

Overview

We are a leading global provider of on-demand unified talent management software solutions. We offer recruiting, performance management, compensation 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 and Taleo Business Edition. Taleo Enterprise 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 nine months 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.

On September 14, 2009, we entered into an Amended and Restated Agreement and Plan of Merger (the "Merger Agreement") to acquire Worldwide Compensation, Inc. ("WWC"), a private company with headquarters in California that provides compensation management solutions. In accordance with the terms of the Merger Agreement, we will pay up to $16 million in cash, subject to adjustment for any outstanding debt, third-party expenses and certain other specified items, in exchange for all of the issued and outstanding capital stock, options and warrants of WWC that we do not already own. Fifteen percent (15%) of the consideration will be placed into escrow for one year following the closing to be held as security for losses incurred by us in the event of certain breaches of the representations and warranties contained in the Merger Agreement or certain other events. The acquisition has been approved by both companies' boards of directors and is subject to customary closing conditions. The Merger Agreement provides that the closing of the acquisition shall not occur before January 1, 2010. The Merger Agreement contains certain termination rights for both us and WWC. Previously, in the third quarter of 2008, we made an initial investment of $2.5 million for a 16% equity investment in and an option to purchase WWC at a later date. In connection with the execution of the Merger Agreement, we negotiated more favorable terms than the purchase option and also terminated the purchase option. Accordingly, we wrote-off the $1.1 million carrying value of the purchase option in the third quarter of 2009.

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 generally consists 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 ratably on a monthly basis over the life of the application agreement, based on a stated, fixed-dollar amount. The majority of our application revenue in any quarter comes from transactions entered into in previous quarters. 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 in the third 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 third quarters of 2009 and 2008 was typically one year. Application agreements entered into during the three and nine months ended September 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 primarily consists 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.

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. As a result, consulting revenue recognized in a quarter may vary significantly depending on the mix of standalone and bundled engagements within the current and previous quarters.

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 fourth quarter 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. We recognize expenses related to our consulting services in the period in which the expenses are incurred. 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.

Due to an error identified in stock-based compensation expense as described in Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements "Restatement of Condensed Consolidated Financial Statements" in Part I, Item 1 of this Form 10-Q, we changed our estimates for stock-based compensation expense. There have been no other significant changes in our critical accounting policies and estimates during the first nine 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, as amended for the fiscal 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 September 30,               Nine Months Ended September 30,
                                                2009                      2008                2009                      2008
Condensed Consolidated Statement of
Operations Data:
Revenue:
Application                                             88 %                      80 %                87 %                      82 %
Consulting                                              12 %                      20 %                13 %                      18 %
Total revenue                                          100 %                     100 %               100 %                     100 %
Cost of revenue (as a percent of related
revenue):
Application                                             24 %                      26 %                24 %                      23 %
Consulting                                             106 %                      79 %                99 %                      85 %
Total cost of revenue                                   33 %                      37 %                34 %                      34 %
Gross profit                                            67 %                      63 %                66 %                      66 %
Operating expenses:
Sales and marketing                                     32 %                      34 %                33 %                      32 %
Research and development                                17 %                      18 %                18 %                      19 %
General and administrative                              17 %                      20 %                17 %                      19 %
Restructuring and severance expense                      0 %                       3 %                 0 %                       1 %
Total operating expenses                                66 %                      75 %                68 %                      72 %
Operating income / (loss)                                1 %                     -12 %                -2 %                      -6 %
Other income (expense):
Interest income                                          0 %                       1 %                 0 %                       1 %
Interest expense                                         0 %                       0 %                 0 %                       0 %
Investment purchase option write-off                    -2 %                       0 %                -1 %                       0 %
Total other income, net                                 -2 %                       0 %                -1 %                       1 %
Loss before provision / (benefit) for
income taxes                                            -2 %                     -11 %                -3 %                      -5 %
Provision / (benefit) for income taxes                   1 %                       1 %                -1 %                       0 %
Net loss                                                -2 %                     -13 %                -2 %                      -5 %

Comparison of the Three and Nine Months Ended September 30, 2009 and 2008

Revenue


                        Three Months Ended                                       Nine Months Ended
                           September 30,                                           September 30,
                         2009          2008       $ change      % change        2009          2008        $ change      % change
                          (In thousands)                                          (In thousands)
Application revenue   $   44,870     $ 37,469     $   7,401            20 %   $ 128,988     $  98,362     $  30,626            31 %
Consulting revenue         5,866        9,177        (3,311 )         -36 %      18,924        22,015        (3,091 )         -14 %
Total revenue         $   50,736     $ 46,646     $   4,090             9 %   $ 147,912     $ 120,377     $  27,535            23 %

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 from our products for larger more complex organizations increased by $6.9 million and $26.3 million for the three and nine months ended September 30, 2009, respectively. Application revenue from small business product lines increased by $0.5 million and $4.3 million for the three and nine months ended September 30, 2009, respectively. Application product revenue for the nine months ended September 30, 2009 includes legacy Vurv customer revenue for the entire period. Application product revenue for the nine months ended September 30, 2008 includes legacy Vurv customer revenue only after the acquisition date of July 1, 2008. The difference amounts to approximately $13.3 million. During the nine months ended September 30, 2009, new sales of our products for smaller, less complex organizations were more negatively affected by the economic downturn than new sales of our product 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 percentage range, but unexpected events, such as bankruptcy filings within our customer base, may negatively impact our renewal trends. We expect total application revenue in the fourth quarter to remain consistent with the application revenue in three months ended September 30, 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 and nine months ended September 30, 2009, consulting revenue decreased due to a decrease in standalone consulting engagements, where revenue is recognized as the consulting services are performed, compared to the same period in 2008, and a reduction in consulting services for legacy Vurv products. During the third quarter of 2009, consulting services revenue for legacy Vurv engagements decreased significantly compared to the same period in the prior year as we have completed the consulting engagements assumed in connection with the July 2008 acquisition of Vurv. We have entered into a very limited number of new consulting agreements related to legacy Vurv products since we no longer sell those products. We expect total consulting revenue to remain flat over the remainder of the year.

Cost of Revenue

                     Three Months Ended                                      Nine Months Ended
                        September 30,                                          September 30,
                      2009          2008       $ change      % change        2009          2008        $ change       % change
                       (In thousands)                                          (In thousands)
Cost of revenue
- application      $   10,599     $  9,866     $     733             7 %   $  30,901     $ 22,521     $    8,380             37 %
Cost of revenue
- consulting            6,203        7,245        (1,042 )         -14 %      18,758       18,607            151              1 %
Cost of revenue
- total            $   16,802     $ 17,111     $    (309 )          -2 %   $  49,659     $ 41,128     $    8,531             21 %

Cost of revenue - application- summary of changes

                                          Change from 2008 to 2009
                                Three Months Ended         Nine Months Ended
                                  September 30,              September 30,
Employee-related costs         $               (117 )     $             1,976
Hosting facility cost                         1,004                     3,715
Depreciation and amortizaton                    (38 )                   1,526
Various other expense                          (116 )                   1,163
                               $                733       $             8,380

During the three and nine months ended September 30, 2009, the increase in cost of application revenue was primarily driven by an increase in hosting facility expenses. Hosting facility expenses increased primarily due to the opening of our production data center in Amsterdam in the fourth quarter of 2008. For the nine months ended September 30, 2009, we also incurred additional hosting facility costs, including third-party software costs, internet bandwidth costs, depreciation and other costs associated with legacy Vurv hosting facilities added July 1, 2008, as compared to the same period in 2008. Our net headcount increased by 16 persons as compared to the same quarter in the prior year as we added customer service and technical support to meet our customers' needs. Additionally, for the nine months ended September 30, 2009, we incurred additional amortization expenses attributable to the amortization of intangible assets obtained from the acquisition of Vurv as compared to the same period in 2008. We expect cost of application revenue to increase slightly in terms of absolute dollars for the remainder of the year.

Cost of revenue - consulting - summary of changes

                                      Change from 2008 to 2009
. . .