Filed pursuant to Rule 424(b)(4)

Registration No. 333-138646

    PROSPECTUS       

5,700,000 Shares

Common Stock

Salary.com, Inc. is selling 4,898,443 shares of common stock and the selling stockholders identified in this prospectus are selling an additional 801,557 shares. We will not receive any of the proceeds from the sale of the shares by the selling stockholders. We and the selling stockholders have granted the underwriters a 30-day option to purchase up to an additional 855,000 shares from us and the selling stockholders to cover over-allotments, if any.

This is an initial public offering of shares of common stock of Salary.com. The initial public offering price is $10.50 per share. We have been approved for quotation of our common stock on the Nasdaq Global Market under the symbol “SLRY.”

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE “ RISK FACTORS” BEGINNING ON PAGE 8.

	Per Share		Total
Public offering price	$	10.50	$	59,850,000
Underwriting discount	$	0.735	$	4,189,500
Proceeds, before expenses, to us	$	9.765	$	47,833,296
Proceeds, before expenses, to the selling stockholders	$	9.765	$	7,827,204

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

Thomas Weisel Partners LLC William Blair & Company

Needham & Company, LLC

Wachovia Securities

Pacific Crest Securities

The date of this prospectus is February 15, 2007.

TABLE OF CONTENTS

	Page
Prospectus Summary	1
Risk Factors	8
Forward-Looking Statements and Projections	29
Use of Proceeds	30
Dividend Policy	31
Capitalization	32
Dilution	33
Selected Financial Data	34
Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Business	56
Management	74
Principal and Selling Stockholders	91
Certain Transactions	94
Description of Capital Stock	96
Shares Eligible for Future Sale	100
Underwriting	103
Legal Matters	107
Experts	107
Market and Industry Data	107
Where You Can Find More Information	107
Index to Financial Statements	F-1

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We and the selling stockholders are offering to sell shares of common stock and seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock.

In this prospectus, “Company,” “we,” “us,” and “our” refer to Salary.com, Inc. Unless otherwise indicated, all information in this prospectus assumes no exercise of the underwriters’ over-allotment option.

PROSPECTUS SUMMARY

You should read the following summary together with the more detailed information concerning our company, the common stock being sold in this offering and our financial statements appearing in this prospectus. Because this is only a summary, you should read the rest of this prospectus before you invest in our common stock. Read the entire prospectus carefully, especially the risks described under “Risk Factors.”

Our Business

Salary.com is a leading provider of on-demand compensation management solutions. Our comprehensive on-demand software applications are integrated with our proprietary data sets to automate the essential elements of our customers’ compensation management processes. As a result, our solutions can significantly improve the effectiveness of our customers’ compensation spending. We enable employers of all sizes to replace or supplement inefficient and expensive traditional approaches to compensation management, including paper-based surveys, consultants, internally developed software applications and spreadsheets.

Our on-demand solutions, which incorporate market compensation intelligence from our proprietary data sets, enable companies to determine how much to pay new and existing employees and to manage overall compensation programs. Our data sets contain base, bonus and incentive pay data for positions held by more than 73% of U.S. employees and similar data for the top executives in over 10,000 U.S. public companies. Our flagship offering is CompAnalyst, a suite of compensation management applications that integrates our data, third party survey data and a customer’s own pay data in a complete analytics offering. We have also introduced TalentManager, an employee life-cycle performance management application that links employee pay to performance. In addition to our on-demand enterprise software offerings, we also provide a series of applications through our website, which allows us to deliver salary management comparison and analysis tools to individuals and small businesses on a cost-effective, real-time basis.

We offer our solutions principally on an annual or multi-year subscription basis. Our direct sales group markets and sells our solutions primarily using the telephone and web-based demonstrations. From the introduction of our solutions in 2000 through December 31, 2006, our enterprise subscriber base has grown to approximately 1,700 companies who spend from $2,000 to more than $100,000 annually, including companies such as Wal-Mart, Home Depot, Procter & Gamble, Merrill Lynch, UPS and Cisco Systems. We also sell to both individual consumers and smaller businesses through our Salary.com website. According to comScore Networks, the amount of website traffic received by Salary.com over the twelve months ended September 30, 2006 places our website in the top 10 for Career Services and Development websites. Salary.com has also been ranked in the top 10 for Financial Information and Advice websites during the same period. Additionally, our Internet media traffic has grown to an average of more than 2 million unique monthly visitors over the nine months ended September 30, 2006 according to comScore Networks.

From April 2001 through December 31, 2006, we achieved 23 consecutive quarters of revenue growth. During the years ended March 31, 2004, 2005 and 2006, and the nine months ended December 31, 2006, we achieved positive operating cash flows of $0.3 million, $0.9 million, $1.8 million and $2.0 million, respectively. During these periods, we have consistently incurred operating losses, including $0.8 million for 2004, $1.9 million for 2005, $3.0 million for 2006 and $4.0 million for the nine months ended December 31, 2006. As of December 31, 2006, we had an accumulated deficit of $25.3 million.

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Our Markets and Opportunities

In today’s service-based economy, the attraction, motivation and retention of employees is a leading strategic priority for most companies. Moreover, compensation ranks as one of the largest expense categories for most employers. According to the U.S. Bureau of Labor Statistics, employee compensation in the United States totaled approximately $5.4 trillion in 2005. Employers who underpay their employees risk high turnover, while employers who overpay their employees risk impairing their profitability. Accordingly, compensation management is critical to organizations of all sizes.

The compensation management technology market, which includes software and online compensation data offerings, is estimated to grow from approximately $320 million for 2006 to approximately $460 million for 2008, according to an April 2006 study by Yankee Group, an independent market research firm. This projection from Yankee Group is focused on the market for software and related data offerings. However, we believe our total addressable market is larger, as our products provide a solution which replaces, in part or in full, not only software and data offerings, but also service offerings addressing the compensation management market such as those provided by compensation consulting firms and human resource business process outsourcers, or HR BPOs. Yankee Group has estimated the market for service offerings to be approximately $960 million for 2006. In sum, the markets for software, data and service offerings total approximately $1.28 billion for 2006, which we believe provides a better estimate of our total addressable market.

Companies have traditionally used a variety of approaches for managing the compensation function. Many continue to use relatively simplistic, internally developed software tools, often based on generic desktop programs such as Microsoft Excel. Some companies utilize broad human resource, or HR, and/or enterprise resource planning, or ERP, software offerings, which include some compensation management capability but lack the specialized functionality to adequately address compensation management. Many of these solutions must be installed on clients’ servers and maintained by their information technology, or IT, departments and do not seamlessly incorporate compensation data. Larger organizations also engage outside third parties to assist them in managing their compensation process. Traditional third party solution providers such as HR consultants provide full service market pricing, comparison analysis and compensation management process assistance, but at a high cost - up to $200,000 annually for a typical company with 500 positions.

Our Products

Our flagship product offerings include the following on-demand applications:

CompAnalyst is a suite of on-demand compensation management solutions for use by the compensation professional in an enterprise. CompAnalyst is built around a core data set of market pricing information and includes access to several analytics applications, including the following:

• Job Analyzer. Allows large enterprise customers easy access to our U.S. benchmark data set of market pricing for approximately 3,200 positions in companies of all sizes, across 20 industries and all U.S. geographies (including regions, states and major metropolitan areas).

• Survey Center. Provides customers with a centralized, online repository for managing and performing market pricing with third party surveys that they acquire and own themselves.

• Salary Structures. Provides tools for analyzing current pay structures and for modeling the cost of proposed changes.

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• Reporting & Analysis. Enables organizations to assess external competitiveness against internal equity by comparing actual pay practices to market data developed in Job Analyzer or Survey Center.

TalentManager is a suite of on-demand solutions that provides the essential workflow to link pay to performance across the enterprise. TalentManager enables an organization to manage goal setting, performance reviews and incentive programs, and to link those elements to relevant compensation programs within a single integrated application. Our TalentManager suite includes the following:

• Performance Manager. Enables the communication and setting of goals by employees and managers and tracks performance against those goals. The system uses the goals as the basis for managing the performance review process.

• CompPlanner. Enables organizations to automate and control the process of allocating salary increases, budget pools, lump sum adjustments and basic bonus plans.

• IncentivesManager. Provides organizations with a highly configurable and customizable application capable of managing their incentive plans.

• StockOptionManager. Provides a complete environment and business rules for managing the allocation of stock and stock options as part of the compensation cycle.

Our Growth Strategy

Our objective is to be the leading provider of on-demand software for compensation management solutions. Key elements of our strategy include:

• Maintain focus on the on-demand compensation management market;

• Continue to add new and expand existing proprietary data sets;

• Develop additional on-demand compensation and performance management software applications;

• Add more sales people and continue to cost-effectively obtain new clients; and

• Selectively pursue strategic acquisitions.

Risks Associated with our Business

Our business is subject to numerous risks and uncertainties, as more fully described under “Risk Factors” beginning on page 8, which you should carefully consider prior to deciding whether to invest in our common stock. For example,

• We operate in an emerging and rapidly evolving market which makes it difficult to evaluate our business and future prospects.

• We sell our solutions pursuant to subscription agreements, and if our customers do not renew their agreements it could materially adversely affect our business.

• As of December 31, 2006, we had an accumulated deficit of approximately $25.3 million, and our future profitability is uncertain.

• We have material weaknesses in our internal control over financial reporting which could cause our failure to accurately report our financial results.

• If we fail to attract new customers or to sell additional solutions to our existing customers our revenue growth will be adversely affected.

• We will have broad discretion to use the proceeds of this offering.

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Our Company

We were founded in 1999. Our principal executive offices are located at 195 West Street, Waltham, Massachusetts, and our telephone number is (781) 464-7300. Our website is www.salary.com. The information contained in, or that can be accessed through, our website is not part of this prospectus.

Salary Wizard and CompPlanner are registered trademarks of Salary.com. In addition, Salary.com has applied for registration of the following trademarks: Salary.com, CompAnalyst, CompAnalyst Executive, Survey Center, Pay Score and TalentManager. This prospectus also includes other Salary.com trademarks as well as the registered and unregistered trademarks of other persons. All other trademarks, tradenames and service marks appearing in this prospectus are the property of their respective owners.

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THE OFFERING

Common stock offered by us	4,898,443 shares
Common stock offered by the selling stockholders	801,557 shares
Common stock to be outstanding after this offering	15,014,577 shares
Over-allotment option	855,000 shares
Use of proceeds	We expect to receive net proceeds from the offering of approximately $43.6 million. We intend to use the proceeds from the offering as follows: •   to repay amounts owed under our term and working capital loans; and •   the balance of the net proceeds for general corporate purposes, including working capital and possible acquisitions and investments. We will not receive any proceeds from the sale of shares by the selling stockholders. For further information, see “Use of Proceeds.”
Nasdaq Global Market symbol	“SLRY”

The number of shares of our common stock to be outstanding following this offering and after giving effect to the adjustments below is based on 10,116,134 shares of our common stock outstanding as of December 31, 2006. This number excludes:

• 1,282,131 shares of common stock issuable upon exercise of options outstanding as of December 31, 2006 having a weighted average exercise price of $4.147 per share;

• 3,500,000 shares of common stock reserved as of January 17, 2007 for future issuance under our stock-based compensation plans; and

• 153,466 shares of common stock issuable upon exercise of warrants outstanding as of December 31, 2006 having a weighted average exercise price of $2.08 per share.

Unless otherwise indicated, the share information in this prospectus has been adjusted to reflect or assume the following:

• a 1 for 8.93 reverse stock split of our common stock completed January 17, 2007;

• the conversion of all outstanding shares of our preferred stock into an aggregate of 1,758,599 shares of our common stock immediately prior to the closing of this offering;

• the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated by-laws immediately prior to the effectiveness of this offering; and

• no exercise of the underwriters’ over-allotment option.

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SUMMARY FINANCIAL DATA

The following tables present our summary statements of operations data for the three years ended March 31, 2006 and for the nine months ended December 31, 2005 and December 31, 2006, and our summary historical, pro forma and pro forma as adjusted balance sheet data as of December 31, 2006. The summary statements of operations data for the three years ended March 31, 2006 are derived from our audited financial statements as of and for the three years ended March 31, 2006. The summary statements of operations data for the nine months ended December 31, 2005 and 2006 and the selected balance sheet data as of December 31, 2006 have been derived from our unaudited financial statements included elsewhere in this prospectus. Our unaudited financial statements have been prepared on the same basis as the audited financial statements and notes thereto, which include, in the opinion of our management, all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the information for the unaudited interim period. Our historical results for prior interim periods are not necessarily indicative of results to be expected for a full fiscal year or for any future period. You should read this data together with our financial statements and related notes included elsewhere in this prospectus and the information under “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

(in thousands, except per share data)
	Years ended March 31,									Nine months ended December 31,
	2004			2005			2006			2005			2006
										(Unaudited)
Statements of Operations Data:
Revenues	$	6,400		$	9,976		$	15,299		$	10,787		$	16,635
Gross Profit		5,499			8,145			12,191			8,624			12,978
Net loss(1)		(1,194	)		(2,290	)		(3,130	)		(1,933	)		(4,028	)
Accretion of preferred stock		(473	)		(513	)		(515	)		(387	)		(387	)
Net loss attributable to common stockholders		(1,667	)		(2,803	)		(3,645	)		(2,320	)		(4,415	)
Net loss attributable to common stockholders per share:
Basic and diluted	$	(0.68	)	$	(0.81	)	$	(0.89	)	$	(0.58	)	$	(0.90	)
Weighted average shares outstanding used in computing per share amounts:
Basic and diluted		2,441			3,468			4,079			3,985			4,916
(1)     Net loss includes stock-based compensation expense, as follows:
	Years ended March 31,									Nine months ended December 31,
	2004			2005			2006			2005			2006
										(Unaudited)
Stock-based compensation	$	1		$	512		$	1,078		$	535		$	1,487

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The following table summarizes our balance sheet data as of December 31, 2006:

• on an actual basis;

• on a pro forma basis to reflect the automatic conversion of all outstanding shares of our preferred stock into 1,758,599 shares of common stock upon the closing of the offering; and

• on a pro forma as adjusted basis to reflect the pro forma adjustment above, as well as the receipt by us of estimated net proceeds of $43.6 million from the sale of 4,898,443 shares of common stock offered by us, at an initial public offering price of $10.50 per share, less underwriting discounts and commissions and estimated offering expenses payable by us and the payment by us of approximately $4.3 million to repay our outstanding indebtedness as described under “Use of Proceeds.”

(in thousands)

	As of December 31, 2006
				(Unaudited)
							Pro forma
	Actual			Pro forma			as adjusted
Balance Sheet Data:
Cash	$	2,822		$	2,822		$	42,078
Total assets		15,913			15,913			55,169
Total debt		4,328			4,328			—
Total deferred revenue		15,371			15,371			15,371
Redeemable convertible preferred stock		10,925			—			—
Total stockholders’ equity (deficit)		(20,055	)		(9,130	)		34,453

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider all the risks described below, together with the other information contained in this prospectus (including our financial statements and related notes), before making a decision to invest in our common stock. Our business could be harmed by any of these risks at any time. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment.

Risks Related to Our Business and Industry

We operate in an emerging and rapidly evolving market which makes it difficult to evaluate our business and future prospects and may increase the risk of your investment.

We derive, and expect to continue to derive for the foreseeable future, the vast majority of our revenues from on-demand compensation management solutions, which is a relatively new and emerging market, making our business and future prospects difficult to evaluate. Many companies have invested substantial personnel and financial resources in their human resource, or HR, departments or have engaged outside consulting firms or HR Business Process Outsourcers, or HR BPOs, to obtain corporate compensation data and solutions, and may be reluctant or unwilling to migrate to on-demand software designed to address their compensation management needs. The market for on-demand software solutions is at an early stage of development, and it is uncertain whether an on-demand model such as ours will achieve and sustain the high level of market acceptance that is critical to the success of our business. Our success will depend to a substantial extent on the willingness of companies to increase their use of on-demand software in general and on-demand compensation management software in particular. If businesses do not perceive the benefits of on-demand software, then the market may not develop further, or it may develop more slowly than we expect, either of which would adversely affect our business, financial condition and results of operations. You must consider our business and future prospects in light of the challenges, risks and difficulties we encounter in the new and rapidly evolving market for on-demand compensation management. These challenges, risks and difficulties include the following:

• generating sufficient revenue to achieve and maintain profitability;

• developing new products and enhancing the functionality and features of existing applications;

• attracting and retaining new customers and expanding the revenue generated from existing customers;

• managing growth in our operations, including the expansion of our direct sales and marketing operations; and

• attracting and retaining key personnel.

We may not be able to successfully address any of these challenges, risks and difficulties, including the other risks related to our business and industry described below. Failure to adequately do so could adversely affect our business, results of operations or financial condition.

Our solutions are sold pursuant to subscription agreements, and if our existing customers elect either not to renew these agreements or renew these agreements for fewer applications or at a lower price, our business, financial condition and results of operations will be adversely affected.

Our solutions are sold pursuant to annual or multi-year subscription agreements and our customers have no obligation to renew these agreements. As a result, we are not able to consistently and accurately predict future renewal rates. Our customers’ renewal rates may decline or fluctuate or our customers may

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renew for fewer applications or at a lower price as a result of a number of factors, including their level of satisfaction with our solutions, budgetary concerns or the availability and pricing of competing products. Additionally, we may lose customers due to the high turnover rate in their HR departments. If large numbers of existing customers do not renew these agreements, or renew these agreements on terms less favorable to us, and if we cannot replace or supplement those non-renewals with new subscription agreements generating the same or greater level of revenue, our business, financial condition and results of operations will be adversely affected.

We have incurred operating losses in the past and expect to incur operating losses in the future.

We have incurred operating losses in the past and we expect to incur operating losses in the future. As of December 31, 2006, our accumulated deficit is approximately $25.3 million. Our recent operating losses were $1.9 million for the fiscal year ended March 31, 2005, $3.0 million for the fiscal year ended March 31, 2006, and $4.0 million for the nine months ended December 31, 2006. We have not been profitable since our inception, and we may not become profitable. In addition, we expect our operating expenses to increase in the future as we expand our operations. If our operating expenses exceed our expectations, our financial performance could be adversely affected. If our revenue does not grow to offset these increased expenses, we may not become profitable. You should not consider recent revenue growth as indicative of our future performance. In fact, in future periods, we may not have any revenue growth, or our revenue could decline.

Our quarterly results of operations may fluctuate in the future. As a result, we may fail to meet or exceed the expectations of investors or securities analysts which could cause our stock price to decline.

Our quarterly revenue and results of operations may fluctuate as a result of a variety of factors, many of which are outside of our control. If our quarterly revenue or results of operations fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Fluctuations in our results of operations may be due to a number of factors, including, but not limited to, those listed below and identified throughout this “Risk Factors” section in this prospectus:

• our ability to retain and increase sales to existing customers and attract new customers;

• changes in the volume and mix of products sold in a particular quarter;

• seasonality of our business cycle, given that our cash flows from operating activities are typically lower in our fiscal first and second quarters and higher in our fiscal third and fourth quarters;

• our policy of expensing sales commissions in each year of our customer subscriptions;

• the timing and success of new product introductions or upgrades by us or our competitors;

• changes in our pricing policies or those of our competitors;

• competition, including entry into the market by new competitors and new product offerings by existing competitors;

• the amount and timing of expenditures related to expanding our operations, research and development, or introducing new products;

• changes in the payment terms for our products and services; and

• the purchasing and budgeting cycles of our customers.

Because our on-demand software is sold pursuant to annual or multi-year subscription agreements and we recognize revenue from these subscriptions over the term of the agreement, downturns or upturns in sales may not be immediately reflected in our operating results. Most of our expenses, such as

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salaries and third party hosting co-location costs, are relatively fixed in the short-term, and our expense levels are based in part on our expectations regarding future revenue levels. As a result, if revenue for a particular quarter is below our expectations, we may not be able to proportionally reduce operating expenses for that quarter, causing a disproportionate effect on our expected results of operations for that quarter.

Due to the foregoing factors, and the other risks discussed in this prospectus, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance.

Because we recognize revenue over the term of the applicable subscription agreement, the lack of subscription renewals or new subscription agreements may not be immediately reflected in our operating results.

We recognize revenue from our customers over the term of their subscription agreements with us. The substantial majority of our quarterly revenue usually represents deferred revenue from subscriptions sold during previous quarters. As a result, a decline in new or renewed subscription agreements in any one quarter will not necessarily be fully reflected in the revenue for the corresponding quarter but will negatively affect our revenue in future quarters. Additionally, the effect of significant downturns in sales and market acceptance of our solutions may not be fully reflected in our results of operations until future periods. Our business model also makes it difficult for us to reflect any rapid increase in our customer base and the resulting effect of this increase in our revenue in any one period because revenue from new customers will be recognized over the applicable subscription agreement term.

If we fail to successfully migrate to our new accounting system, we may be unable to timely or accurately prepare financial reports.

Historically, our accounting systems have been operated on a platform which we do not believe is sufficient to permit compliance with our financial reporting requirements as a public company and the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley. As a result, we are in the process of upgrading our accounting platform to our new accounting system which we believe provides us with the ability to expand our accounting capabilities as our business grows while providing the necessary accounting controls needed for compliance with Sarbanes-Oxley. Any delay in the implementation of, or disruption in the transition to, our new and enhanced accounting platform could adversely affect our ability to accurately report financial information, including the filing of our quarterly or annual reports with the SEC on a timely and accurate basis. When we convert from prior systems and processes, data integrity problems or other issues may be discovered that if not corrected could impact our business or financial results.

Our independent registered public accounting firm has advised us that it has identified certain material weaknesses in our internal control over financial reporting. Failure to achieve and maintain effective internal control over financial reporting could result in our failure to accurately report our financial results.

In connection with the audit of our financial statements as of and for the year ended March 31, 2006, our independent registered public accounting firm reported to our audit committee on November 6, 2006 that they had identified certain material weaknesses and other significant deficiencies in our internal control over financial reporting. A material weakness is a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following three material weaknesses were reported by our independent registered public accounting firm in connection with their audit of our financial statements as of and for the year ended March 31, 2006:

• We did not have a sufficient number of accounting personnel who possessed an appropriate level of experience in SEC reporting requirements. This lack of enough experienced accounting

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personnel increased the risk of our preparing inaccurate financial statements. As a result, the financial statement drafts we prepared were missing or contained incomplete material footnotes (such as those related to earnings per share, stock-based compensation under SFAS 123(R) and income taxes) and disclosures required for a public company and certain adjustments for compensation expense relating to the adoption of Statement of Financial Accounting Standards 123R “Share Based Payment.”

• In prior years, we entered into sophisticated and high dollar value equity and debt financing transactions to finance our business, but did not have a formal policy regarding the policies and procedures for the recording and reporting of these types of transactions (specifically related to the beneficial conversion feature of our preferred stock issuance). In addition, we did not have a sufficient number of accounting personnel who possessed an appropriate level of experience in the selection and application of generally accepted accounting principles, or GAAP, with respect to redeemable preferred stock.

• We also had material weaknesses in the design and operation of our internal control relating to revenue accounting. In particular, because of system limitations, we did not have a process or policy to maintain a detailed deferred revenue listing by customer to support our deferred revenue balances. As a result of the identified deficiency, we recorded a material adjustment to reclassify from short-term to long-term deferred revenue within the liability section of our balance sheet. In some instances, we also did not maintain sufficient evidence of our customers’ completion of implementation of our products or subscription renewals. Lastly, the documentation of our revenue recognition policy lacked sufficient detail to support how we recognize revenue in accordance with GAAP.

We have concurred with the findings of our independent registered public accounting firm and have begun our remediation efforts. While we expect to complete this remediation process as quickly as possible, we cannot at this time estimate how long it will take to complete the remedial steps identified above. While the costs to date of our remediation efforts have not been material, we may incur material costs in the future for remediation of material weaknesses in internal control. We cannot assure you that the measures we have taken to date or any future measures will remediate the material weaknesses reported by our independent registered public accounting firm. Additional deficiencies in our internal control may be discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our prior period financial statements. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our common stock.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Controls and Procedures” on page 54 and “—Risks Related to this Offering—Being a public company will increase our administrative costs” on page 24.

If our efforts to attract new customers or to sell additional solutions to our existing customers are not successful, our revenue growth will be adversely affected.

To grow our revenue, we must continually add new customers and sell additional solutions to existing customers. If our existing and prospective customers do not perceive our solutions to be of sufficiently high value and quality, we may not be able to attract new customers or to increase sales to existing customers. Our ability to attract new customers and to sell new solutions to existing customers will depend in large part on the success of our sales and marketing efforts. However, our existing and prospective customers may not be familiar with some of our solutions or may have traditionally used other products and services for some of their compensation management and talent management

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requirements. In addition, prospective customers may have invested substantial personnel and financial resources in their HR departments or have engaged outside consulting firms or HR BPOs to obtain corporate compensation data and solutions, and may be reluctant or unwilling to migrate to our on-demand compensation management solutions to address their compensation management needs. Existing customers and prospective customers may also decline to purchase our compensation management solutions due to budgetary concerns or the availability and pricing of competing products. If we fail to generate additional business from our existing customers and new customers, our revenue could grow at a slower rate or decrease, which could adversely affect our business, financial condition and results of operations.

If we fail to successfully develop new applications, the growth of our business, our revenues and our results of operations will be materially adversely affected.

We have developed new applications over time that have contributed to the growth of our business to date. For example, we initially launched Job Analyzer in 2000 and have since added the Survey Center, Reporting & Analysis, Salary Structures and CompAnalyst Executive modules to create our CompAnalyst suite. Products in the on-demand compensation management market typically take years to develop widespread market acceptance. We expect to rely on newly introduced applications for a substantial portion of our growth for the foreseeable future. For example, in 2004, we introduced our TalentManager suite of enterprise pay-for-performance applications. We anticipate that, as with any on-demand compensation management application, it may be an extended period of time before TalentManager achieves market acceptance. If we are unable to continue to develop and launch new applications or if our new applications are not able to achieve market acceptance, our business, financial condition and results of operations will be materially adversely affected.

If the economy worsens or labor market conditions deteriorate materially, our business may be harmed.

To the extent that the economy or labor market conditions materially deteriorate, our existing and potential clients may no longer consider investment in their compensation and talent management systems a necessity, or may elect to defer purchases or reduce budgets in these areas. Either of these developments could have an adverse effect on our business, financial condition and results of operations.

If we do not continue to innovate and provide compensation management solutions that are useful to users, we may not remain competitive, and our revenues and operating results could suffer.

Our success depends on providing compensation management solutions that HR decision makers may use to make compensation decisions and individuals may use to assess their worth in the job market. Our competitors are constantly developing innovations in compensation management solutions. Additionally, the market for our on-demand software is characterized by changes in customer requirements, changes in protocols and evolving industry standards. As a result, we must continue to invest significant resources in research and development in order to improve and enhance the responsiveness, functionality and features of our existing applications and develop new applications so that we may offer a complete suite of solutions that are easy to use and effective. In particular, we will need to expand our offering to more comprehensively address our customers’ compensation management needs. If our innovations are not responsive to the needs of our users, they may become dissatisfied and move to competitors’ products and services, which would significantly impair our revenue growth, operating results and reputation. In addition, if we are unable to predict user preferences or industry changes, or if we are unable to modify our offerings on a timely basis, we may lose customers. Our operating results would also suffer if our innovations are not appropriately timed with market opportunities or are not effectively brought to market.

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Failure to effectively develop and expand our sales and marketing capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our solutions.

Increasing our customer base and achieving broader market acceptance of our solutions will depend to a significant extent on our ability to expand our direct sales and marketing operations. We plan to continue to expand our direct sales force in our Waltham, Massachusetts office. Competition for our direct sales personnel is intense. Because the majority of our direct sales personnel will be located in our Massachusetts office, we will select candidates primarily from the Massachusetts labor market. We may have difficulty hiring qualified candidates, particularly individuals with both compensation management and sales experience, or may incur additional costs related to training new employees without a compensation or sales background. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled direct sales personnel with appropriate qualifications.

Our sales force currently consists primarily of direct sales personnel who sell our products over the telephone. As we expand our offerings and our customer base, it may be necessary for our sales personnel to increase the frequency of in-person meetings with our customers in order to sell our products, which will increase the costs incurred in the sales process, will require us to hire additional sales personnel and may extend the length of our typical sales cycle.

Our expansion will require us to invest significant financial and other resources in the sales and marketing functions. New sales personnel are often not profitable during their first year with us. Our business will be seriously harmed if the expansion of the direct sales force does not generate a corresponding significant increase in revenue. We may not achieve anticipated revenue growth from expanding our direct sales force if we are unable to hire and develop talented direct sales personnel, if our new direct sales personnel are unable to achieve desired productivity levels in a reasonable period of time or if we are unable to retain our existing direct sales personnel.

If we fail to develop or maintain our brand cost-effectively, our business may suffer.

We believe that developing and maintaining awareness of our brand in a cost-effective manner is critical to achieving widespread acceptance of our existing and future applications and is an important element in attracting new customers and increasing business with existing customers. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful solutions. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incur in building our brand. To date, we have developed our brand at a low cost primarily by partnering with large Internet companies who drive traffic to our web site. Our strategy of partnering with large Internet companies may not continue to build awareness of our brand at the rate we expect. If we are unable to rely on the low cost distribution strategy of partnering with these Internet companies, we would incur costs to replace this distribution which would adversely affect our results of operations. If we fail to successfully promote and maintain our brand, or incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, and our business could suffer.

We are dependent on our executive officers, and the loss of any of them may prevent us from implementing our business plan in a timely manner if at all.

Our success depends largely upon the continued services of our executive officers and other key personnel, particularly Kent Plunkett, our Chairman, President and Chief Executive Officer, and Yong Zhang, our Executive Vice President, Chief Operating Officer and Chief Technology Officer. We are also substantially dependent on the continued service of our existing development personnel

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because of the complexity of our products and technologies, as well as on our existing personnel with both compensation management and technical experience because of the difficulty we have had hiring individuals who have experience in both of these fields. Although we currently maintain a key man life insurance policy on Kent Plunkett, this insurance would not adequately compensate us for the loss of his services, and we may not maintain this policy following completion of this offering. The loss of one or more of our key employees could seriously harm our business.

We may not be able to attract and retain the highly skilled employees we need to support our planned growth.

To execute our business strategy, we must attract and retain highly qualified personnel. Competition for these personnel is intense, especially for senior direct sales personnel with compensation management experience and engineers with high levels of experience in designing and developing on-demand software. Additionally, because the majority of our employees are located in our Waltham, Massachusetts office, our search will be limited primarily to the Massachusetts labor market. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we do. In addition, in making employment decisions, particularly in the Internet and high-technology industries, job candidates often consider the value of the stock options or restricted stock they are to receive in connection with their employment. Significant volatility in the price of our stock after this offering may, therefore, adversely affect our ability to attract or retain key employees. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.

Our growth could strain our personnel and infrastructure resources, and if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to successfully implement our business plan.

Rapid growth in our headcount and operations may place a significant strain on our management, administrative, operational and financial infrastructure. Between March 31, 2004 and December 31, 2006, the number of our full time equivalent employees increased from 68 to 206. We anticipate that additional growth will be required in order to increase our customer base and handle an increase in the volume of our business.

Our success will depend in part upon the ability of our senior management to manage growth effectively. To do so, we must continue to hire, train and manage new employees as needed. To date, we have not experienced any significant problems as a result of the rapid growth in our headcount, other than occasional office space constraints. However, our anticipated future growth may place greater strains on our resources. For instance, if our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees as needed, or if we are not successful in retaining our existing employees, we may not be able to handle any increase in the volume of our business and our business may be harmed. As we continue to grow, we may outgrow our current space in Waltham, Massachusetts and Shanghai, China or desire to open additional offices domestically and internationally, which will require us to expend additional financial resources and make it more difficult to manage employees not located at our principal headquarters and maintain uniform standards, controls, procedures and policies across locations. If we determine that it is necessary or desirable to open additional offices, whether domestically or internationally, management resources will be allocated to integrating new offices, handling cultural and language issues arising from international operations and managing costs associated with a multi-office organization. Such focus could divert management’s attention from managing ongoing business operations.

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To manage the expected growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. The additional headcount and capital investments we expect to add will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by offsetting expense reductions in the short term. If we fail to successfully manage our growth, we will be unable to execute our business plan.

Our data is obtained from a variety of sources, some of which may not be available to us in the future.

Our proprietary compensation data sets are comprised of extensive data. We obtain our data from a variety of sources, including major consulting firms and our partners, the SEC and other U.S. government agencies and other third party providers, and through our own research efforts. We generally obtain data on a non-exclusive basis and in a summary form. While we do not generally have an ability to resell such data in its entirety, we use such data internally in generating our proprietary data sets. We cannot assure you that the data we require for our proprietary data sets will be available from these sources in the future or that the cost of such data will not increase. From time to time in the past, third parties, including Mercer Human Resource Consulting, or Mercer, have sent us letters asserting that our use of data may have violated our agreement with them or infringed upon their copyright, and on February 1, 2007, Mercer filed a Complaint against us in the United States District Court for the Southern District of New York. The Complaint alleges copyright infringement, unfair competition, false representation, fraud, breach of contract and tortious interference with business relations. Specifically, the Complaint asserts that our use of Mercer surveys infringes upon Mercer’s copyrights, that we have breached, and have induced our customers to breach, license agreements with Mercer, that we have attempted to deceive Mercer in connection with our acquisition of Mercer surveys, and that we have misrepresented our rights to use Mercer’s surveys to our current and potential customers. The Complaint seeks injunctive relief and monetary damages. Although we believe that our purchase and use of all third party surveys (including Mercer’s) complies with copyright law and any applicable license agreements, we cannot assure you that we will prevail in this claim or other claims asserted against us and any litigation, regardless of its validity, may involve significant costs and could divert our management’s time and attention from developing our business.

If Mercer or another third party successfully asserts a claim that we have violated their copyrights or our license agreements with them, we may be required to remove the applicable data from our data sets and regenerate our data sets without such data. Additionally, we may no longer be able to obtain data from the provider or other providers on reasonable terms, if at all. Any inability to obtain data may have a material adverse effect on our business, financial condition and results of operations.

Further, as we expand our customer base to include customers outside of the United States, we may not be able to obtain sufficient international data on reasonable terms to support our data sets. We plan to obtain data which we believe is sufficient to build proprietary data sets in order to support the development of an international business. We expect to incur substantial expense to build proprietary data sets for international markets. We cannot assure you that we will be able to successfully obtain sufficient data to develop proprietary data sets for international markets.

We may expand through acquisitions of, investments in or through business relationships with other organizations, all of which may divert our management’s attention, result in additional dilution to our stockholders, consume resources that are necessary to sustain our business and may not result in the realization of the goals underlying the acquisition, investment or business relationship.

One of our business strategies is to selectively pursue the acquisition of companies that would either expand the functionality of our compensation management and talent management solutions or

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provide access to new customers or markets, or both. In April 2006, we completed one small asset acquisition, our first, relating to one of our products. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” We also may enter into business relationships with other organizations in order to expand our offerings, which could involve preferred or exclusive licenses, additional channels of distribution or discount pricing or investments in other organizations. An acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the acquired organizations, technologies, products, personnel or operations of the acquired organizations, particularly if the key personnel of the acquired company choose not to work for us, and we may have difficulty retaining the customers of any acquired business due to changes in management and ownership. Acquisitions may also disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for ongoing development of our business. We also may experience lower rates of renewal from customers obtained through acquisitions than we do from existing customers. Additionally, to the extent we expand into new facilities, we may have difficulty maintaining uniform standards, controls, procedures and policies across locations. Moreover, we cannot assure you that the anticipated benefits of any acquisition, investment or business relationship would be realized or that we would not be exposed to unknown liabilities. In connection with one or more of these transactions, we may:

• issue additional equity securities that would dilute our existing stockholders’ ownership;

• use cash that we may need in the future to operate our business;

• incur debt on terms unfavorable to us or that we are unable to repay;

• incur large charges or substantial liabilities;

• encounter difficulties retaining key employees of an acquired company or integrating diverse business cultures; and

• become subject to adverse tax and accounting consequences.

Although we periodically engage in preliminary discussions with respect to acquisitions, we are not currently a party to any agreement or commitment, and we have no understandings with respect to any acquisition.

We face competition from a variety of sources, and our failure to compete successfully could make it difficult for us to add new customers and retain existing customers and could reduce or impede the growth of our business.

The market for on-demand compensation management and talent management solutions is fragmented, competitive and rapidly evolving, and there are low barriers to entry to some segments of this market. We expect the intensity of competition to increase in the future as existing competitors develop their capabilities and as new companies enter our market. Additionally, as we expand our suite of compensation management and talent management solutions and create new types of applications, we may face additional competition. Increased competition could result in pricing pressure, reduced sales, lower margins or the failure of our solutions to achieve or maintain broad market acceptance. If we are unable to compete effectively, it will be difficult for us to maintain our pricing rates and add and retain customers, and our business, financial condition and results of operations will be seriously harmed. We face competition primarily from:

• generic desktop software and in-house or custom-developed solutions;

• established software vendors offering products specifically designed for compensation management or talent management;

• established compensation and HR consulting firms;

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• other websites and advertising venues; and

• existing and future start-up companies offering software, data and interactive compensation solutions.

Many of our current and potential competitors have longer operating histories, a larger presence in the general corporate compensation and talent management market, access to larger customer bases and substantially greater financial, technical, sales and marketing, management, service, support and other resources than we have. As a result, our competitors may be able to respond more quickly than we can to new or changing opportunities, technologies, standards or customer requirements or devote greater resources to the promotion and sale of their products and services than we can. To the extent our competitors have an existing relationship with a potential customer, that customer may be unwilling to switch vendors due to existing commitments with such competitors.

We also expect that new competitors, including companies currently operating in the HR market, enterprise software vendors and online service providers that have traditionally focused on enterprise resource planning or back office applications will enter the on-demand compensation management market with competing products as this market develops and matures. Many of these potential competitors have established or may establish business, financial or strategic relationships among themselves or with existing or potential customers, alliance partners or other third parties or may combine and consolidate to become more formidable competitors with better resources. It is possible that these new competitors could rapidly acquire significant market share.

Mergers or other strategic transactions involving our competitors could weaken our competitive position or reduce our revenue.

We believe that our industry is highly fragmented and that there is likely to be consolidation, which could lead to increased price competition and other forms of competition. Increased competition may cause pricing pressure and loss of market share, either of which could have a material adverse effect on our business, financial condition and results of operations. Our competitors may establish or strengthen cooperative relationships with HR BPO vendors, systems integrators, third party consulting firms or other parties. Established companies may not only develop their own products but may also merge with or acquire our current competitors. In addition, we may face competition in the future from large established companies, as well as from emerging companies that have not previously entered the markets for compensation management and talent management solutions or that currently do not have products that directly compete with our solutions. It is also possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. In addition, our competitors may announce new products, services or enhancements that better meet the price or performance needs of clients or changing industry standards.

If there are interruptions or delays in our on-demand services due to third-party error, our own error or the occurrence of unforeseeable events, delivery of our solutions and the use of our service could become impaired, which could harm our relationships with customers and subject us to liability.

All of our solutions reside on hardware that we own or lease and operate and which is currently located in a third party operations facility maintained and operated by AT&T in Watertown, Massachusetts. We do not maintain long-term supply contracts with AT&T, and AT&T does not guarantee that our customers’ access to our solutions will be uninterrupted, error-free or secure. Our operations depend on AT&T’s ability to protect their and our systems in their facilities against damage or interruption from natural disasters, power or telecommunications failures, computer viruses or other attempts to harm our systems, criminal acts and similar events. In the event that our operations facility arrangement with AT&T is terminated, or there is a lapse of service or damage to such facility, we could

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experience interruptions in our service as well as delays and additional expense in arranging new facilities and services.

Our disaster recovery computer hardware and systems located at our headquarters in Waltham, Massachusetts have not been tested under actual disaster conditions and may not have sufficient capacity to recover all data and services in the event of an outage occurring at our operations facility. In the event of a disaster in which our operations facility was irreparably damaged or destroyed, we could experience lengthy interruptions in our service. Moreover, our disaster recovery computer hardware and systems are located within five miles of our operations facility and may be equally or more affected by any disaster affecting our operations facility. Any or all of these events could cause our customers to lose access to our on-demand software.

Our on-demand compensation management and talent management solutions are accessed by a large number of customers at the same time. As we continue to expand the number of our customers and applications available to our existing clients, we may not be able to scale our technology to accommodate the increased capacity requirements, which may result in interruptions or delays in services. In addition, the failure by the AT&T facility to meet our capacity requirements could result in interruptions or delays in our service or impede our ability to scale our operations.

We design the system infrastructure and procure and own or lease the computer hardware used for our on-demand services. Design and mechanical errors, spikes in usage volume and failure to follow system protocols and procedures could cause our systems to fail, resulting in interruptions in our service. While we have not experienced extended system failures in the past, any interruptions or delays in our service, whether as a result of third-party error, our own error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with customers and our reputation. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. These factors in turn could damage our brand and reputation, divert our employees’ attention, reduce our revenue, subject us to liability, cause us to issue credits or cause customers to fail to renew their subscriptions, any of which could adversely affect our business, financial condition and results of operations.

Material defects or errors in our on-demand software could affect our reputation, result in significant costs to us and impair our ability to sell our solutions, which would harm our business.

The software applications forming part of our solutions may contain material defects or errors, which could materially and adversely affect our reputation, result in significant costs to us and impair our ability to sell our solutions in the future. After the release of our products, defects or errors may also be identified from time to time by our internal team and by our clients. The costs incurred in correcting any material product defects or errors may be substantial and would adversely affect our operating results. Such defects or errors may occur in the future.

Because our customers use our solutions for important aspects of their business, any errors or defects in, or other performance problems with, our solutions could hurt our reputation and may damage our customers’ businesses. If that occurs, we could lose future sales or our existing customers could elect not to renew their agreements with us. Software performance problems could result in loss of market share, failure to achieve, or a delay in achieving, market acceptance of our solutions and the diversion of development resources. If one or more of our solutions fail to perform or contain a technical defect, a customer may assert a claim against us for substantial damages, whether or not we are responsible for our solutions’ failure or defect. We do not currently maintain any warranty reserves.

Product liability claims could require us to spend significant time and money in litigation or arbitration/dispute resolution or to pay significant settlements or damages. Although we maintain general

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liability insurance, including coverage for errors and omissions, this coverage may be inadequate, or may not be available in the future on reasonable terms, or at all. Defending a lawsuit, regardless of its merit, could be costly and divert management’s attention and could cause our business to suffer.

We may be liable to our customers and may lose customers if we provide poor service, if our solutions do not comply with our agreements or if there is a loss of data.

The information used in our proprietary data sets may not be complete or may contain inaccuracies that our customers regard as significant. Our ability to collect and report data may be interrupted by a number of factors, including the termination of agreements with third-party data providers, our inability to access the Internet, the failure of our network or software systems or failure by our operations facility to meet our capacity requirements. In addition, computer viruses and intentional or unintentional acts of our employees may harm our systems, causing us to lose data we maintain and supply to our customers or data that our customers input and maintain on our systems, and the transmission of computer viruses could expose us to litigation. Our subscription agreements generally give our customers the right to terminate their agreements for cause if we materially breach our obligations. Any failures in the services that we supply or the loss of any of our customers’ data that we cannot rectify in a reasonable time period may give our customers the right to terminate their agreements with us and could subject us to liability. As a result, we may also be required to spend substantial amounts to defend lawsuits and pay any resulting damage awards. In addition to potential liability, if we supply inaccurate data or experience interruptions in our ability to supply data, our reputation could be harmed and we could lose customers.

Although we maintain general liability insurance, including coverage for errors and omissions, this coverage may be inadequate, or may not be available in the future on reasonable terms, or at all. In addition, we cannot assure you that this policy will cover any claim against us for loss of data or other indirect or consequential damages and defending a lawsuit, regardless of its merit, could be costly and divert management’s attention.

Reductions in information technology spending could limit our ability to grow our business.

Our operating results may vary based on changes in the information technology, or IT, spending of our clients. The revenue growth and profitability of our business depend on the overall demand for enterprise application software and services. We sell our solutions primarily to large organizations whose businesses fluctuate with general economic and business conditions. As a result, decreased demand for enterprise application software and services, and in particular on-demand compensation management solutions, caused by a weakening global economy or otherwise may cause a decline in our revenue. Historically, economic downturns have resulted in overall reductions in corporate IT spending. In particular, compensation management software may be viewed by some of our existing and potential clients as a lower priority and may be among the first expenditures reduced as a result of unfavorable economic conditions. In the future, potential clients may decide to reduce their IT budgets by deferring or reconsidering product purchases, which would negatively affect our operating results.

Because our products collect and analyze applicants’ and employees’ stored personal information, concerns that our products do not adequately protect the privacy of applicants and employees could result in liability to us and inhibit sales of our products.

Some of the features of our compensation management and talent management applications depend on the ability to develop and maintain profiles of applicants and employees for use by our clients. Our software applications augment these profiles over time by capturing additional data and collecting usage data. Although our applications are designed to protect user privacy, privacy concerns nevertheless may cause individuals and businesses to resist providing the personal data necessary to support our products. Any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy laws and regulations, could result in liability to us, damage our reputation, inhibit sales of our products and seriously harm our business, financial condition and operating results.

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As we extend our operations outside of the United States, we may become subject to various data protection regulations such as those adopted by the European Union related to the confidentiality of personal data.

If our security measures are breached and unauthorized access is obtained to client data, clients may curtail or stop their use of our solutions, which would harm our business, financial condition and results of operations.

Our solutions involve the storage and transmission of confidential information of clients and their existing and potential employees, and security breaches could expose us to a risk of loss of, or unauthorized access to, this information, resulting in possible litigation and possible liability. Although we have never sustained such a breach, if our security measures were ever breached as a result of third-party action, employee error, malfeasance or otherwise, and, as a result, an unauthorized party obtained access to this confidential data, our reputation could be damaged, our business could suffer and we could incur significant liability. Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not discovered until launched against a target. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of our security measures could be harmed and we could lose sales and clients.

We may increase our sales and marketing efforts to clients outside the United States and open offices outside the United States, which would expose us to additional risks associated with international operations.

As a part of our future business strategy, we intend to increase our operations outside the United States, including our international sales efforts. In December 2006, we established a wholly foreign owned enterprise in Shanghai, China and hired 23 employees to develop software for us in China. While we have no additional specific plans or commitments with respect to any further international expansion, we may open additional offices outside of the United States in the future. We may not be successful in our efforts to establish our Chinese operations or to expand our sales into international markets and open additional international offices. International operations and sales subject us to risks and challenges that we would otherwise not face if we conducted our business only in the United States including:

• legal and regulatory restrictions;

• challenges caused by distance, language and cultural differences and in doing business with foreign agencies and governments;

• difficulties obtaining additional data sources that cover international job markets at a reasonable cost;

• difficulties obtaining the data necessary to support international customers on reasonable terms, if at all;

• difficulties developing algorithms that can be used to generate and analyze data on international job markets;

• difficulties in developing products and services in different languages and for different cultures;

• difficulties in managing and staffing international operations;

• challenges in protecting data and intellectual property;

• longer payment cycles in some countries;

• credit risk and higher levels of payment fraud;

• currency exchange rate fluctuations;

• political and economic instability and export restrictions;

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• potentially adverse tax consequences, including the complexities of foreign value added tax systems and restrictions on the repatriation of earnings; and

• higher costs associated with doing business internationally.

Our limited experience with conducting business internationally increases our risk of operating internationally and requires management to focus additional attention and resources on our international operations. These risks could harm our international expansion efforts or other aspects of our business, which would in turn harm our business, financial condition and results of operations.

Evolving regulation of the Internet may increase our expenditures related to compliance efforts, which may adversely affect our financial condition.

As Internet commerce continues to evolve, increasing regulation by federal, state or foreign agencies becomes more likely. We are particularly sensitive to these risks because the Internet is a critical component of our on-demand business model. For example, we believe that increased regulation is likely in the area of data privacy, and laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information could affect our clients’ ability to use and share data, potentially reducing demand for solutions accessed via the Internet and restricting our ability to store, process and share data with our clients via the Internet. In addition, taxation of services provided over the Internet or other charges imposed by government agencies or by private organizations for accessing the Internet may also be imposed. Any regulation imposing greater fees for Internet use or restricting information exchange over the Internet could result in a decline in the use of the Internet and the viability of Internet-based services, which could harm our business.

The success of our business depends on the continued growth and acceptance of the Internet as a business and communications tool, and the related expansion of the Internet infrastructure.

The future success of our business depends upon the continued and widespread adoption of the Internet as a primary medium for commerce, communication and business applications. Our business growth would be impeded if the performance or perception of the Internet was harmed by security problems such as “viruses,” “worms” and other malicious programs, reliability issues arising from outages and damage to Internet infrastructure, delays in development or adoption of new standards and protocols to handle increased demands of Internet activity, increased costs, decreased accessibility and quality of service or increased government taxation of Internet activity.

The Internet has experienced, and is expected to continue to experience, significant user and traffic growth, which has, at times, caused user frustration with slow access and download times. If Internet activity grows faster than Internet infrastructure or if the Internet infrastructure is otherwise unable to support the demands placed on it, or if hosting capacity becomes scarce, our business growth may be adversely affected.

If we are unable to protect our proprietary technology and other intellectual property rights, it will reduce our ability to compete for business and we may lose valuable assets, experience reduced revenue and incur costly litigation to protect our rights.

Our intellectual property rights are important to our business, and our success is dependent, in part, on protecting our proprietary technology and our brand, marks and domain names. In particular, the processes we use when working with the data we obtain, including the use of algorithms and other analytical tools, are critical to the accuracy of our data sets and the success of our business. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as licensing agreements, third-party nondisclosure agreements and other contractual provisions and technical measures, to protect our intellectual property rights. These protections may not be adequate to prevent our competitors from copying our solutions or otherwise infringing on our intellectual property rights. Existing copyright laws

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afford only limited protection for our intellectual property rights and may not protect such rights in the event competitors independently develop solutions similar or superior to ours. In addition, the laws of some countries in which our solutions are or may be licensed may not protect our solutions and intellectual property rights to the same extent as do the laws of the United States.

To protect our proprietary methods, we have one U.S. issued patent and corresponding foreign equivalents, and currently have three U.S. patent applications pending and corresponding foreign equivalents. We cannot assure you that the U.S. Patent and Trademark Office (or its foreign equivalents) will grant these patents, or that the patents granted will give us the protection that we seek.

To protect our trade secrets and other proprietary information, we require employees, consultants, advisors and collaborators to enter into non-disclosure agreements. These agreements may not provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information.

We will not be able to protect our intellectual property if we do not detect unauthorized use of our intellectual property. If we discover that a third party is infringing upon our intellectual property rights, we may need to undertake costly and time-consuming litigation to enforce our intellectual property rights. We cannot be sure we will prevail in any litigation filed to protect our intellectual property, and even if we are successful in protecting our intellectual property rights, we may incur significant legal costs and management’s attention may be diverted from the ongoing development of our business, which could adversely affect our business. If we are unable to protect our intellectual property, our competitors could use our intellectual property to market products similar to ours, which could decrease demand for our solutions.

If a third party asserts that we are infringing its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation or expensive licenses, and our business may be harmed.

The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. Third parties may assert patent and other intellectual property infringement claims against us in the form of lawsuits, letters, or other forms of communication. If a third party successfully asserts a claim that we are infringing their proprietary rights, royalty or licensing agreements might not be available on terms we find acceptable or at all. As currently pending patent applications are not publicly available, we cannot anticipate all such claims or know with certainty whether our technology infringes the intellectual property rights of third parties.

In December 2006, we received a letter from a law firm representing a patent holder which asserts that certain of our products are covered by its patent and offering to enter into a license agreement with us. Although we have reviewed the patent and we believe that our products are not covered by any of the claims in the patent, the patent holder may elect to pursue its assertion through litigation or other means. Additionally, in February 2007, Mercer filed a complaint against us alleging copyright infringement, unfair competition, false representation, fraud, breach of contract and tortious interference with business relations. See “Legal Proceedings” on page 73 for more information. Any litigation, with or without merit, could be time consuming and expensive to litigate or settle and could divert management’s attention from our business. Any license agreement we enter into with the patent holder could have unfavorable terms, including royalty payments, which could adversely affect our business.

In order to obtain certain of the necessary data that serves as the backbone of our compensation management solutions, we enter into agreements with major consulting firms and other third-party providers. We generally receive data in a summary form. We do not generally have an ability to resell

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such data in its entirety, but we can use such data internally to generate our proprietary data sets. If a third party successfully asserts a claim that our use of its data has violated our agreement with such provider or infringed upon their copyright, we may be required to remove the applicable data from our data sets and regenerate our data sets without such data. Additionally, we may no longer be able to obtain data from the provider or other providers on reasonable terms, if at all.

We expect that the number of infringement and breach of contract claims in our market will increase as the number of solutions and competitors in our industry grows. These claims, whether or not successful, could:

• require significant management time and attention;

• result in costly and time-consuming litigation, and the payment of substantial damages;

• require us to enter into royalty or licensing agreements, which may not be available on terms acceptable to us, if at all;

• require us to remove data from our compensation management data sets and regenerate our data sets without such data;

• require us to expend additional development resources to redesign our solutions to avoid infringement or discontinue the sale of our solutions;

• create negative publicity that adversely affects our reputation and brand and the demand for our solutions; or

• require us to indemnify our clients.

As a result, any third-party intellectual property infringement claims or breach of contract claims against us could increase our expenses and adversely affect our business. In addition, many of our customer agreements require us to indemnify our customers for third-party intellectual property infringement claims, which would increase the cost to us resulting from an adverse ruling in any such claim. Even if we have not infringed any third parties’ intellectual property rights, we cannot be sure our legal defenses will be successful, and even if we are successful in defending against such claims, our legal defense could require significant financial resources and management’s time, which could adversely affect our business.

We might require additional capital to support business growth, and this capital might not be available.

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new software or enhance our existing solutions, enhance our operating infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to complete additional equity or debt financings to secure additional funds. We cannot assure you that further equity or debt financing will be available on acceptable terms. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock, including shares of common stock sold in this offering.

Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, the Securities and Exchange Commission, or SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a

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significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.

Our ability to use net operating loss carryforwards in the United States may be limited.

As of March 31, 2006, we had net operating loss carryforwards of approximately $14.7 million for federal tax purposes. These loss carryforwards expire at various dates through 2026. To the extent available, we intend to use these net operating loss carryforwards to reduce the U.S. corporate income tax liability associated with our operations. Section 382 of the U.S. Internal Revenue Code of 1986 generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in stock ownership. Our ability to utilize net operating loss carryforwards may be limited by the issuance of common stock in this offering. To the extent our use of net operating loss carryforwards is significantly limited, our income could be subject to U.S. corporate income tax earlier than it would if we were able to use net operating loss carryforwards, which could result in lower profits.

Risks Related to this Offering

Being a public company will increase our administrative costs.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. Sarbanes-Oxley, as well as new rules subsequently implemented by the SEC and the Nasdaq Global Market, have required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal and financial compliance costs, and to make some activities more time consuming and/or costly. For example, we are migrating our core financial systems to our new accounting system, adopting additional internal controls and disclosure controls and procedures, retaining a transfer agent and a financial printer and adopting corporate governance policies. In addition, as a public company we will have all of the internal and external costs of preparing and distributing periodic public reports in compliance with our obligations under the securities laws. We also expect these new rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance. These new rules and regulations could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers.

Beginning with our annual report for the year ending March 31, 2008, Section 404 of Sarbanes-Oxley requires us to include an internal control report with our annual report on Form 10-K. That report must include management’s assessment of the effectiveness of our internal control over financial reporting as of the end of the fiscal year. Additionally, beginning with our annual report on Form 10-K for the year ending March 31, 2009, our independent registered public accounting firm will be required to issue a report on management’s assessment of our internal control over financial reporting and a report on its evaluation of the operating effectiveness of our internal control over financial reporting. The material weaknesses and any other deficiencies in internal control that we currently have identified and that we may identify in the future will need to be addressed as part of the evaluation of our internal control over financial reporting and may impair our ability to comply with Section 404. If we are not able to successfully implement internal control over financial reporting, we may not be able to accurately and timely report on our financial position, results of operations or cash flows, which could adversely affect our business and investor confidence in us.

See “— Risks Related to Our Business and Industry — Our independent registered public accounting firm has advised us that it has identified certain material weaknesses in our internal control over financial reporting. Failure to achieve and maintain effective internal control over financial reporting could result in our failure to accurately report our financial results” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Controls and Procedures.”

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There has been no public market, and it is possible that no trading market will develop or be maintained, for our common stock, and you may not be able to resell shares of our common stock for an amount equal to or more than your purchase price.

Prior to this offering, there has not been a public market for our common stock. Therefore, stockholders should be aware that they cannot benefit from information about prior market history as to their decision to invest. Although it is anticipated that the common stock will be approved for quotation on the Nasdaq Global Market, there can be no assurance that a trading market will develop or, if such a market does develop, how liquid that market might become, or whether it will be maintained. The initial public offering price will be determined by our negotiations with the representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. If an active trading market fails to develop or be maintained, you may be unable to sell the shares of common stock purchased in this offering at an acceptable price or at all.

If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our stock could decline.

Prior to our public offering, we have received very limited analyst coverage. The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. There are many large, well-established publicly-traded companies active in our industry and market, which may mean it will be less likely that we receive widespread analyst coverage. Furthermore, if one or more of the analysts who do cover us downgrade our stock, our stock price would likely decline rapidly. If one or more of these analysts cease coverage of us, we could lose visibility in the market, which in turn could cause our stock price to decline and may also impair our ability to expand our business with existing customers and attract new customers.

Volatility of our stock price could adversely affect stockholders.

The market price of our common stock could fluctuate significantly as a result of:

• quarterly variations in our operating results;

• seasonality of our business cycle;

• interest rate changes;

• changes in the market’s expectations about our operating results;

• our operating results failing to meet the expectation of securities analysts or investors in a particular period or failure of securities analysts to publish reports about us or our business;

• changes in financial estimates and recommendations by securities analysts concerning our company or the on-demand software industry in general;

• operating and stock price performance of other companies that investors deem comparable to us;

• news reports relating to trends in our markets;

• announcements by us or our competitors of acquisitions, new offerings or improvements, significant contracts, commercial relationships or capital commitments;

• our ability to market new and enhanced offerings on a timely basis;

• changes in laws and regulations affecting our business;

• commencement of, or involvement in, litigation;

• the volume of shares of our common stock available for public sale;

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• any major change in our board or management;

• sales of substantial amounts of common stock by our directors, executive officers or significant stockholders or the perception that such sales could occur; and

• general economic and political conditions such as recessions and acts of war or terrorism.

Fluctuations in the price of our common stock could contribute to the loss of all or part of your investment. Furthermore, any of the factors listed above could have a material adverse effect on your investment in our common stock and our common stock may trade at prices significantly below the offering price. We could be the subject of securities class action litigation due to future stock price volatility, which could divert management’s attention and adversely affect our results of operations.

The concentration of our capital stock ownership with insiders upon the completion of this offering will likely limit your ability to influence corporate matters.

We anticipate that our employees, current 5% or greater stockholders and affiliated entities will together beneficially own approximately 32% of our common stock outstanding after this offering. As a result, these stockholders, acting together, will have control over most matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate action might be taken even if other stockholders, including those who purchase shares in this offering, oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial. In addition, we anticipate that Kent Plunkett, our Chairman, President and Chief Executive Officer, will beneficially own approximately 21% of our common stock outstanding after this offering. Mr. Plunkett’s significant ownership interest could adversely affect investors’ perception of our corporate governance or delay, prevent or cause a change in control of our company, any of which could adversely affect the market price of our common stock.

We do not intend to pay dividends on our common stock in the foreseeable future.

We have not declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings and do not expect to pay any dividend in the foreseeable future. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases. For more information, see “Dividend Policy.”

Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

Our management will have broad discretion to use the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. We may not apply the net proceeds of this offering in ways that increase the value of your investment. We expect to use the estimated net proceeds from this offering to repay outstanding indebtedness, acquire additional data to supplement and expand our data sets, hire additional sales personnel and for general corporate purposes, including working capital and capital expenditures, and for possible investments in, or acquisitions of, complementary products, technologies or businesses. We have not allocated these estimated net proceeds for any specific purposes. Our management might not be able to yield a significant return, if any, on any investment of these estimated net proceeds. You will not have the opportunity to influence our decisions on how to use the proceeds.

You will experience immediate and substantial dilution in the net tangible book value of the shares you purchase in this offering.

If you purchase shares of our common stock in this offering, you will experience immediate and substantial dilution, in that the price you pay will be substantially greater than the net tangible book

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value per share of the shares you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the public offering price when they purchased their shares of common stock. Based on an initial offering price of $10.50 per share, if you purchase our common stock in this offering, you will suffer immediate and substantial dilution of approximately $7.78 per share. If the underwriters exercise their over-allotment option, or if outstanding options and warrants to purchase our common stock are exercised, you will experience additional dilution.

Provisions in our amended and restated certificate of incorporation and bylaws or Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our stock.

Our amended and restated certificate of incorporation and bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions include:

• our board of directors is divided into three classes serving staggered three-year terms;

• only our board of directors may call special meetings of our stockholders;

• our stockholders may take action only at a meeting of our stockholders and not by written consent;

• we have authorized undesignated “blank check” preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;

• stockholder approval of amendments of our certificate of incorporation requires a vote of a majority of our outstanding shares and, in some cases, a vote of 75% of our outstanding shares;

• stockholder approval of amendments of our by-laws requires a vote of a majority of our outstanding shares or, if the amendment is not recommended by our board of directors, a vote of 75% of our outstanding shares;

• vacancies on the board of directors may be filled only by the directors;

• stockholders may remove our directors only for cause and with the affirmative vote of the holders of 75% of the votes that all stockholders would be entitled to cast in the election of directors; and

• we require advance notice for stockholder proposals.

In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company.

Future sales, or the availability for sale, of our common stock may cause our stock price to decline.

In connection with this offering, we, along with our officers, directors and certain stockholders, have agreed, subject to limited exceptions, not to sell or transfer any shares of common stock for 180 days after the date of this prospectus without Thomas Weisel Partners LLC’s consent. However, Thomas Weisel Partners LLC may release these shares from these restrictions at any time. In evaluating whether to grant such a request, Thomas Weisel Partners LLC may consider a number of factors with a view toward maintaining an orderly market for, and minimizing volatility in the market price of, our common stock. These factors include, among others, the number of shares involved, recent trading volume and prices of the stock, the length of time before the lock-up expires and the reasons for, and the timing of, the request. We cannot predict what effect, if any, market sales of shares held by any stockholder or the availability of these shares for future sale will have on the market price of our common stock.

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A total of approximately 9,234,180 shares of common stock may be sold in the public market by existing stockholders on or about 181 days after the date of this prospectus, subject to applicable volume and other limitations imposed under federal securities law. Sales of substantial amounts of our common stock in the public market after the completion of this offering, or the perception that such sales could occur, could adversely affect the market price of our common stock and could materially impair our future ability to raise capital through offerings of our common stock. See “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling shares of our common stock after this offering.

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FORWARD-LOOKING STATEMENTS AND PROJECTIONS

This prospectus contains forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. These statements are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in “Risk Factors” and elsewhere in this prospectus. Accordingly, you should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results could differ materially from those projected in the forward-looking statements. We have identified below some important factors that could cause our forward-looking statements to differ materially from actual results, performance or financial condition:

• our ability to become profitable;

• the ability of our solutions to achieve market acceptance;

• a highly competitive market for compensation management;

• failure of our customers to renew their subscriptions for our products;

• our inability to adequately grow our operations and attain sufficient operating scale;

• our inability to effectively protect our intellectual property and not infringe on the intellectual property of others;

• our inability to raise sufficient capital when necessary or at satisfactory valuations;

• the loss of key personnel; and

• other factors discussed elsewhere in this prospectus.

The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

This prospectus also contains market data related to our business and industry. This market data includes projections that are based on a number of assumptions. If these assumptions turn out to be incorrect, actual results may differ from the projections based on these assumptions. As a result, our markets may not grow at the rates projected by these data, or at all. The failure of these markets to grow at these projected rates may have a material adverse effect on our business, financial condition and results of operations and the market price of our common stock.

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USE OF PROCEEDS

We will receive estimated net proceeds of approximately $43.6 million from the sale of              shares of common stock at the initial public offering price of $10.50 per share, after deducting underwriting commissions and discounts of $3.6 million and estimated offering expenses of $4.3 million. If the underwriters exercise their overallotment option in full, then the estimated net proceeds will be approximately $47.0 million. We will not receive any proceeds from the sale of shares by the selling stockholders.

The principal purposes of this offering are to obtain additional capital, to create a public market for our common stock and to facilitate our future access to the public equity markets.

We intend to repay all amounts owed under our term loan and working capital line of credit with Silicon Valley Bank. As of December 31, 2006, we had approximately $4.3 million outstanding under the term loan and working capital line of credit. Our term loan matures September 2009 and bears interest at a floating annual rate of 1% plus the prime rate and the revolving portion of our credit facility matures August 9, 2008 and bears interest at a floating annual rate of 0.25% plus the prime rate. We entered into the loan agreement with Silicon Valley Bank in August 2006 in order to provide additional working capital for our business and to discharge our existing indebtedness under our revolving line of credit with Kent Plunkett, our Chairman, President and Chief Executive Officer.

We intend to use the remainder of our net proceeds to finance our working capital needs and for general corporate purposes. We may also use a portion of our net proceeds to acquire new data to supplement and expand our existing data sets as well as to acquire complementary products, technologies or businesses. Although we currently have no agreements or commitments to complete any acquisitions or other such transactions and have not allocated funds for any such transactions in our business plan, we believe that the proceeds from this offering will enable us to more effectively pursue strategic opportunities, such as the acquisitions and other transactions discussed above, when and as we identify them.

The amounts described above reflect our estimate of the use of our net proceeds from this offering, based on our current plans. The amounts and timing of our actual expenditures will depend upon numerous factors, including cash flows from operations and the anticipated growth of our business. If our operating cash flows are lower than we expect, we may need to fund operating expenses and capital expenditures with the proceeds of this offering. Management will have significant flexibility in applying the net proceeds from this offering. See “Risk Factors — Risks Related to this Offering—Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.” Pending any use, the net proceeds of this offering will be invested in short-term, interest-bearing investment-grade securities.

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DIVIDEND POLICY

Our board of directors will have discretion in determining whether to declare or pay dividends, which will depend upon our financial condition, results of operations, capital requirements and such other factors as the board of directors deems relevant. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate paying dividends in the foreseeable future. Moreover, our loan and security agreement relating to our term loan and credit facility imposes restrictions on our ability to declare and pay dividends. Although we intend to repay the amounts owed under our term loan and credit facility, we intend to maintain our ability to borrow under the credit facility. We may also incur future indebtedness that will limit our ability to declare and pay dividends.

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CAPITALIZATION

The following table sets forth our capitalization as of December 31, 2006:

• on an actual basis;

• on a pro forma basis to give effect to the conversion of all of our preferred stock upon the closing of this offering; and

• on a pro forma as adjusted basis to give effect to (1) the sale by us of 4,898,443 shares of common stock at an initial public offering price of $10.50 per share, after deducting underwriting discounts and commissions and estimated offering expenses, and (2) the use of $4.3 million of the estimated net proceeds to repay a portion of our outstanding indebtedness. See “Use of Proceeds” for more information regarding our use of the net proceeds of this offering to repay debt.

You should read the following table in conjunction with our financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.

	As of December 31, 2006
	Actual			(Unaudited) Pro forma			Pro forma as adjusted
	(in thousands, except share and per share data)
Cash	$	2,822		$	2,822		$	42,078
Term loan and revolving line of credit		4,328			4,328			—
Redeemable convertible preferred stock		10,925			—			—
Stockholders’ deficit:
Common stock, par value $0.0001 per share, 125,000,000 shares authorized; 5,301,518 shares issued and 5,297,038 outstanding, actual; 125,000,000 shares authorized, 7,060,117 shares issued and 7,055,637 outstanding on a pro forma basis; 100,000,000 shares authorized; 11,958,560 shares issued and 11,954,080 shares outstanding, pro forma as adjusted(1)		1			1			1
Additional paid-in capital		5,220			16,145			59,728
Treasury stock, 4,480 shares at cost		(1	)		(1	)		(1	)
Subscription receivable		(17	)		(17	)		(17	)
Accumulated deficit		(25,258	)		(25,258	)		(25,258	)
Total stockholders’ deficit		(20,055	)		(9,130	)		34,453
Total capitalization	$	(4,802	)	$	(4,802	)	$	34,453

⁽¹⁾ For accounting purposes only, the number of issued and outstanding shares does not include 3,060,497 shares of restricted stock. These shares are subject to a risk of repurchase by us until such shares are vested. See Note 8 to our financial statements for more information.

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DILUTION

Our pro forma net tangible book value as of December 31, 2006 was $(11.1) million, or $(1.57) per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the total number of shares of common stock outstanding, as of December 31, 2006, after giving effect to the conversion of each outstanding share of our preferred stock upon the closing of this offering.

After giving effect to this offering and the receipt of $43.6 million of estimated net proceeds from this offering, based on an initial public offering price of $10.50 per share, the pro forma net tangible book value of our common stock as of December 31, 2006 would have been $32.5 million, or $2.72 per share. This amount represents an immediate increase in net tangible book value of $4.29 per share to the existing stockholders and an immediate dilution in net tangible book value of $7.78 per share to purchasers of our common stock in this offering. Dilution is determined by subtracting pro forma net tangible book value per share after this offering from the amount of cash paid by a new investor for a share of common stock. The new investors will have paid $10.50 per share even though the per share value of our assets after subtracting our liabilities is only $2.72. In addition, the total consideration from new investors will be $51.4 million, which is 76% of the total of $67.6 million paid for all shares of common stock outstanding, but new investors will own only 41% of our outstanding shares of common stock. The following table illustrates such dilution:

Initial public offering price per share				$	10.50
Historical net tangible book value (deficit) per share as of December 31, 2006	$	(4.16	)
Increase per share attributable to pro forma conversion of preferred stock		2.59
Pro forma net tangible book value per share before this offering		(1.57	)
Increase per share attributable to this offering	$	4.29
Pro forma net tangible book value per share after this offering					2.72
Dilution per share to new investors				$	7.78

If the underwriters exercise their overallotment option in full, the pro forma net tangible book value per share after the offering would be $35.9 million, or $3.00 per share. This amount represents an immediate increase in net tangible book value of $4.58 per share to the existing stockholders and an immediate dilution in net tangible book value of $7.50 per share to purchasers of our common stock in this offering.

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SELECTED FINANCIAL DATA

The selected statement of operations data for the three years ended March 31, 2006, and balance sheet data as of March 31, 2004, 2005 and 2006, have been derived from our audited financial statements for the fiscal years ended March 31, 2004 and 2005, which have been audited by Vitale, Caturano & Company LTD., an independent registered public accounting firm, as indicated in their report, and from our audited financial statements for the fiscal year ended March 31, 2006, which have been audited by Grant Thornton LLP, an independent registered public accounting firm, as indicated in their report. The selected statement of operations data for the years ended March 31, 2002 and 2003 and balance sheet data for the fiscal years ended March 31, 2002 and 2003 have been derived from our unaudited financial statements for the fiscal years ended March 31, 2002 and 2003. These unaudited financial statements include, in the opinion of management, all adjustments (consisting of normal recurring adjustments) that management considers necessary for the fair presentation of the financial information set forth in these statements. The statement of operations data for the nine months ended December 31, 2005 and 2006 and the balance sheet data as of December 31, 2006 were derived from our unaudited financial statements and related notes, which are included in this prospectus. These unaudited financial statements include, in the opinion of management, all adjustments (consisting of normal recurring adjustments) that management considers necessary for the fair presentation of the financial information set forth in those statements. The selected financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth below and our financial statements and related notes included elsewhere in this prospectus. The historical results are not necessarily indicative of the results to be expected in any future period and the results for the nine months ended December 31, 2006 should not be considered indicative of results expected for the full year.

(in thousands, except per share data)
																Nine months ended
	Years ended March 31,															December 31,
	2002			2003			2004			2005			2006			2005			2006
Statement of Operations:		(Unaudited)															(Unaudited)
Revenue:
Subscription revenues	$	964		$	2,699		$	5,150		$	8,565		$	13,037		$	9,262		$	14,765
Advertising revenues		508			785			1,250			1,411			2,262			1,525			1,870
Total revenues		1,472			3,484			6,400			9,976			15,299			10,787			16,635
Cost of revenues(1)		972			690			901			1,831			3,108			2,163			3,657
Gross profit		500			2,794			5,499			8,145			12,191			8,624			12,978
Operating expenses:
Research and development(1)		570			671			846			1,410			2,238			1,485			2,807
Sales and marketing(1)		1,919			2,438			3,477			5,855			8,573			5,808			9,048
General and administrative(1)		1,520			1,959			2,002			2,798			4,337			3,131			4,975
Amortization of intangible assets		—			—			—			—			—			—			102
Total operating expenses		4,009			5,068			6,325			10,063			15,148			10,424			16,932
Loss from operations		(3,509	)		(2,274	)		(826	)		(1,918	)		(2,957	)		(1,800	)		(3,954	)
Other income (expense)		(259	)		64			(368	)		(372	)		(173	)		(133	)		(74	)
Net loss		(3,768	)		(2,210	)		(1,194	)		(2,290	)		(3,130	)		(1,933	)		(4,028	)
Accretion of preferred stock		(352	)		(514	)		(473	)		(513	)		(515	)		(387	)		(387	)
Net loss attributable to common stockholders	$	(4,120	)	$	(2,724	)	$	(1,667	)	$	(2,803	)	$	(3,645	)	$	(2,320	)	$	(4,415	)
Net loss attributable to common stockholders per share, basic and diluted	$	(8.91	)	$	(3.47	)	$	(0.68	)	$	(0.81	)	$	(0.89	)	$	(0.58	)	$	(0.90	)

⁽¹⁾ Net loss includes stock-based compensation expense, as follows:

											Nine months ended
	Years ended March 31,										December 31,
	2002		2003		2004		2005		2006		2005		2006
	(Unaudited)										(Unaudited)
Stock-based compensation
Cost of revenues	$	—	$	—	$	—	$	41	$	186	$	71	$	233
Research and development		—		—		—		57		180		79		207
Sales and marketing		—		—		—		162		401		196		514
General and administrative		—		—		1		252		311		189		533
	$	—	$	—	$	1	$	512	$	1,078	$	535	$	1,487

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(in thousands)
	As of March 31,															As of December 31,
	2002			2003			2004			2005			2006			2006
	(Unaudited)															(Unaudited)
Balance Sheet Data:
Cash	$	213		$	156		$	1,423		$	392		$	1,814		$	2,822
Total assets		1,150			1,177			3,401			3,428			7,028			15,913
Total debt		1,830			2,264			2,654			1,100			800			4,328
Total deferred revenue		489			1,682			3,863			6,384			10,548			15,371
Redeemable convertible preferred stock		7,430			8,104			9,185			9,973			10,538			10,925
Total stockholders’ deficit		(9,463	)		(11,961	)		(13,070	)		(15,240	)		(17,914	)		(20,055	)

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with our financial statements and related notes appearing elsewhere in this prospectus. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause our actual results to differ materially from our expectations. Factors that could cause such differences include those described in “Risk Factors” and elsewhere in this prospectus.

Overview

Salary.com is a leading provider of on-demand compensation management solutions. Our comprehensive on-demand software applications are integrated with our proprietary data sets to automate the essential elements of our customers’ compensation management processes. As a result, our solutions can significantly improve the effectiveness of our customers’ compensation spending. We enable employers of all sizes to replace or supplement inefficient and expensive traditional approaches to compensation management, including the use of paper-based surveys, consultants, internally developed software applications and spreadsheets.

Our on-demand solutions, which incorporate market compensation intelligence from our proprietary data sets, enable companies to determine how much to pay new and existing employees and to manage overall compensation programs. Our data sets contain base, bonus and incentive pay data for positions held by more than 73% of U.S. employees and similar data for the top executives in over 10,000 U.S. public companies. Our flagship offering is CompAnalyst, a suite of compensation management applications that integrates our data, third party survey data and a customer’s own pay data in a complete analytics offering. We have also introduced TalentManager, an employee life-cycle performance management application that links employee pay to performance. We offer these solutions principally on an annual or multi-year subscription basis. In addition to our on-demand enterprise software offerings, we also provide a series of applications through our website, which allows us to deliver salary management comparison and analysis tools to individuals and small businesses on a cost-effective, real-time basis.

We were organized as a Delaware corporation in 1999. As of December 31, 2006, our enterprise subscriber base has grown to approximately 1,700 companies who spend from $2,000 to more than $100,000 annually. We have achieved 23 consecutive quarters of revenue growth since April 2001. During the years ended March 31, 2004, 2005 and 2006, and the nine months ended December 31, 2006, we achieved positive operating cash flows of $0.3 million, $0.9 million, $1.8 million, and $2.0 million, respectively. During these periods, we have consistently incurred operating losses, including $0.8 million for 2004, $1.9 million for 2005, $3.0 million for 2006 and $4.0 million for the nine months ended December 31, 2006. As of December 31, 2006, we had an accumulated deficit of $25.3 million.

Sources of Revenues

We derive our revenues primarily from subscription fees and, to a lesser extent, through advertising on our website. For the years ended March 31, 2004, 2005 and 2006 and the nine months ended December 31, 2006, subscription revenues accounted for 80%, 86%, 85% and 89%, respectively, of our total revenues and for the years ended March 31, 2004, 2005 and 2006 and the nine months ended December 31, 2006, advertising revenues accounted for 20%, 14%, 15% and 11%, respectively, of our total revenues. For the years ended March 31, 2004, 2005 and 2006, our subscription revenues derived from our TalentManager products comprised less than 15% of our total revenues, with the remainder of our subscription revenues being derived from our compensation management and data products.

Subscription revenues are comprised primarily of subscription fees from enterprise and small business customers who pay a bundled fee for our on-demand software applications and data products

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and implementation services related to our subscription products, as well as syndication fees from our website partners and premium membership subscriptions sold primarily to individuals. Subscription revenues are recognized ratably over the contract period as they are earned. Our subscription agreements for our enterprise subscription customer base are typically one to five years in length, and as of December 31, 2006, approximately 55% of our contracts were more than one year in length. We generally invoice our customers annually in advance of their subscription (for both new products and renewals), with payment due upon receipt of invoice. Deferred revenue consists primarily of billings or payments received in advance of revenue recognition from our subscription agreements and is recognized over time as the revenue recognition criteria are met. Changes in deferred revenue generally indicate the trend for subscription revenues over the following year as the current portion of deferred revenue is expected to be recognized as revenue within 12 months. To a lesser extent, subscription revenues also include fees for professional services which are not bundled with our subscription products and revenue from the sale of our Compensation Market Study and Salary.com Survey products, which are not sold on a subscription basis.

Advertising revenues are comprised of revenues that we generate through agreements to display third party advertising on our website for a fixed period of time or fixed number of impressions. Advertising revenues are recognized as the advertising is displayed on the website.

Cost of Revenues and Operating Expenses

Cost of Revenues.    Cost of revenues consists primarily of costs for data development and data acquisition, fees paid to our network provider for the hosting and managing of our servers, related bandwidth costs, compensation costs for the support and implementation of our products and amortization of capitalized software costs. As we continue to implement and support our new and existing products and expand our data sets, we expect that over the next few years cost of revenues will continue to increase as a percentage of revenue and on an absolute dollar basis. Over the longer term, we expect our cost of revenues to decrease as a percentage of revenue as our business grows and our new data products gain market acceptance.

Research and Development.    Research and development expenses consist primarily of compensation for our software and data application development personnel. We have historically focused our research and development efforts on improving and enhancing our existing on-demand software and data offerings as well as developing new features, functionality and products. We expect that in the future, research and development expenses will increase on an absolute basis as we upgrade and extend our service offerings and develop new technologies.

Sales and Marketing.    Sales and marketing expenses consist primarily of compensation for our sales and marketing personnel, including sales commissions, as well as the costs of our marketing programs. We capitalize our sales commissions at the time a subscription agreement is executed by a customer and we recognize the initial year sales commission expense ratably over one year. In the case of multi-year agreements, upon billing the customer for each additional year, we incur a subsequent sales commission and recognize the expense for such commission over the applicable year. Typically, a majority of the sales commission is recognized in the initial year of the subscription term. In order to add new customers and increase sales to our existing customers, we plan to continue to invest heavily in our sales efforts by increasing the number of direct sales personnel. We also plan to expand our marketing activities in order to extend brand awareness and generate additional leads for our sales staff. As a result, we expect that our sales and marketing expenses will increase on an absolute basis as we grow our business.

General and Administrative.    General and administrative expenses consist of compensation expenses for executive, finance, accounting, administrative and management information systems personnel, professional fees and other corporate expenses. We expect that in the fiscal year ending

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March 31, 2007 and for some period of time thereafter, general and administrative expenses will increase on an absolute basis as we incur additional costs associated with being a public company. In particular, we will incur costs to implement and maintain our new accounting system and to hire additional personnel to enable us to meet our financial reporting and regulatory compliance requirements, which are necessary to remediate certain material weaknesses in our internal control over financial reporting that have been identified by our independent registered public accounting firm. See “Risk Factors—Risks Related to Our Business and Industry—Our independent registered public accounting firm has advised us that it has identified certain material weaknesses in our internal control over financial reporting. Failure to achieve and maintain effective internal control over financial reporting could result in our failure to accurately report our financial results” and “—Controls and Procedures.”

Critical Accounting Policies

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

We believe that of our significant accounting policies, which are described in the notes to our financial statements, the following accounting policies involve a greater degree of judgment, complexity and effect on materiality. A critical accounting policy is one that is both material to the presentation of our financial statements and requires us to make difficult, subjective or complex judgments for uncertain matters that could have a material effect on our financial condition and results of operations. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.

Revenue Recognition.    In accordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” as amended by Staff Accounting Bulletin No. 104, “Revenue Recognition,” we recognize revenues from subscription agreements for our on-demand software and related services when there is persuasive evidence of an arrangement, the service has been provided to the customer, the collection of the fee is probable and the amount of the fees to be paid by the customer is fixed or determinable. Amounts that have been invoiced are recorded in accounts receivable and deferred revenue. Our subscription agreements generally contain multiple service elements and deliverables. These elements include access to our software and often specify initial services including implementation and training. Except under limited circumstances, our subscription agreements do not provide customers the right to take possession of the software at any time.

In accordance with Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, or EITF 00-21, issued by the Emerging Issues Task Force of the Financial Accounting Standards Board, or FASB, in May 2003, we define all elements in our multiple element subscription agreements as a single unit of accounting, and accordingly, recognize all associated revenue over the subscription period, which is typically one to five years in length. In the event professional services relating to implementation are required, we generally do not recognize revenue until such implementation is complete. In applying the guidance in EITF 00-21, we determined that we do not have objective and reliable evidence of the fair value of the subscription to our on-demand software after delivery of specified initial services. We therefore account for our subscription arrangements and our related service fees as a single unit.

Income Taxes.    We account for income taxes in accordance with FASB Statement No. 109, “Accounting for Income Taxes,” or SFAS 109, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax

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basis of recorded assets and liabilities. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion of all of the deferred tax asset will not be realized. The realization of the deferred tax assets is evaluated quarterly by assessing the valuation allowance and by adjusting the amount of the allowance, if necessary.

Software Capitalization Costs.    We capitalize certain internal software development costs under the provisions of Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (“SOP 98-1”). SOP 98-1 requires computer software costs associated with internal use software to be charged to operations as incurred until certain capitalization criteria are met. Costs incurred during the preliminary project stage and the post-implementation stages are expensed as incurred. Certain qualifying costs incurred during the application development stage are capitalized as property, equipment and software. These costs generally consist of internal labor during configuration, coding, and testing activities. Capitalization begins when the preliminary project stage is complete, management with the relevant authority authorizes and commits to the funding of the software project, and it is probable that the project will be completed and the software will be used to perform the function intended. These costs are amortized using the straight-line method over the estimated useful life of the software, generally three years.

Allowance for Doubtful Accounts.    We maintain an allowance for doubtful accounts for estimated losses resulting from our customers’ inability to pay us. The provision is based on our historical experience and for specific customers that, in our opinion, are likely to default on our receivables from them. In order to identify these customers, we perform ongoing reviews of all customers that have breached their payment terms, as well as those that have filed for bankruptcy or for whom information has become available indicating a significant risk of non-recoverability. In addition, we have experienced significant growth in the number of our customers, and we have less payment history to rely upon with these customers. We rely on historical trends of bad debt as a percentage of total revenue and apply these percentages to the accounts receivable associated with new customers and evaluate these customers over time. To the extent that our future collections differ from our assumptions based on historical experience, the amount of our bad debt and allowance recorded may be different.

Stock-Based Compensation. Effective April 1, 2005, we adopted FASB Statement No. 123-revised, “Share-Based Payment” or SFAS 123R, which revises SFAS No. 123, “Accounting for Stock-Based Compensation” or SFAS 123 and supersedes Accounting Principles Board or APB Opinion No. 25, “Accounting for Stock Issued to Employees” or APB 25. SFAS 123R requires that all stock-based compensation be recognized as an expense in the financial statements and that such expense be measured at the fair value of the award.

We adopted SFAS 123R using the prospective method of application, which requires us to recognize compensation expense on a prospective basis; therefore, prior period financial statements have not been restated. Compensation expense recognized includes the expense of stock options granted on and subsequent to April 1, 2005. Stock options granted by us prior to that time are specifically excluded from SFAS 123R and will continue to be accounted for in accordance with APB 25. These options were valued using the minimum value method.

Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the use of highly subjective assumptions, including the expected life of the stock-based payment awards and stock price volatility. In fiscal 2006, we used the Black-Scholes option-pricing model to value our option grants and determine the related compensation expense. The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could

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be materially different in the future. Prior to the adoption of SFAS 123R, we had adopted SFAS 123, but in accordance with SFAS 123, we had elected not to apply fair value-based accounting for awards under our employee stock incentive plan through March 31, 2005. Instead, we measured compensation expense for our stock plans using the intrinsic value method prescribed by APB 25 and related interpretations and provided pro forma disclosures as permitted under SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure an amendment of SFAS 123”.

In fiscal 2006, we have employed the following key assumptions to determine fair values of option grants pursuant to the Black-Scholes option pricing model:

	March 31, 2006
Expected dividend yield	0	%
Risk-free interest rate	3.72-4.82	%
Expected option term (in years)	5
Volatility	60-75	%

We estimate our expected volatility based on that of our publicly traded peer companies and expect to continue to do so until such time as we have adequate historical data from our traded share price. Management believes that the historical volatility of the Company’s stock price does not best represent the expected volatility of the stock price. We are currently a private company and therefore lack company-specific historical and implied volatility information. We intend to continue to consistently use the same group of publicly-traded peer companies to determine volatility in the future until such time that sufficient information regarding the volatility of our share price becomes available or that the selected companies are no longer suitable for this purpose.

The risk-free interest rate used for each grant is equal to the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected life.

The expected term of the options granted was determined based upon review of the period that our share-based awards are expected to be outstanding and is estimated based on historical experience of similar awards, giving consideration to the contractual term of the awards, vesting schedules, employee turnover and expectations of employee exercise behavior.

The stock price volatility and expected terms utilized in the calculation of fair values involve management’s best estimates at that time, both of which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the life of the option. SFAS 123R also requires that we recognize compensation expense for only the portion of options that are expected to vest. Therefore, we have estimated expected forfeitures of stock options with the adoption of SFAS 123R. In developing a forfeiture rate estimate, we have considered our historical experience, our growing employee base and the limited liquidity of our common stock. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.

We have historically granted stock options at exercise prices equivalent to the fair value of our common stock as estimated by our board of directors, with input from management, as of the date of grant. Because there has been no public market for our common stock, our board of directors determined the fair value of our common stock by considering a number of objective and subjective factors, including our operating and financial performance and corporate milestones, the prices at which we sold shares of redeemable convertible preferred stock, the superior rights and preferences of securities senior to our common stock at the time of each grant and the risk and non-liquid nature of our common stock. In years prior to 2006, we have not historically obtained contemporaneous valuations by

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an unrelated valuation specialist because, at the time of the issuances of stock options, we believed our estimates of the fair value of our common stock to be reasonable based on the foregoing factors.

In anticipation of a potential public offering and solely for the purposes of accounting for stock-based compensation for financial statement purposes, during 2006 we reassessed the valuation of our common stock at various selected dates from April 1, 2004 through March 31, 2006. The difference between the original estimated fair value and the reassessed valuation of the underlying common stock related to the grants made during those timeframes has been booked as additional compensation expense in our financial statements. Reassessed values are inherently uncertain and highly subjective. We made retrospective adjustments to our financial statements for the year ended March 31, 2005 related to these valuations. Prior to April 1, 2004, no expense was recorded as we determined that the estimated fair value of our stock at the date of grant did not exceed the exercise price.

Additionally, for fiscal 2005, prior to adoption of SFAS 123R, we have revised the Black-Scholes fair value of the stock option grants to reflect the reassessed fair value of our common stock, which is included in the pro forma compensation expense per our financial statement footnote. Upon adoption of SFAS 123R during fiscal 2006, the Black-Scholes calculations reflect the reassessed fair value of our common stock and the fair value of these grants will be recognized as compensation expense on a straight line basis over the vesting period of the options. The compensation expense on unvested options at March 31, 2006 that will be recognized in future periods net of forfeitures is as follows:

	2007		2008		2009		2010		2011
123R Stock-Based Compensation Charge	$	760,095	$	901,689	$	946,840	$	946,840	$	653,615

We account for stock compensation arrangements with non-employees in accordance with Emerging Issues Task Force No. 96-18, or EITF No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” using a fair value approach. For stock options granted to non-employees, the fair value of the stock options is estimated using the Black-Scholes valuation model. Stock-based compensation expense is recognized over the period of expected service by the non-employee. As the service is performed, we are required to update these assumptions and periodically revalue unvested options and make adjustments to the stock-based compensation expense using the new valuation. These adjustments may result in additional or lesser stock-based compensation expense than originally estimated or recorded, with a corresponding increase or decrease in compensation expense in the statement of operations.

Significant Factors, Assumptions, and Methodologies Used in Determining Fair Value.    Determining the fair value of our stock requires making complex and subjective judgments. Our approach to the valuation of our company is based on a weighted average of the guideline public company method and the discounted future cash flow method.

We estimated our enterprise value under the guideline public company method by comparing our company to publicly-traded companies in our industry group. The companies used for comparison under the guideline public company method were selected based on a number of factors, including but not limited to, the similarity of their industry, business model, and financial risk to those of ours. We used those companies that we believed were closely comparable to ours, based on the above factors. In determining our enterprise value under this method, we utilized a risk adjusted enterprise value multiple to sales ratio, which ranged from 1.9 to 3.5 during the period from September 30, 2004 through November 6, 2006, based on the median of the guideline companies and applied the ratio to the sales of our company.

We also estimated our enterprise value under the discounted future cash flow method, which involves applying appropriate discount rates to estimated cash flows that are based on forecasts of

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revenue and costs. Our revenue forecasts are based on expected market growth rates ranging from 25% to 58% over the next five years as well as assumptions about our future costs during the next five years. There is inherent uncertainty in making these estimates. These assumptions underlying the estimates are consistent with the plans and estimates that we use to manage the business. The risks associated with achieving our forecasts were assessed in selecting the appropriate discount rates, which ranged from 22.31% to 33.33% during the period from September 30, 2004 through November 6, 2006. If different discount rates had been used, the valuations would have been different.

In order to allocate the enterprise value determined under the guideline public company method and the discounted future cash flow method to our common stock, we used the probability-weighted expected return method. Under the probability-weighted expected return method, the fair market value of the common stock is estimated based upon an analysis of future values for our company assuming various future outcomes. The anticipated timing of these future outcomes is based on the plans of our board and management. Stock value is based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to us as well as the rights of each class of stock.

The fair market value of our common stock was estimated using a probability-weighted analysis of the present value of the returns afforded to our stockholders under each of four possible future scenarios. Three of the scenarios assume a stockholder exit, through our initial public offering, sale or dissolution. The fourth scenario assumes operations continue as a private company and no exit transaction occurs.

For each of the first three scenarios, estimated future and present values for our common stock were calculated using assumptions including: the expected pre-money valuation (pre-offering or pre-sale); the expected dates of the future expected initial public offering or sale; and an appropriate risk-adjusted discount rate. An estimated present value for our common stock was calculated for the fourth scenario (private company with no exit scenario) using a weighted average of the discounted cash flow method and the guideline public company method. Finally, the present values calculated for our common stock under each scenario were weighted based our management’s estimates of the probability of occurrence of each of the scenarios. The resulting value indications represent the estimated fair market value of our common stock at each valuation date.

Significant Factors Contributing to the Difference between Fair Value as of the Date of Each Grant and IPO Price.    As discussed more fully in Note 8 to the financial statements, we granted stock options with a weighted average exercise price of $6.749 per share during the nine months ended December 31, 2006. We determined that the fair value of our common stock increased from $3.929 per share to $7.411 per share during that period. The reasons for the difference between the fair value of our common stock and an initial public offering price set forth on the front cover of this prospectus of $10.50 per share are as follows:

• During the quarter ended December 31, 2005, we continued to operate our business in the ordinary course. Although we saw increases in sales and revenue, we also increased our operating expenses in support of growing the business (primarily by hiring additional personnel). Our business continued to operate at a GAAP loss. During this quarter we had no plans to launch an initial public offering in the near term, as we did not believe that an initial public offering would be worthwhile for a company of our small size.

• During the quarter ended March 31, 2006, we continued to operate our business in the ordinary course. Although we saw increases in sales and revenue, we also increased our operating expenses in support of growing the business (primarily by hiring additional personnel). Our business continued to operate at a GAAP loss. In order to strengthen our infrastructure, we hired an experienced Chief Financial Officer with a background in technology companies as well as experience in the financial management of public companies. Throughout this quarter, we

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continued to believe that our small size, combined with continued operating losses, would preclude us from completing an initial public offering in the near term.

• During the quarter ended June 30, 2006, we acquired certain assets of the eComp Data Services Division from Aon Consulting, Inc. for total consideration, including assumed liabilities, of $705,000. This small but strategic acquisition assisted us in accelerating our growth through product and client expansion. We also started to explore the possibility of opening a software development center in China. During this quarter we reviewed the performance of on-demand software companies that had recently completed an initial public offering and found that we might be approaching the growth and cash flow metrics that would permit us to launch an initial public offering given the success of other on-demand software companies.

• With the continued success of other on-demand software companies that had recently completed their initial public offerings, we concluded that it made sense to begin a dialogue with investment banks about a possible initial public offering. During the quarter ended September 30, 2006, we engaged investment bankers, lawyers and accountants to start the process of an initial public offering and held our initial organizational meeting.

• During the quarter ended December 31, 2006, we filed a registration statement with the Securities and Exchange Commission to sell stock in an initial public offering.

Based on an initial public offering price of $10.50, the intrinsic value of the options outstanding at December 31, 2006, was $8.1 million, of which $1.8 million related to vested options and $6.3 million related to unvested options.

Although we expect that the completion of this offering will add value to our common stock because of increased liquidity and marketability, the amount of additional value cannot be measured with precision or certainty.

Valuation of Goodwill.    We follow the guidance of SFAS No. 142, “Goodwill and Other Intangible Assets” or SFAS 142. In accordance with SFAS No. 142, goodwill and certain intangible assets are no longer amortized, but instead we assess the impairment of goodwill and identifiable intangible assets on at least an annual basis and whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Factors we consider important that could trigger an impairment review include significant underperformance relative to historically or projected future operating results, identification of other impaired assets within a reporting unit, the disposition of a significant portion of a reporting unit, significant adverse changes in business climate or regulations, significant changes in senior management, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period, a decline in our credit rating, or a reduction of our market capitalization relative to net book value. Determining whether a triggering event has occurred includes significant judgment from management.

The goodwill impairment test prescribed by SFAS No. 142 requires us to identify reporting units and to determine estimates of the fair value of our reporting units as of the date we test for impairment. To conduct a goodwill impairment test, the fair value of the reporting unit is compared with its carrying value. If the reporting unit’s carrying value exceeds its fair value, we record an impairment loss to the extent that the carrying value of the goodwill exceeds its implied fair value. The fair value of a reporting unit is the amount for which the unit as a whole could be bought or sold in a current transaction between willing parties. The estimation of the fair values of reporting units requires the use of discounted cash flow valuation models. Those models require estimates of future revenue, profits, capital expenditures and working capital for each unit. These estimates will be determined by evaluating historical trends, current budgets, operating plans and industry data. Determining the fair value of reporting units and goodwill includes significant judgment by management and different judgments could yield different results.

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Results of Operations

The following tables set forth selected statements of operations data for each of the periods indicated as a percentage of total revenues.

	Year Ended March 31,						Nine Months Ended December 31,
	2004		2005		2006		2005		2006
							(Unaudited)
Revenues
Subscription Revenues	80	%	86	%	85	%	86	%	89	%
Advertising Revenues	20		14		15		14		11
Total Revenues	100		100		100		100		100
Cost of Revenues	14		18		20		20		22
Gross Profit	86		82		80		80		78
Operating Expenses
Research and Development	13		14		15		14		17
Sales and Marketing	55		59		56		54		54
General and Administrative	31		28		28		29		30
Amortization of Intangible Assets	—		—		—		—		1
Total Operating Expenses	99		101		99		97		102
Loss from Operations	(13	)	(19	)	(19	)	(17	)	(24	)
Other Income (Expense) Net	(6	)	(4	)	(1	)	(1	)	—
Net Loss	(19	)%	(23	)%	(20	)%	(18	)%	(24	)%

The following table sets forth our total deferred revenue and net cash (used in) provided by operating activities for each of the periods indicated as well as our active enterprise subscribers. We define our active enterprise subscribers as those companies that had an active enterprise subscription license for one or more years at an annual rate of more than $2,000 during at the end of the periods indicated.

(in thousands, except for active subscribers)
	Year Ended March 31,						Nine Months Ended December 31,
	2004		2005		2006		2005		2006
							(Unaudited)
Total deferred revenue	$	3,863	$	6,384	$	10,548	$	9,659	$	15,371
Net cash provided by operating activities		330		939		1,791		1,071		1,977
Active enterprise subscribers		528		907		1270		1,161		1,704

Nine Months Ended December 31, 2006 and 2005

Revenues.    Revenues for the nine months ended December 31, 2006 were $16.6 million, an increase of $5.8 million, or 54%, over revenues of $10.8 for the nine months ended December 31, 2005. Subscription revenues were $14.8 million for the nine months ended December 31, 2006, an increase of $5.5 million, or 59%, over subscription revenues of $9.3 million for the nine months ended December 31, 2005. The growth in subscription revenues was due principally to an increase of $2.0 million in renewal revenues to existing subscription customers, an increase of $2.0 million in revenues to new subscription customers due to an increase of $0.9 million in revenues from additional products sold to existing customers for the nine months ended December 31, 2006 as compared to the nine months ended December 31, 2005. The increase in total revenues was due to our hiring of additional sales personnel focused on retaining existing customers, adding new customers and upselling to existing customers. While we introduced TalentManager in 2004, we have not yet recognized a material amount of revenues from this solution partly due to the requirement to recognize revenue over the subscription period. Advertising revenues were $1.9 million for the nine months ended December 31, 2006, an increase of

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$0.4 million, or 23%, over advertising revenues of $1.5 million for the nine months ended December 31, 2005. The growth in advertising revenues was primarily due to increased advertising volume. Total deferred revenue as of December 31, 2006 was $15.4 million, representing an increase of $5.7 million, or 59%, over total deferred revenue of $9.7 million as of December 31, 2005.

Cost of Revenues.    Cost of revenues for the nine months ended December 31, 2006 was $3.7 million, an increase of $1.5 million, or 69%, over cost of revenues of $2.2 million for the nine months ended December 31, 2005. The increase was primarily due to a $929,000 increase in employee related costs due to the addition of 13 personnel from December 31, 2005 to December 31, 2006 for our compensation and professional service teams, a $162,000 increase in stock-based compensation expense as well as $161,000 of costs associated with sales of our CompAnalyst Executive Product which was not available during the nine months ended December 31, 2005. As a percent of total revenues, cost of revenues increased from 20% to 22%. We increased the number of professional service personnel in order to provide implementation services to our increasing number of customers.

Research and Development Expenses.    Research and development expenses for the nine months ended December 31, 2006 were $2.8 million, an increase of $1.3 million, or 89%, over research and development expenses of $1.5 million for the nine months ended December 31, 2005. The increase in research and development expenses was primarily due to a $838,000 increase in employee related costs due to the addition of 18 personnel from December 31, 2005 to December 31, 2006, and an increase of $128,000 in stock-based compensation expense. Our research and development headcount increased as we hired additional personnel to upgrade and expand our on-demand software.

Sales and Marketing Expenses.    Sales and marketing expenses for the nine months ended December 31, 2006 were $9.1 million, an increase of $3.3 million, or 56%, over sales and marketing expenses of $5.8 million for the nine months ended December 31, 2005. The increase was primarily due to a $1.8 million increase in employee related costs due to the addition of 25 sales and marketing personnel from December 31, 2005 to December 31, 2006, $502,000 in increased sales commissions as a result of increased sales, and to a lesser extent, a $318,000 increase in stock-based compensation expense. Our sales and marketing headcount increased as we hired additional personnel to focus on adding new customers and increasing revenues from existing customers.

General and Administrative Expenses.    General and administrative expenses for the nine months ended December 31, 2006 were $5.0 million, an increase of $1.9 million, or 60%, over general and administrative expenses of $3.1 million for the nine months ended December 31, 2005. The increase in general and administrative expenses was due to an increase of $349,000 in rent expense related to taking on additional space to support continued growth, a $344,000 increase in stock-based compensation expense, a $366,000 increase in employee related costs due to the addition of 8 IT, accounting and legal personnel and a $161,000 increase in depreciation expense from December 31, 2005 to December 31, 2006. Our general and administrative headcount increased as we hired additional personnel to support our growth.

Amortization of Intangible Assets.    Amortization of intangible assets for the nine months ended December 31, 2006 was $102,000. The amortization was the result of the acquisition of certain assets of the eComp Data Services Division from Aon Consulting in April 2006.

Other Income (Expense).    Other income (expense) consists primarily of interest income and expense. Other income (expense) for the nine months ended December 31, 2006 was an expense of $74,000, a decrease of $59,000, or 45%, from other expenses of $133,000 for the nine months ended December 31, 2005. The decrease was primarily due to decreased interest expense attributable to the paying down of certain outstanding notes and a lower average outstanding balance on our lines of credit.

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Fiscal Years Ended March 31, 2006 and 2005

Revenues.    Revenues for 2006 were $15.3 million, an increase of $5.3 million, or 53%, over revenues of $10.0 million for 2005. Subscription revenues were $13.0 million in 2006, an increase of $4.4 million, or 52%, over subscription revenues of $8.6 million in 2005. The growth in subscription revenues was due principally to an increase of $1.8 million in renewal revenues to existing subscription customers, an increase of $1.5 million in revenues to new subscription customers and due to an increase of $0.6 million in revenues from additional products sold to existing customers for the fiscal year ended March 31, 2006 as compared to the fiscal year ended March 31, 2005. The increase in total revenues was due to our hiring of additional sales personnel focused on retaining existing customers, adding new customers and upselling to existing customers. Although we introduced TalentManager in 2004, we have not yet recognized a material amount of revenues from this solution partly due to the requirement to recognize revenue over the subscription period. Advertising revenues for 2006 were $2.3 million, an increase of $0.9 million, or 60%, over advertising revenues of $1.4 million in 2005. The growth in advertising revenues was primarily due to increased advertising volume. Total deferred revenue as of March 31, 2006 was $10.5 million, representing an increase of $4.1 million, or 65%, over total deferred revenue of the $6.4 million as of March 31, 2005.

Cost of Revenues.    Cost of revenues for 2006 was $3.1 million, an increase of $1.3 million, or 70%, over cost of revenues of $1.8 million for 2005. The increase was primarily due to a $1.0 million increase in employee related costs due to the addition of 8 personnel from March 31, 2005 to March 31, 2006 to our compensation and professional services teams and a $144,000 increase in stock-based compensation expense. As a percent of total revenues, cost of revenues increased slightly to 20% in 2006 as compared to 18% in 2005. We increased the number of professional service personnel in order to provide implementation services to our increasing number of customers.

Research and Development Expenses.    Research and development expenses for 2006 were $2.2 million, an increase of $0.8 million, or 59%, over research and development expenses of $1.4 million for 2005. The increase in research and development expenses was primarily due to a $570,000 increase in employee related costs due to the addition of 5 personnel from March 31, 2005 to March 31, 2006, and a $123,000 increase in stock-based compensation expense. Our research and development headcount increased as we hired additional personnel to upgrade and expand our on-demand software.

Sales and Marketing Expenses.    Sales and marketing expenses for 2006 were $8.6 million, an increase of $2.7 million, or 46%, over sales and marketing expenses of $5.9 million for 2005. The increase was primarily due to a $1.7 million increase in employee related costs due to the addition of 20 personnel from March 31, 2005 to March 31, 2006 to our sales and marketing teams, a $535,000 increase in sales commissions as a result of increased sales, and a $239,000 increase in stock-based compensation expense. Our sales and marketing headcount increased as we hired additional personnel to focus on adding new customers and increasing revenues from existing customers.

General and Administrative Expenses.    General and administrative expenses for 2006 were $4.3 million, an increase of $1.5 million, or 55%, over general and administrative expenses of $2.8 million for 2005. The increase in general and administrative expenses was primarily due to a $903,000 increase in employee related costs due to the addition of 5 personnel from March 31, 2005 to March 31, 2006, a $256,000 increase in rent expense related to taking on additional space to support continued growth, and to a lesser extent, a $60,000 increase in stock-based compensation expense. Our general and administrative headcount increased as we hired additional personnel to support our growth.

Other Income (Expense).    Other income (expense) for 2006 was an expense of $173,000, a decrease of $199,000 from other expense of $372,000 in 2005. This decrease in other expense was primarily due to decreased interest expense attributable to a lower average outstanding balance on our line of credit.

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Fiscal Years Ended March 31, 2005 and 2004

Revenues.    Revenues for 2005 were $10.0 million, an increase of $3.6 million, or 56%, over revenues of $6.4 million for 2004. Subscription revenues were $8.6 million in 2005, an increase of $3.5 million, or 66%, over subscription revenues of $5.1 million in 2004. The growth in subscription revenues was due principally to an increase of $2.0 million in revenues to new subscription customers and due to an increase of renewal revenues to existing customers for the fiscal year ended March 31, 2005 as compared to the fiscal year ended March 31, 2004. The increase in total revenues was due to our hiring of additional sales personnel focused on retaining existing customers and adding new customers. Advertising revenues for 2005 were $1.4 million, an increase of $0.2 million, or an increase of 13%, over advertising revenues of $1.2 million in 2004. The growth in advertising revenues was primarily due to increased advertising volume. Total deferred revenue as of March 31, 2005 was $6.4 million, representing an increase of $2.5 million, or 65%, over total deferred revenue of $3.9 million as of March 31, 2004.

Cost of Revenues.    Cost of revenues for 2005 was $1.8 million, an increase of $0.9 million, or 103%, over cost of revenues of $0.9 million for 2004. The increase was primarily due to a $750,000 increase in employee related costs due to the addition of 10 personnel from March 31, 2004 to March 31, 2005 to our compensation and professional services teams as well as a $101,000 increase in data development and data acquisition fees, and a $42,000 increase in stock-based compensation expense. As a percent of total revenues, cost of revenues increased to 18% in 2005 as compared to 14% in 2004. We increased the number of professional service personnel in order to provide implementation services to our increasing number of customers.

Research and Development Expenses.    Research and development expenses for 2005 were $1.4 million, an increase of $0.6 million, or 67%, over research and development expenses of $0.8 million for 2004. The increase was primarily due to a $554,000 increase in employee related costs due to the addition of 11 personnel from March 31, 2004 to March 31, 2005, and a $57,000 increase in stock-based compensation expense. Our research and development headcount increased as we hired additional personnel to upgrade and expand our on-demand software.

Sales and Marketing Expenses.    Sales and marketing expenses for 2005 were $5.9 million, an increase of $2.4 million, or 68%, over sales and marketing expenses of $3.5 million for 2004. The increase was primarily due to a $1.7 million increase in employee related costs due to the addition of 22 personnel from March 31, 2004 to March 31, 2005 to our sales and marketing team and $248,000 in increased sales commissions as a result of increased sales, and a $162,000 increase in stock-based compensation expense. Our sales and marketing headcount increased as we hired additional personnel to focus on adding new customers and increasing revenues from existing customers.

General and Administrative Expenses.    General and administrative expenses for 2005 were $2.8 million, an increase of $0.8 million, or 40%, over general and administrative expenses of $2.0 million for 2004. The increase in general and administrative expenses was primarily due to a $410,000 increase in employee related costs due to the addition of 6 personnel from March 31, 2004 to March 31, 2005, and a $250,000 increase in stock-based compensation expense. Our general and administrative headcount increased as we hired additional personnel to support our growth.

Other Income (Expense).    Other expense for 2005 was $372,000, an increase of $4,000 over other expense of $368,000 for 2004. This increase in other expense was due to increased interest expense attributable to a higher average outstanding balance on our line of credit.

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Quarterly Results of Operations

The following table sets forth our unaudited operating results for each of the eleven quarters preceding and including the period ended December 31, 2006. This information is derived from our unaudited financial statements, which in the opinion of management contain all adjustments necessary for a fair presentation of such financial data. Operating results for these periods are not necessarily indicative of the operating results for a full year. Historical results are not necessarily indicative of the results to be expected in future periods. You should read this data together with our financial statements and the related notes to these financial statements included elsewhere in this prospectus.

(in thousands, except per share data)
	Three months ended
	June 30, 2004			Sept. 30, 2004			Dec. 31, 2004			March 31, 2005			June 30, 2005			Sept. 30, 2005			Dec. 31, 2005			March 31, 2006			June 30, 2006			Sept. 30, 2006			Dec. 31, 2006
	(Unaudited)
Statements of Operations Data:
Revenue:
Subscription revenues	$	1,818		$	2,134		$	2,180		$	2,433		$	2,672		$	3,101		$	3,488		$	3,776		$	4,441		$	4,840		$	5,484
Advertising revenues		345			313			317			436			464			502			560			736			715			602			553
Total revenues		2,163			2,447			2,497			2,869			3,136			3,603			4,048			4,512			5,156			5,442			6,037
Cost of revenues(1)		320			432			452			627			688			679			797			944			1,052			1,122			1,483
Gross profit		1,843			2,015			2,045			2,242			2,448			2,924			3,251			3,568			4,104			4,320			4,554
Operating Expenses:
Research and development(1)		277			344			311			478			416			502			567			753			728			899			1,180
Sales and marketing(1)		1,186			1,345			1,599			1,724			1,670			1,915			2,222			2,766			2,687			2,965			3,396
General and administrative(1)		486			605			781			928			964			1,001			1,166			1,206			1,448			1,553			1,974
Amortization of intangible assets		—			—			—			—			—			—			—			—			53			24			25
Total operating expenses		1,949			2,294			2,691			3,130			3,050			3,418			3,955			4,725			4,916			5,441			6,575
Loss from operations		(106	)		(279	)		(646	)		(888	)		(602	)		(494	)		(704	)		(1,157	)		(812	)		(1,121	)		(2,021	)
Other income (expense)		(101	)		(98	)		(117	)		(56	)		(52	)		(44	)		(37	)		(40	)		(22	)		(25	)		(27	)
Net loss		(207	)		(377	)		(763	)		(944	)		(654	)		(538	)		(741	)		(1,197	)		(834	)		(1,146	)		(2,048	)
Accretion of preferred stock		(128	)		(128	)		(128	)		(128	)		(129	)		(129	)		(129	)		(129	)		(129	)		(129	)		(129	)
Net loss attributable to common stockholders	$	(335	)	$	(505	)	$	(891	)	$	(1,072	)	$	(783	)	$	(667	)	$	(870	)	$	(1,326	)	$	(963	)	$	(1,275	)	$	(2,177	)
Net loss attributable to common stockholders per share:
Basic and diluted	$	(0.10	)	$	(0.15	)	$	(0.26	)	$	(0.28	)	$	(0.21	)	$	(0.17	)	$	(0.20	)	$	(0.31	)	$	(0.20	)	$	(0.26	)	$	(0.43	)

⁽¹⁾ Amounts include stock-based compensation expense, as follows:

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	Three months ended
	June 30, 2004		Sept. 30, 2004		Dec. 31, 2004		March 31, 2005		June 30, 2005		Sept. 30, 2005		Dec. 31, 2005		March 31, 2006		June 30, 2006		Sept. 30, 2006		Dec. 31, 2006
	(Unaudited)
Stock-based compensation
Cost of revenues	$	4	$	9	$	13	$	16	$	10	$	8	$	53	$	115	$	28	$	27	$	178
Research and development		5		12		22		19		7		6		65		102		19		18		170
Sales and marketing		14		34		58		55		30		25		141		205		69		67		378
General and administrative		22		48		106		76		50		36		103		122		127		132		274
	$	45	$	103	$	199	$	166	$	97	$	75	$	362	$	544	$	243	$	244	$	1,000

As percentage of revenues:

	Three months ended
	June 30, 2004		Sept. 30, 2004		Dec. 31, 2004		March 31, 2005		June 30, 2005		Sept. 30, 2005		Dec. 31, 2005		March 31, 2006		June 30, 2006		Sept. 30, 2006		Dec. 31, 2006
	(Unaudited)
Statements of Operations Data:
Revenue:
Subscription revenues	84	%	87	%	87	%	85	%	85	%	86	%	86	%	84	%	86	%	89	%	91	%
Advertising revenues	16		13		13		15		15		14		14		16		14		11		9
Total revenues	100		100		100		100		100		100		100		100		100		100		100
Cost of revenues	15		18		18		22		22		19		20		21		20		21		25
Gross profit	85		82		82		78		78		81		80		79		80		79		75
Operating Expenses:
Research and development	13		14		13		17		13		14		14		17		14		17		20
Sales and marketing	55		55		64		60		53		53		55		61		53		54		56
General and administrative	22		24		31		32		31		28		28		27		28		29		33
Amortization of intangible assets	—		—		—		—		—		—		—		—		1		—		—
Total operating expenses	90		93		108		109		97		95		97		105		96		100		109
Loss from operations	(5	)	(11	)	(26	)	(31	)	(19	)	(14	)	(17	)	(26	)	(16	)	(21	)	(34	)
Other income (expense)	(5	)	(4	)	(5	)	(2	)	(2	)	(1	)	(1	)	(1	)	—		—		—
Net loss	(10	)%	(15	)%	(31	)%	(33	)%	(21	)%	(15	)%	(18	)%	(27	)%	(16	)%	(21	)%	(34	)%

Revenues increased sequentially in each of the quarters presented primarily due to increases in the number of total active customers and revenue recognized from deferred revenue.

Gross profit in absolute dollars also increased sequentially for the quarters presented primarily due to revenue growth. As a percentage of revenues, gross profit decreased from 85% for the quarter ended June 30, 2004 to 75% for the quarter ended December 31, 2006 due to an increase in cost of revenues due to increases in the number of compensation and professional services personnel, and to a lesser extent increased stock-based compensation expense.

Operating expenses in total have increased sequentially for the quarters presented primarily due to increased sales and marketing expenses in absolute dollars due to increases in the number of sales

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personnel and to a lesser extent increased stock-based compensation expense and increased sales commissions. Operating expenses as a percentage of revenues have fluctuated between quarters due to stock-based compensation and the timing of employee-related spending, sales commissions and incentives.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through the placement of redeemable preferred stock, borrowings under credit facilities, issuances of subordinated notes payable to stockholders, and more recently, through cash flow from operations. At December 31, 2006, our principal sources of liquidity were cash totaling $2.8 million and accounts receivable of $5.7 million.

In August 2006, we entered into a $5,000,000 credit facility with Silicon Valley Bank. The line, which expires in two years, provides for a term loan up to $1,000,000 and a $4,000,000 revolving working capital line of credit. Borrowings on the term loan bear interest at the bank’s prime rate plus 1.00%, and interest is payable on a monthly basis. Borrowings on the revolving line bear interest at the bank’s prime rate plus 0.25%. The credit facility is collateralized by substantially all of our assets. In addition, the facility carries an unused revolving line facility fee of 0.375% of the balance available, but not drawn down.

Net cash provided by operating activities was $2.0 million during the nine months ended December 31, 2006, and net cash provided by operating activities was $1.8 million during 2006, $0.9 million during 2005, and $0.3 million during 2004. These net cash inflows resulted primarily from operating losses, offset by increases in working capital accounts and non-cash charges for depreciation and amortization and stock-based compensation expense. The operating losses are primarily due to increased employee related costs due to the addition of personnel, and to a lesser degree increased operating expenses.

The increases in working capital items consisted primarily of the following:

The changes in deferred revenue were as follows:

• during the nine months ended December 31, 2006, deferred revenue increased $4.9 million from $10.5 million to $15.4 million, offset by a $0.2 million non-cash adjustment resulting from purchase accounting;

• during 2006, deferred revenue increased $4.1 million from $6.4 million to $10.5 million;

• during 2005, deferred revenue increased $2.5 million from $3.9 million to $6.4 million; and

• during 2004, deferred revenue increased $2.2 million from $1.7 million to $3.9 million.

The increases in deferred revenue are due to continued growth in invoiced amounts to our subscription customers, offset by the recognition of revenue ratably over time. The growth in the invoiced amounts was primarily due to sales to new customers, increased sales to existing customers, the introduction of new products, and the enhancement of existing products. Changes in deferred revenue generally indicate the trend for subscription revenues over the following year as the current portion of deferred revenue is expected to be recognized within 12 months.

The changes in accounts receivable, net of provision for doubtful accounts, were as follows:

• during the nine months ended December 31, 2006, accounts receivable increased $2.8 million from $2.9 million to $5.7 million;

• during 2006, accounts receivable increased $1.4 million from $1.5 million to $2.9 million;

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• during 2005, accounts receivable increased $0.5 million from $1.0 million to $1.5 million; and

• during 2004, accounts receivable increased $0.5 million from $0.5 million to $1.0 million.

The increases in accounts receivable are due to continued growth in invoiced amounts to our customers, offset by the collections on existing receivables. We generally receive cash payments from subscription customers early in the revenue recognition process, which has a positive effect on our accounts receivable balances. Currently, payment for the majority of our subscription agreements is due upon invoicing. If our subscription sales increase, our deferred revenue and accounts receivable balances typically increase as well.

The changes in accrued expenses and other current liabilities were as follows:

• during the nine months ended December 31, 2006, accrued expenses and other current liabilities increased $0.7 million from $2.0 million to $2.7 million, offset by a $0.3 million non-cash adjustment resulting from purchase accounting;

• during 2006, accrued expenses and other current liabilities increased $1.0 million from $1.0 million to $2.0 million;

• during 2005, accrued expenses and other current liabilities increased $0.6 million from $0.4 million to $1.0 million; and

• during 2004, accrued expenses and other current liabilities increased $0.1 million from $0.3 million to $0.4 million.

The increases in accrued expenses and other current liabilities were primarily due to an increase in accrued compensation resulting from the addition of personnel.

The changes in accounts payable were as follows:

• during the nine months ended December 31, 2006, accounts payable increased $1.5 million from $0.3 million to $1.8 million;

• during 2006, accounts payable increased $0.1 million from $0.2 million to $0.3 million;

• during 2005, accounts payable increased $0.1 million from $0.1 million to $0.2 million; and

• during 2004, accounts payable decreased $0.2 million from $0.3 million to $0.1 million.

The increases in accounts payable was primarily due to the timing of payments to vendors.

The net cash provided by operating activities also resulted primarily from the following non-cash charges, which need to be added back as an adjustment to reconcile net loss to cash provided by operating activities:

• stock-based compensation expense of $1.5 million, $1.1 million, $0.5 million and $1,000 during the nine months ended December 31, 2006, and during 2006, 2005 and 2004, respectively; and

• depreciation and amortization of property, equipment and software of $556,000, $496,000, $330,000 and $233,000 during the nine months ended December 31, 2006 and during 2006, 2005 and 2004, respectively.

The increase in stock-based compensation was primarily due to the adoption of SFAS 123R. The increase in depreciation and amortization of property, equipment and software was primarily due to increased purchases of fixed assets required to support the continued growth and expansion of the business.

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As of March 31, 2006, we had net operating loss carryforwards of $14.7 million which may be available to offset potential payments of future federal income tax liabilities which expire at various dates through 2026 and $6.8 million available to offset potential payments of future state income tax liabilities which expire at various dates through 2011. In the future, we may use our net operating loss carryforwards and would begin making cash tax payments once they are fully utilized. In addition, the limitations on utilizing net operating loss carryforwards and other state-level minimum tax requirements may also increase our overall tax obligations.

Net cash used in investing activities was $3.2 million during the nine months ended December 31, 2006, $0.8 million during fiscal year 2006, $0.7 million during 2005 and $0.4 million during 2004. Net cash used in investing activities consisted primarily of cash paid for purchases of fixed assets for new offices, network infrastructure and computer equipment for our employees, development of our content database, capitalization of certain software development costs, and to a lesser extent, a one-time cost for the acquisition of certain assets of a division of Aon Consulting, Inc. in April 2006. We intend to continue to invest in our content data sets, software development and network infrastructure to ensure our continued ability to enhance our existing software, expand our data sets, introduce new products, and maintain the reliability of our network.

Net cash provided by (used in) financing activities was $2.3 million during the nine months ended December 31, 2006, $0.5 million during fiscal year 2006, $(1.3) million during fiscal 2005 and $1.3 million during 2004. Net cash provided by financing activities during the nine months ended December 31, 2006 consisted primarily of proceeds from borrowings pursuant to our line of credit, partially offset by prepaid stock issuance costs, repayments of certain borrowings pursuant to our prior line of credit and the repayment of loans by employees. Net cash provided by financing activities during fiscal 2006 consisted primarily of proceeds from the exercise of stock options and warrants and the issuance of preferred stock, partially offset by repayment of certain borrowings pursuant to our line of credit. Net cash used by financing activities during 2005 consisted primarily of repayments of certain borrowings pursuant to our line of credit and repayment of subordinated notes to stockholders, partially offset by the repayment of notes payable to us in connection with the sale of our series A-4 convertible preferred stock in 2004 and proceeds from the exercise of stock options and warrants. Net cash provided by financing activities during 2004 was primarily proceeds from the issuance of our series A-4 convertible preferred stock, establishment of and borrowing under our line of credit, and the exercise of stock options and warrants, partially offset by repayment of borrowings under the line of credit and certain notes payable.

Given our current cash, accounts receivable, the estimated net proceeds of this offering and available borrowings under our credit facility, we believe that we will have sufficient liquidity to fund our business and meet our contractual obligations for the foreseeable future. However, we may need to raise additional funds in the future in the event that we pursue acquisitions or investments in complementary businesses or technologies or experience operating losses that exceed our expectations. If we raise additional funds through the issuance of equity or convertible securities, our stockholders may experience dilution. In the event that additional financing is required, we may not be able to obtain it on acceptable terms or at all.

During the last three fiscal years, inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the forseeable future.

Off-Balance-Sheet Arrangements

We do not have any off-balance sheet arrangements that are required to be disclosed under Item 303(a)(4)(ii) of SEC Regulation S-K.

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Contractual Obligations

The following table summarizes our contractual cash obligations at March 31, 2006 and the effect such obligations are expected to have on our liquidity and cash flow in future periods:

	Payments Due by Period
Contractual Obligations	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
	(in thousands)
Revolving line of credit	$	800	$	800	$	—	$	—	$	—
Operating leases		4,021		1,110		2,911		—		—
Contractual commitments		700		499		193		8		—
Total	$	5,521	$	2,409	$	3,104	$	8	$	—

As of March 31, 2006, we did not have any material purchase obligations, capital leases, or other material long-term commitments reflected on our balance sheet.

The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum services to be used; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Obligations under agreements that we can cancel without a significant penalty are not included in the table above.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

On September 9, 2006, we informed Vitale, Caturano & Company LTD., or Vitale, of its dismissal as our independent registered public accounting firm, which was immediately effective. Effective October 2, 2006, Grant Thornton LLP was appointed as our independent registered public accounting firm for the year ended March 31, 2006. The decision to change independent registered public accounting firms was approved by our audit committee.

The audit report of Vitale on our financial statements for the years ended March 31, 2005 and March 31, 2004, did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. During its audit for the fiscal years ended March 31, 2005 and March 31, 2004 and during the period beginning April 1, 2005 and ended September 9, 2006 (the date we dismissed Vitale as our independent registered public accounting firm), we had no disagreements with Vitale on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which, if not resolved to Vitale’s satisfaction, would have caused Vitale to make reference to the matter in their report, and there have been no “reportable events” as defined in Item 304 (a)(1)(v) of Regulation S-K.

Qualitative and Quantitative Disclosures about Market Risk

Foreign Currency Exchange Risk.    Our results of operations and cash flows are not subject to fluctuations due to changes in foreign currency exchange rates.

Interest Rate Sensitivity.    Interest income and expense are sensitive to changes in the general level of U.S. interest rates. However, based on the nature and current level of our investments, which are primarily cash and debt obligations, we believe that there is no material risk of exposure.

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Controls and Procedures

A company’s internal control over financial reporting is a process designed by, or under the supervision of, a company’s principal executive and principal financial officers, or persons performing similar functions, and effected by a company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. As a private company, we have designed our internal control over financial reporting to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of financial statements. As a public company, under Section 404 of Sarbanes-Oxley, we will also be required to include a report of management on our internal control over financial reporting in our annual reports on Form 10-K beginning with our fiscal year ending March 31, 2008. Our annual reports beginning with our fiscal year ending March 31, 2009 must include a report from the independent registered public accounting firm auditing our financial statements attesting to and reporting on management’s assessment of the effectiveness of our internal controls over financial reporting. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

In connection with the audit of our financial statements as of and for the year ended March 31, 2006, our independent registered public accounting firm identified certain material weaknesses and other significant deficiencies in our internal control over financial reporting. A material weakness is a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following three material weaknesses were reported by our independent registered public accounting firm in connection with their audit of our financial statements as of and for the year ended March 31, 2006.

• We did not have sufficient number of accounting personnel who possessed an appropriate level of experience in SEC reporting requirements. This lack of enough experienced accounting personnel increased the risk of our preparing inaccurate financial statements. As a result, the financial statement drafts we prepared were missing or contained incomplete material footnotes (such as those related to earnings per share, stock-based compensation under SFAS 123(R) and income taxes) and disclosures required for a public company and certain adjustments for compensation expense relating to the adoption of SFAS 123R “Share Based Payments.”

• In prior years, we entered into sophisticated and high dollar value equity and debt financing transactions to finance our business, but did not have a formal policy regarding the policies and procedures for the recording and reporting of these types of transactions (specifically related to the beneficial conversion feature of our preferred stock issuance). In addition, we did not have a sufficient number of accounting personnel who possessed an appropriate level of experience in the selection and application of GAAP with respect to redeemable preferred stock.

• We also had material weaknesses in the design and operation of our internal controls relating to revenue accounting. In particular, because of system limitations, we did not have a process or policy to maintain a detailed deferred revenue listing by customer to support our deferred revenue balances. As a result of the identified deficiency, we recorded a material adjustment to reclassify from short-term to long-term deferred revenue within the liability section of our balance sheet. In some instances, we also did not maintain sufficient evidence of our customers’ completion of implementation of our products or subscription renewals. Lastly, the documentation of our revenue recognition policy lacked sufficient detail to support how we recognize revenue in accordance with GAAP.

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We have concurred with the findings of our independent registered public accounting firm and have begun our remediation efforts. Our efforts to date have included the following:

• We have and will continue to expand our internal accounting and legal teams to add additional skills and experience, specifically experience in public company reporting, including complex financial transaction reporting, as well as the use of qualified outside professionals as necessary to enhance and maintain our internal accounting controls. Since March 20, 2006, we have hired a new Chief Financial Officer, a new General Counsel, a new Director of Finance and a Director of Accounting and Financial Reporting, each with a significant amount of public company reporting experience.

• We have begun the implementation of our new accounting system which we believe will alleviate many of the issues identified. This new accounting system is fully integrated (as compared to our current accounting system which is not integrated with the three other systems we use to record customer transactions and activities) and is more sophisticated in the manner in which it handles complex accounting issues such as subscription revenue recognition. In addition, this new system can automatically maintain evidence of our customers’ completion of implementation and our products or subscription renewals. By its nature and design, this new system will make it much easier for us to adhere to the requirements of Sarbanes-Oxley.

• Even before we complete implementation of our new system, we have established a new process to retain evidence of our customers’ product implementations and subscription renewals. In addition, we have begun updating our documentation of our revenue recognition policy.

The actions we will take are subject to continued management review supported by confirmation and testing by management and by our independent registered public accounting firm, as well as audit committee oversight. While we expect to fully remediate these weaknesses, we cannot assure you that we will be able to do so, which could impair our ability to accurately and timely report our financial position, results of operations or cash flows. See “Risk Factors—Risk Relating to Our Business—Our independent registered public accounting firm has advised us that it has identified certain material weaknesses in our internal control over financial reporting. Failure to achieve and maintain effective internal control over financial reporting could result in our failure to accurately report our financial results.”

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BUSINESS

Overview

Salary.com is a leading provider of on-demand compensation management solutions. Our comprehensive on-demand software applications are integrated with our proprietary data sets to automate the essential elements of our customers’ compensation management processes. As a result, our solutions can significantly improve the effectiveness of our customers’ compensation spending. We enable employers of all sizes to replace or supplement inefficient and expensive traditional approaches to compensation management, including paper-based surveys, consultants, internally developed software applications and spreadsheets.

In today’s service-based economy, the attraction, motivation and retention of employees is a leading strategic priority. Employee compensation in the United States totaled approximately $5.4 trillion in 2005 according to the U.S. Bureau of Labor Statistics, and for most companies, compensation ranks as one of their largest expense categories. Employers who underpay their employees risk high turnover, while employers who overpay their employees risk impairing their profitability. Accordingly, compensation management is critical to organizations of all sizes. Based on an April 2006 study by independent market research firm Yankee Group, the compensation management technology market, which includes software and on-line compensation data offerings, is estimated to grow from approximately $320 million in 2006 to approximately $460 million in 2008. This projection from Yankee Group is focused on the market for software and related data offerings. However, we believe our total addressable market is larger, as our products provide a solution which replaces, in part or in full, not only software and data offerings, but also service offerings addressing the compensation management market such as those provided by compensation consulting firms and HR BPOs. Yankee Group has estimated the market for service offerings to be approximately $960 million for 2006. In sum, the markets for software, data and service offerings total approximately $1.28 billion for 2006, which we believe provides a better estimate of our total addressable market.

Our on-demand solutions, which incorporate market compensation intelligence from our proprietary data sets, enable companies to determine how much to pay new and existing employees and to manage overall compensation programs. Our data sets contain base, bonus and incentive pay data for positions held by more than 73% of U.S. employees and similar data for the top executives in over 10,000 U.S. public companies. Our flagship offering is CompAnalyst, a suite of compensation management applications that integrates our data, third-party survey data and a customer’s own pay data in a complete analytics offering. We have also introduced TalentManager, an employee life-cycle performance management application that links employee pay to performance. In addition to our on-demand enterprise software offerings, we also provide a series of applications through our website, which allows us to deliver salary management comparison and analysis tools to individuals and small businesses on a cost effective, real-time basis.

We offer our solutions principally on an annual or multi-year subscription basis. Our direct sales group markets and sells our solutions primarily using the telephone and web-based demonstrations. From the introduction of our solutions in 2000 through December 31, 2006, our enterprise subscriber base has grown to approximately 1,700 companies who spend from $2,000 to more than $100,000 annually, including companies such as Wal-Mart, Home Depot, Procter & Gamble, Merrill Lynch, UPS and Cisco Systems. We also sell to both individual consumers and smaller businesses through our Salary.com website. According to comScore Networks, the amount of website traffic received by Salary.com over the twelve months ended September 30, 2006 places our website in the top 10 for Career Services and Development websites. Salary.com has also been ranked in the top 10 for Financial Information and Advice websites during the same period. Additionally, our Internet media traffic has grown to an average of more than 2 million unique monthly visitors over the nine months ended September 30, 2006 according to comScore Networks.

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From April 2001 through December 31, 2006, we achieved 23 consecutive quarters of revenue growth. During the years ended March 31, 2004, 2005 and 2006, and the nine months ended December 31, 2006, we achieved positive cash flows from operating activities of $0.3 million, $0.9 million, $1.8 million, and $2.0 million, respectively. During these periods, we have consistently incurred operating losses, including $0.8 million for 2004, $1.9 million for 2005, $3.0 million for 2006 and $4.0 million for the nine months ended December 31, 2006. As of December 31, 2006, we had an accumulated deficit of $25.3 million.

Industry Background

Compensation Management

For most organizations, the primary goal of compensation management is to design a compensation program that allows the employer to effectively and efficiently attract, motivate and retain employees. According to a February 2006 survey by CFO Magazine, 91% of companies ranked the management of “human capital” as one of the most important factors in the success of their business. Optimizing pay is a priority as compensation remains one of the largest expense categories for most companies. Also, it is widely believed that compensation is one of the most important factors influencing employee performance. The best managed companies typically are analytical and deliberate in establishing and monitoring their compensation programs and seek to understand compensation practices and levels at the organizations that compete with them for talent.

To execute their pay strategies, most large organizations rely on their internal compensation functions. Whether formal or informal, the compensation group’s role is to manage the organization’s full breadth of pay practices. Analytical professionals develop the overall compensation philosophy and specific pay programs; build the organization’s salary structures and manage the overall compensation budget; typically define how to link pay to performance and often work with line managers to cascade that linkage to each individual employee. They also report and make recommendations to senior management and the board of directors. The foundation for all this work is a true understanding of the appropriate compensation practices for specific jobs, departments, groups, and entire organizations.

The predominant approach used by companies to determine appropriate compensation is “market pricing.” Market pricing is the process of comparing positions and pay in a company against aggregated,

statistically significant compensation data from companies of comparable size, industry and location. To conduct a market pricing analysis for a particular position at a particular company, an internal compensation specialist or an outside consultant compares the job at that company with the closest matching “benchmark” jobs found in compensation surveys. When ample market data has been identified (generally from three or more third party sources), the compensation specialist or consultant weights, adjusts and averages the data to form an opinion of the market price for the job. Through the use of market pricing, the development of salary structures, and execution of pay programs (for example, base pay, commissions and incentives), organizations can effectively manage their compensation costs and link pay to performance.

Although most organizations are in agreement regarding the importance of market pricing in compensation management, there is wide variation regarding the processes and tools employed to make compensation decisions. Some organizations employ in-house compensation professionals who purchase surveys and use them to price the positions themselves, whereas others hire compensation consultants to market price their positions and recommend appropriate salary ranges. Many large companies will take a combination approach, using in-house resources for a majority of positions and engaging consulting firms to market price the jobs that are most critical to the success of the organization or for which data is more difficult to obtain. It is also common for large organizations to purchase data from more than one source and use one or more software packages to manage different parts of the process. Smaller

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organizations do not typically have dedicated compensation specialists and therefore often rely on a human resource, or HR, generalist to manage the compensation analysis duties for the organization as part of a larger job.

Traditional Approaches to Compensation Management

Companies have traditionally used a variety of approaches for managing the compensation function. Many continue to use relatively simplistic internally developed software tools, often based on generic desktop programs such as Microsoft Excel. Some companies utilize broad HR and/or enterprise resource planning, or ERP, software offerings, which include some compensation management capability but typically lack the specialized functionality to adequately address compensation management. Many of these solutions must be installed on clients’ servers and maintained by their information technology, or IT, departments and do not seamlessly incorporate compensation data. Larger organizations also engage outside third parties to assist them in managing their compensation processes. Traditional third-party solution providers include HR business process outsourcers, or HR BPOs, such as Hewitt Associates, Affiliated Computer Services, and HR consultants, such as Mercer, Watson Wyatt Worldwide, Towers Perrin and Hay Group. HR consultants provide full service market pricing, comparison analysis and compensation management process assistance, but at a high cost — up to $200,000 annually for a typical company with 500 positions.

Larger organizations are faced with the challenges of compiling and managing large amounts of information, analyzing and reporting on actual and proposed compensation programs, collaborating among large or geographically dispersed teams and increasing the organizational effectiveness of their compensation plans. Although larger organizations typically have well-staffed HR departments and dedicated budgets and resources for compensation management, the need to manage information and data from multiple internal and external constituencies and integrate those inputs within a single system creates significant difficulties.

For small and mid-sized organizations, professional compensation management is often prohibitively expensive and time-consuming. These organizations are typically faced with a decision either to use external consulting firms, the cost of which often exceeds available budgets, or to commit scarce internal resources. In addition, HR responsibilities for these organizations are often assigned to only one or two dedicated staff or, in many cases, shared across non-dedicated staff who have other full-time

responsibilities and may lack compensation expertise. Furthermore, these companies do not possess sophisticated interactive tools and information for making compensation decisions or administering compensation programs.

On-Demand Software and Compensation Management

Recent innovations in information technology have created opportunities to deliver software applications directly to users over the Internet in a subscription-based, on-demand business model. This model is made possible by the proliferation of high-speed, broadband Internet connectivity, open standards for application integration and advances in network availability and security. For the user, on-demand software eliminates the need for expensive hardware, software and internal IT support.

For HR personnel, who may not have large capital spending budgets, the often minimal (if any) upfront expenditure required to implement on-demand solutions and the minimal need for IT department involvement is particularly attractive. In addition, the hosted architecture helps ensure that the software and vendor-supplied content is kept current and secure, without requiring any user involvement. On-demand solutions also permit rapid deployment of and training for new applications, resulting in faster product adoption and increased productivity, especially for users who may have little or no technological background. These benefits typically result in a lower total cost of ownership and, in

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our belief, an increased return on investment. Finally, the on-demand model enables multiple users, including geographically dispersed executives, HR departments, departmental managers and employees, to easily coordinate and collaborate within a single application. These factors make the compensation management market well-suited for the on-demand software business model.

Market Opportunity

Employee compensation is one of the largest expense categories for corporations in the U.S., with total compensation expense in 2005 approximating $5.4 trillion, according to the U.S. Bureau of Labor Statistics. As a result, managing compensation expense is critically important to organizations of all sizes. The compensation management technology market, which includes software and online compensation data offerings, is estimated to grow from approximately $320 million for 2006 to approximately $460 million for 2008, according to an April 2006 study by independent market research firm Yankee Group. This projection from Yankee Group is focused on the market for software and related data offerings. However, we believe our total addressable market is larger, as our products provide a solution which replaces, in part or in full, not only software and data offerings, but also service offerings addressing the compensation management market such as those provided by compensation consulting firms and HR BPOs. Yankee Group has estimated the market for service offerings to be approximately $960 million for 2006. In sum, the markets for software, data and service offerings total approximately $1.28 billion for 2006, which we believe provides a better estimate of our total addressable market.

Our Solutions

Salary.com is a leading provider of on-demand compensation management solutions. Our web-based software suites help organizations of all sizes optimize compensation and employee performance. Our integrated software applications provide extensive features and broad functionality that address the critical functions of compensation analysis and planning, goal setting and performance management. By automating and integrating essential elements of compensation management, our solutions allow our customers to reduce costs, save time and increase the effectiveness of their compensation spending.

Our unique combination of software and data addresses the various stages of the compensation management lifecycle — ranging from benchmarking positions to establish the market price of equivalent positions to managing the compensation review and goal setting process between operating managers and front-line employees. We deliver our compensation management solutions to customers through our CompAnalyst suite of on-demand software applications, which are tightly integrated with our proprietary data sets. In addition to our compensation management solutions, we offer our TalentManager suite to deliver employee lifecycle performance management solutions, which help organizations establish goals throughout the organization and link employee pay to performance of those goals.

Our comprehensive suite of integrated software applications provides the following key benefits:

Facilitates more effective compensation spending.    Our solutions enable companies to deliver more effective and consistent compensation programs by reducing the risk of high turnover caused by underpaying employees and the risk of reduced profitability caused by overpaying employees. By making better compensation decisions, our customers are able to better attract, motivate and retain their employees, which we believe can lead to improved business execution and financial performance.

Enables Human Resource professionals to be more strategic.    Our solutions incorporate features and best practices that automate compensation management to reduce or eliminate manual, paper-based and discrete business activities. As a result, our solutions help maximize the effectiveness of HR departments by enabling compensation professionals to focus on more strategic, high-value corporate-wide initiatives.

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Provides access to proprietary market-driven compensation intelligence.    Companies have traditionally made compensation decisions based on a limited number of surveys that are updated only once a year. By contrast, our proprietary data sets provide market-driven compensation information that is derived from numerous sources and which is updated monthly. We believe that the current nature, as well as the breadth and depth, of our data sets provide our customers with significant advantages as they set their compensation levels. To build and update our data sets, our compensation professionals apply proprietary comparative algorithms and sophisticated statistical analysis to the data to provide the most up-to-date, comprehensive and useful information to our customers.

Reduces compensation management costs.    We believe that our solutions are more cost-effective than other available offerings. Our on-demand model significantly reduces or eliminates the installation and maintenance costs associated with on-premise solutions. Our intuitive user interfaces allow our customers to find the right data, manage its application and configure overall compensation plans with little or no technical assistance. Furthermore, by integrating our software with our proprietary data sets, we provide our customers with a significantly less expensive compensation management solution than the traditional approach of separately purchasing combinations of consulting services, surveys and software applications.

Allows for rapid deployment and scalability.    Our on-demand software can be deployed rapidly and provisioned easily, without our customers having to make a large and risky upfront investment in software, hardware, implementation services or dedicated IT staff. The delivery platform for our software allows the solution to scale to suit customers’ needs. Additional users with defined privileges can be granted access with minimal implementation time, and new applications, such as analytics, can be deployed quickly and transparently to existing customers.

Our Strategy

Our objective is to be the leading provider of on-demand compensation management solutions. Key elements of our strategy include:

Maintain focus on the on-demand compensation management market.    We intend to continue to dedicate ourselves to the compensation management market, which we believe represents a large and growing opportunity. Our focus on this market has allowed us to create what we believe to be the most robust set of on-demand data and applications available. We also believe that integrating our on-demand delivery model with our proprietary data sets, the approach we have taken since our inception, is well-suited for this market and difficult for our competition to replicate.

Continue to add new and expand existing proprietary data sets.    Our data sets contain base, bonus and incentive pay data for positions held by more than 73% of U.S. employees as well as similar data for the top executives in over 10,000 U.S. public companies. We plan to increase the breadth, depth and geographical scope of our data sets in order to further increase the applicability of our compensation information to industry sectors and geographies not currently addressed by our data sets.

Develop additional on-demand compensation and performance management software applications. We believe there are additional opportunities to broaden our compensation management offerings. Over the past five years, we have expanded our initial compensation management offering to include Survey Center, Reporting & Analysis, Salary Structures and CompAnalyst Executive. In addition, we believe that there is a natural link between compensation and performance, which creates an opportunity for us to sell performance management solutions. In 2004, we introduced our TalentManager Suite of pay-for-performance applications that addresses the performance management market. The modular architecture of our solution allows our customers to quickly and easily adopt additional functionality as we develop and deploy it.

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Add more sales people and continue to cost-effectively obtain new clients.    We intend to continue to use our cost-effective approach of selling primarily over the telephone and using web-based product demonstrations. Our enterprise products are sold through a sales team of 60 people that includes 33 account executives who primarily perform demonstrations and complete sales. In addition, we have a team of 16 business development representatives, or BDRs, who identify and qualify potential customers. We intend to add additional sales personnel to broaden sales coverage and increase market penetration.

Selectively pursue strategic acquisitions.    The fragmented nature of our market provides opportunities for selective acquisitions. We have completed one small asset acquisition relating to one of our products. We intend to continue to explore acquisitions of companies, data sets and technologies which would either expand our solutions’ functionality, provide access to new customers or markets, or both.

Data

Our proprietary data sets are a core differentiator of our solutions. By providing comprehensive data within our applications, we are able to assist corporate customers in achieving their compensation management objectives faster and more efficiently. The following diagram illustrates how we gather and process data and make it available to our enterprise customers through our software applications:

To develop our data sets, we begin with raw data we obtain from numerous sources. We purchase data directly from industry associations, compensation consulting firms, economic analysis firms and other sources. We also collect data directly from employers, partners and government agencies (for example, the U.S. Bureau of Labor Statistics, Department of Labor and SEC). Our team of compensation professionals processes data from these sources to derive our own proprietary data sets of compensation and other job-related information.

Our Market Pricing Data Processes

For our proprietary market pricing data sets, we use both standard and proprietary algorithms, which provide our customers with complete and consistent data that is representative of nearly all relevant markets and reasonable combinations of jobs, industries, locations and organization sizes. The completeness and consistency of our data sets provides our enterprise and consumer customers with market-driven compensation intelligence that we believe they could not procure or easily derive from

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alternate sources. In addition, our market pricing data processes and data sets also reduce the problems corporate compensation departments face from their lack of standardized processes for analyzing and combining multiple survey sources and maintaining the consistency of those sources year-over-year.

Enterprise and Consumer Data Sets

We have one proprietary data set for our enterprise customers and one for consumer customers. Our enterprise data set contains base, bonus and incentive pay data for positions held by more than 73% of U.S. employees and our consumer data set currently addresses the jobs held by more than 80% of the U.S. workforce.

Our enterprise solutions report data based on the most reliable sources available. Our enterprise customers may also incorporate data sources that they have independently acquired, which are then available for their exclusive use. Our enterprise data set is also augmented by compensation data from our customers, which they provide to us through surveys we conduct and which we do not include in our consumer data set. In addition, we provide a module in which an enterprise customer can store its own employee records to match to its preferred market sources and compare actual compensation, target compensation and market compensation.

Our lower priced and free consumer products report data designed to provide a reasonably accurate estimate of the compensation pay levels for thousands of jobs in various types of organizations throughout the United States and Canada. The jobs reported in our consumer tools are primarily the major benchmark jobs available from numerous public data sources. The purpose of the consumer tools is to educate the individual employee regarding the compensation decision-making process and to provide a reasonable approximation of the market for that individual’s job. We believe the best way for an employee and employer to have a productive conversation regarding compensation and pay for performance is for both to be educated about the process and current market values.

SEC Data Set

In addition to our proprietary market pricing data sets described above, we also maintain a complete data set of executive compensation and related data for more than 10,000 U.S. publicly-traded companies. All compensation data included in this data set is obtained directly from filings made by these companies with the SEC. Our SEC data set also contains data on director compensation from approximately 3,000 of the largest publicly-traded companies. Our SEC data set is updated daily to reflect new public filings and we maintain the historical data in our SEC data set to facilitate comparisons.

We also include basic financial data on public companies in our SEC data set, which we purchase from Standard & Poors. This data is used to allow our customers to place compensation data in the context of a company’s financial performance.

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Products

We offer a suite of compensation management applications for enterprise customers that helps companies determine how much to pay new and existing employees and manage overall compensation programs. We also offer a suite of performance management applications to assist customers to establish performance goals throughout their organizations and link each employee’s pay to performance against these goals (“pay-for-performance”). Along with our application suites, we provide our customers with implementation and data configuration services as well as assistance with the application of our compensation and performance management solutions to their organization. In addition to our enterprise offerings, we also provide a series of consumer and e-commerce solutions through our website to provide compensation information and tools designed for the consumer. We provide our solutions on a subscription, transaction or ad-sponsored basis. For the years ended March 31, 2004, 2005 and 2006, our subscription revenues derived from our TalentManager products comprised less than 15% of our total revenues, with the remainder of our subscription revenues being derived from our compensation management and data products. Our solutions consist of the following products:

Product Category	Product Name	Principal Revenue Type
Enterprise Solutions — Compensation Management Products	CompAnalyst Suite Job Analyzer Survey Center Salary Structures Reporting & Analysis	Subscription Subscription Subscription Subscription
	CompAnalyst Executive	Subscription
	CompAnalyst Professional Edition	Subscription
	Salary.com Professional Edition	Subscription
	Job Valuation Reports	Subscription
	Compensation Market Studies	Transaction
	Salary.com Survey	Transaction
Enterprise Solutions — Performance Management Products	TalentManager Suite PerformanceManager CompPlanner IncentivesManager StockOptionManager	Subscription Subscription Subscription Subscription
Consumer & E-Commerce Solutions	www.salary.com	Subscription/Ad-sponsored
	Salary Wizard	Subscription/Ad-sponsored
	Salary Center	Subscription/Ad-sponsored
	Personal Salary Report Subscription	Subscription

Enterprise Solutions

Compensation Management Products

CompAnalyst is a suite of on-demand compensation management solutions for use by the compensation professional in an enterprise. CompAnalyst is built around a core data set of market pricing information and includes access to several analytics applications, including the following:

Job Analyzer:    Allows large enterprise customers easy access to our U.S. benchmark data set of market pricing for approximately 3,200 positions in companies of all sizes, across 20 industries and all U.S. geographies (including regions, states and major metropolitan areas). Customers can also quickly find the market price for any benchmark job or create and price a “hybrid job” by mixing multiple positions together.

Survey Center:    Provides customers with a centralized, online repository for managing and performing market pricing with third-party surveys that they acquire and own themselves. Easy to

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use tools enable customers to age, weight, adjust and combine data from multiple sources to produce market rates for use in compensation program design and analysis. Customers can use this functionality when they have specific data sources and weightings they choose to employ in determining market pricing. The Survey Center module also simplifies and speeds up the customer’s survey participation process by leveraging data typically used within the module’s core functionality - including employee pay and demographic data and company job to survey job matches - and exporting survey participation files in the specific survey vendor’s preferred format.

Salary Structures:    Provides tools for analyzing current pay structures and for modeling the cost of proposed changes. The Salary Structures module enables customers to assess the alignment of pay practices with the external market and internal targets, and to perform “what if” analysis to support recommendations for changes in compensation program design.

Reporting & Analysis:    Enables organizations to assess external competitiveness against internal equity by comparing actual pay practices to market data developed in Job Analyzer or Survey Center. Customers may analyze trends by year, compare pay practices across groups of employees (for example, by region, business unit, Equal Employment Opportunity Commission protected class) and create custom queries to meet their analysis needs. Customers can also store data and use it to conduct historical comparisons.

CompAnalyst Executive:    This application allows CEOs, CFOs, executive compensation specialists, board members and consultants to analyze and review compensation information disclosed in filings with the SEC for more than 10,000 public companies. The data available with this product, which is updated daily, includes pay, incentive compensation, Black-Scholes values, benefits, director compensation, financial and stock performance data and more. CompAnalyst Executive’s functionality includes the ability to build and analyze peer groups by industry, size and location, as well as company financial performance measures and executive and director pay measures.

CompAnalyst Professional Edition:    This application is similar to Job Analyzer, except with less data and functionality. Our sales force sells this application to smaller businesses.

Salary.com Professional Edition:    This data product is similar to CompAnalyst Professional Edition, but contains data only on small companies. We sell this application online through our website and our partners’ websites directly to businesses that typically have fewer than 100 employees.

Job Valuation Reports:    This report is designed for use by HR departments to price a single position. It allows users to view a report on the appropriate market compensation data for that job and, if they desire, recommend adjustments to reflect the particular experience, education and other factors specific to an employee currently in the job. The job valuation report also includes basic explanations of how to use the data and how to explain market pricing practices to an employee. We sell this application to employers through our website and our partners’ websites.

Compensation Market Studies:    These survey-like reports aggregate the data, generally for 50 to 200 related job titles within an industry group, typically within the same job family (for example, finance and accounting) or the same level (for example, executives). Salary.com has more than 100,000 of these reports that we update each month and sell to employers through our website and our partners’ websites.

Salary.com Surveys:    Salary.com runs and manages compensation and benefits surveys, some of which are sponsored directly by Salary.com and others of which are sponsored in partnership with industry associations or other external sponsors. To conduct a survey, Salary.com solicits companies to submit actual pay data for their employees to us. We analyze, aggregate and anonymize their data and report the results back to participating companies. Typically, we charge participants a fee and we also may sell final reports to non-participants for a higher fee.

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Performance Management Products

TalentManager is a suite of on-demand solutions that provides the essential workflow to link pay to performance across the enterprise. TalentManager enables an organization to manage goal setting, performance reviews and incentive programs, and to link those elements to relevant compensation programs within a single integrated application. Our TalentManager suite includes the following:

Performance Manager:    Enables the communication and setting of goals by employees and managers and tracks performance against those goals. The system uses the goals as the basis for managing the performance review process. Performance Manager is fully integrated with CompPlanner, IncentivesManager and StockOptionManager and can link a virtually unlimited number of pay plans to an individual or to a particular goal.

CompPlanner:    Enables organizations to automate and control the process of allocating salary increases, budget pools, lump sum adjustments and basic bonus plans. Within CompPlanner, HR and finance departments can set rules or guidelines that dictate the limits and the approval process for any component of the compensation decision-making process. By setting all of the rules in one system, which programmatically enforces the process, the entire organization can easily and efficiently adhere to policies and control procedures.

IncentivesManager:    A configurable and customizable application capable of managing incentive plans. Incentive plans vary significantly among and within organizations and can have very complex management and payout structures. Although CompPlanner includes features to address basic incentive plans, many organizations need the additional sophisticated performance measures and calculations available in IncentivesManager.

StockOptionManager:    Provides an environment and business rules for managing the allocation of stock and stock options as part of the compensation cycle. The granting of equity incentives within a company can be a simple or complex process, depending on the company’s philosophy and internal rules. Like IncentivesManager, StockOptionManager addresses the complexity necessary to accommodate an organization’s equity allocation rules and processes. The StockOptionManager module accommodates both publicly-traded and private company equity.

Professional Services

Our CompAnalyst professional services teams handle new customer implementations, training and general help desk services for the CompAnalyst product line and all data products. The TalentManager professional services team handles all new customer implementations, configurations, training, and general help desk services for the TalentManager suite of applications. For implementations that are not strictly “plug and play,” our product-specific implementation teams provide initialization, configuration, training and general help-desk services. We also train our customers so that they can be more self-sufficient for future implementations. TalentManager customers generally require more professional services than do CompAnalyst customers. Professional services in most cases are included as part of our subscription agreements and, to a lesser extent, are offered on an as-needed basis.

Consumer and E-Commerce Solutions

Our consumer and e-commerce family of products consists of free-to-user applications that are ad-sponsored, as well as certain premium products that are sold directly to individuals visiting our website. We also generate indirect revenue from these products through advertisers that pay for space on our website and our partners’ websites.

Our consumer and e-commerce products include:

www.salary.com:    Our destination website and marketing face of the company is an advertising and online subscription sales channel. Our internet media traffic has grown to an average of more than

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2 million unique monthly visitors over the nine months ended September 30, 2006, according to comScore Networks. According to comScore Networks, the amount of website traffic received by Salary.com over the twelve months ended September 30, 2006 places it in the top 10 most visited for Career Services and Development websites. Salary.com has also been ranked in the top 10 most visited for Financial Information and Advice websites during the same period. According to a search we performed using Google, more than 9,000 websites currently link directly to www.salary.com. The site includes calculators, memberships, newsletters and content around the topic of career and pay management for individuals, as well as related business content for small business and enterprise audiences. We believe that more than 90% of Salary.com’s traffic is organically generated and is not the result of substantial direct advertising and marketing on our part.

Salary Wizard:    Salary Wizard is an ad-sponsored salary calculator designed to provide non-scoped, national average base pay and total annual cash compensation ranges for the positions we track. Users may adjust the national average information to their desired location by selecting a metropolitan area or zip code, and the results will be adjusted using a geographic adjustment factor to estimate the pay level for that location. Salary Wizard also attracts visitors to our website and our syndicated partner network of sites and serves as an entry point for consumers and employers to purchase a report or subscription product from us. The product is used more than 3 million times per month by both individuals and businesses.

Salary Center:    Our syndicated product is a fully functional set of applications that deploy onto our partners’ websites to power the compensation section of their websites in a co-branded manner. For example, AOL Career Channel’s salary area is populated with Salary.com tools and the content is hosted and managed by Salary.com. The syndicated Salary Center product typically includes advertising inventory and e-commerce reports for which partners share revenue with Salary.com. Salary.com partners include AOL, MSN, CNN Money, Yahoo! Hotjobs, Dice, Business Week, the New York Times, ADP and 400 other companies representing more than 2,500 discrete websites.

Personal Salary Report Subscription:    This application is a premium 14-page report providing individuals with an HR-quality assessment of their worth in the job market. The report also educates the subscriber about how employers determine compensation and also advises the subscriber on how to negotiate salary for a win-win outcome.

In addition to these online offerings, we also sell space for third party advertisers to deliver their messages to users of Salary.com’s website. Advertisers will pay for targeted inventory space adjacent to content that will be viewed by certain types of consumers. We believe our advertising inventory is attractive to advertisers because we provide a large volume of exposure opportunities and we can link those opportunities to a variety of consumer demographic factors, such as job title, location and income. Advertisers that purchase this inventory include job boards, recruiters, colleges and universities and financial services firms.

Compensation Team

We believe that one of the most significant differentiators between us and our software competitors is our compensation team. In addition to hiring experienced compensation professionals from industry, we train our technology personnel about compensation and our compensation personnel about technology, so that each group possesses both the HR and the technological expertise essential to our products. We believe that this combined expertise allows us to design our software and data sets in a sophisticated and useful manner for our customers. We also try to ensure that employees with compensation experience are deployed throughout our organization. Historically we have moved compensation professionals into roles within sales, product management, and professional services. In this way we are able to embed compensation knowledge, skills and abilities in all aspects of what we do, and we believe this allows us to position our domain expertise as a true competitive advantage.

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Research & Development

Our research and development efforts are focused on improving and enhancing our existing on-demand service offerings as well as developing new products, features and functionality. Expansion of our solutions into new areas often involves a multiple year commitment to enter a new business, and we seek new product opportunities related to compensation, performance and talent management. When we extend an existing application or data set, our development costs are relatively low. When we innovate in an area requiring the development of a new data set, our development costs increase due to the high initial fixed costs of entering the new area and also building original software functionality. Once the initial investment in a new area has been made, however, the ongoing costs to maintain a data set and extend a product are often significantly less than the costs of maintaining the typical installed software product. Research and development expense for the fiscal years ended March 31, 2004, 2005 and 2006 was $0.8 million, $1.4 million, and $2.2 million, respectively, and was $1.5 million and $2.8 million, respectively, for the nine months ended December 31, 2005 and 2006.

Technology

We were a pioneer in hosted, multi-tenant, on-demand software, launching our first product in 2000. Our on-demand software is a highly scalable, multi-tenant application platform written in CSS, XML, DHTML, Visual Basic, C++, Java and C# for the .NET framework and COM+ and MSMQ for the Windows operating systems. We use commercially available hardware and a combination of proprietary and commercially available software, including Microsoft SQL Server, Microsoft IIS Server and Microsoft Windows.

Our on-demand software treats our customers as separate tenants in central applications and data sets. As a result, we are able to spread the cost of delivering our service across our user base. In addition, because we do not have to manage thousands of distinct applications with their own business logic and database schemas, we believe that we can scale our business faster than traditional software vendors, even those that have modified their products to be accessible over the Internet.

Our TalentManager products are built on our proprietary, highly scalable Salary.com FlexTenant platform, which enables us to customize the business logic, data flow, workflow and user interfaces of our enterprise applications for clients and yet continue to operate in the same multi-tenant application shared by our other customers.

Operations

We serve all of our customers from a third-party network operations facility located in Watertown, Massachusetts, operated by AT&T. This facility provides around-the-clock security personnel, photo ID/access cards, biometric hand scanners and sophisticated fire systems. The overall security of each data center (inside and outside) and network operations center are monitored by digital video surveillance cameras 24 hours a day, seven days a week. Additionally, redundant bandwidth, on-site electrical generators and environmental control devices are used to keep servers up and running. We continuously monitor the performance of our service. We have a comprehensive security infrastructure, including firewalls, intrusion detection systems and encryption for transmissions over the Internet. We monitor and test this security infrastructure on a regular basis. Our site operations team provides system management, maintenance, monitoring and back-up. We run tests regularly to ensure adequate response from our sites and conduct production environment reviews for hosting capacity, expansion and upgrade planning. We also monitor site availability and latency. We own or lease and operate all of the hardware on which our applications run in the network operations facility.

To facilitate high availability of our solutions and loss recovery, we operate a multi-tiered system configuration with redundant bandwidth, load balanced web server pools, replicated and clustered database servers and fault tolerant storage devices. Data sets are restored to hot standby database servers

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using transaction logs shipped from primary production database servers. This solution is designed to provide near real-time fail-over service in the event of a malfunction with a primary clustered database or server. Full backups of all data sets take place nightly and are archived to tapes. These tapes are rotated offsite to a separate facility managed by Iron Mountain. We also maintain a fully redundant site, located within our headquarters, which would serve as our primary site in the event that a disaster was to render the network operations facility inoperable. Our real-time backups are stored on servers in our corporate headquarters. Although we have not experienced a failure of our third-party network operations facility, we believe that if such facility became inoperable, most of our products would be available to our customers with minimal interruption in service.

Sales and Marketing

We sell our enterprise solutions primarily through our direct sales organization and to a lesser extent through indirect channels. Our direct sales force consists of 60 employees, including 33 account executives. We employ business development representatives to call potential enterprise customers to book initial demonstrations and to qualify customer leads. Once a lead is qualified, our account executives assess customer needs, complete demonstrations and close sales, primarily by telephone and via web-based product demonstrations. We also employ account managers who maintain on-going or post-sale relationships with subscribers, manage renewals and generate interest from existing customers to purchase additional products. Additionally, our sales engineers and compensation professionals assist with sales to customers with particularly complex needs. Most of our sales personnel are located in our headquarters in Waltham, Massachusetts. We also have an advertising and syndication sales team, which works much in the same way as our enterprise product sales team, but focuses its efforts on selling and marketing advertising on our website and syndication of our consumer offerings to other websites. Although we have relationships with many partners, including websites and consulting firms, these partners accounted for less than 10% in the aggregate of our total revenue in the fiscal year ended March 31, 2006 and the nine months ended December 31, 2006.

Our marketing program is anchored by an integrated communications strategy that supports the core of our brand and value proposition. Our marketing programs include direct mail and email campaigns, using our website to provide product and company information, advertising in both print and online media, search engine marketing, issuing press releases on a regular basis and launching events to publicize our service to existing customers and prospects. We build our brand through our website, syndication and public relations, all of which are intended to increase market awareness of Salary.com as a top-tier provider of on-demand compensation management solutions, as well as a leading website for free information about compensation. Furthermore, our spokespersons are frequently sought as expert commentators by major media, including television, radio, newspapers and mainstream and trade magazines. We believe that this is a critical component of our branding program and positions Salary.com as an expert in the compensation field. In the nine months ended December 31, 2006, our television and radio appearances were viewed more than 50 million times and our print appearances were viewed more than 43 million times. We also conduct seminars, participate in trade shows and industry conferences, publish white papers on HR issues and develop customer reference programs.

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Customers

As of December 31, 2006, we had more than 1,700 enterprise subscribers, in various industries, who spend from $2,000 to more than $100,000 annually. No single customer accounted for more than 3% of our revenue in the fiscal year ended March 31, 2006 or in the nine months ended December 31, 2006. Below is a representative list of companies who were customers as of December 31, 2006, grouped by industry category and number of employees in the business unit we serve.

Industry	More than 500 Full-Time Employees	500 or Fewer Full-Time Employees
Retail	Toys R’ Us	Dial-a-Mattress
	Home Depot	Hickory Farms
	Abercrombie & Fitch	Honey Baked Ham
	Linens ‘N Things	Red Envelope
	Hallmark	Rolex Watch USA
Consumer Products	Campbell Soup	LaCrosse Footwear
	Maytag	Premier Agenda
	Kohler	Birds Eye
	Royal Caribbean	Waterford Wedgewood USA
	Avon	Heineken USA Inc.
Financial Products and Services	Equifax	American Capital Strategies
	Merrill Lynch	Cole Taylor Bank
	Countrywide Financial	Cascade Bancorp
	M&T Bank	Ocean First Financial
	LaSalle Bank	Juniper Bank
Manufacturing	Raytheon	Wagner Spray Technology
	Bosch	Royal Appliance
	Honeywell	Rockford Corporation
	BASF	Troy Corporation
	Goodrich	JSP International
Technology	Cisco Systems	Sycamore Networks
	Thermo Fisher Scientific	Powerwave Technologies
	Trimble Navigation	DigitalGlobe
	Mitsubishi Electronics USA	SiRF Technologies
	SRA International	Omron Components

Competition

The market for on-demand compensation management and performance management solutions is fragmented, competitive and rapidly evolving, and there are low barriers to entry to some segments of this market. Within our markets, the most common applications in use today are generic desktop software tools and solutions that are not specifically designed for compensation management or performance management. We also compete with software vendors that offer solutions through either traditional on-premise delivery methods or to a lesser extent, on-demand solutions, and established consulting firms that continue to offer a diversity of services and software products. We also expect to encounter new and evolving competition as the market for on-demand compensation management software and services consolidates and matures and as organizations become increasingly aware of the advantages and efficiencies that can be attained from the use of compensation management software and data solutions.

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We believe the principal factors that generally determine a company’s competitive advantage in the compensation management and performance management markets include the following:

• a large installed customer base;

• a well-known and respected brand;

• breadth and depth of proprietary content;

• the ability to offer both powerful software and technology and accurate compensation data in a single offering;

• ease of deployment;

• low cost of ownership;

• a suite of products (rather than individual point solutions); and

• an integrated platform (e.g., in which pay and performance software and data are linked).

We face competition primarily from five sources:

• generic desktop software and in-house or custom-developed solutions;

• established software vendors offering products specifically designed for compensation management, performance management and/or talent management;

• established compensation and HR consulting firms;

• other websites and advertising venues; and

• existing and future start-up companies offering software, data, and e-commerce compensation solutions.

Generic desktop software and in-house or custom- developed solutions.    Perhaps the most common applications in use today are generic desktop software tools such as Microsoft Excel and Microsoft Access, as well as other commercially available software solutions not specifically designed for compensation or performance management. Compensation professionals at organizations of all sizes routinely use these generic software tools to develop in-house or home-grown solutions. Although we believe our CompAnalyst and TalentManager offerings are superior to these home-grown, partially-automated solutions, some potential customers may be reluctant to switch both because of the cost of our solution and because of the perceived risk they face in giving up direct control over their sources of data.

Established software vendors.    Established HR software vendors compete with both our CompAnalyst and TalentManager solutions. In addition, the market for our TalentManager solution is extremely competitive and includes several companies that are more established and have greater financial, technological and marketing resources than we do. As a result, we expect to face intense ongoing competition in this segment of our business, which could affect our ability to increase or maintain market share in the performance management arena.

We also expect that new competitors, such as enterprise software vendors that have traditionally focused on enterprise resource planning, or ERP, or back office applications, will enter, or greatly expand their offerings in, the on-demand compensation and performance management software market as it develops and matures. In addition, there are a number of companies that have products in the broader talent management market, which includes not only compensation and performance management, but also learning and recruitment management. We expect over time that certain of these companies may also seek to offer compensation and performance management products in competition with us. These large, traditional players in the HR space could focus their considerable financial,

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technical, marketing and sales resources on various segments of our business, either by developing their own products in-house or purchasing a smaller company. To the extent such efforts are successful, it is possible that these new competitors could rapidly acquire significant market share.

Established compensation and HR consulting firms.    The market for compensation management data and services has traditionally been dominated by large consulting firms, all of which have greater financial, sales and marketing, management, service, support and other resources than we have. Such firms have traditionally offered an expensive but fully customized compensation management solution to the nation’s largest enterprises. Additionally, in recent years such firms have begun to reinvest in their software-based compensation management tools. We thus face two types of competition from established consulting firms:

• First, their customized consulting services represent a challenge to our CompAnalyst suite, particularly in larger organizations, which frequently have long-standing and well-entrenched relationships with compensation and HR consulting firms. This challenge is particularly acute for our CompAnalyst Executive product line, as HR and compensation executives are often reluctant to change the processes used to determine their bosses’ pay.

• Second, some established HR consulting firms offer software that competes directly with certain modules of both our CompAnalyst and TalentManager product lines. While we believe that our software products compete favorably with those offered by consulting firms, these firms have far greater resources than we do and as a result may compete successfully with our CompAnalyst and TalentManager solutions.

Other websites and advertising venues.    Our advertising-sponsored offerings (Salary Wizard, www.salary.com, and Salary Center) compete with a wide variety of other websites and online media for advertising dollars. To the extent these competitors are able to offer advertisers more effective or cost-efficient means of marketing their product and services, we may be unable to grow, or face reduced revenues from some or all of our advertising-based products.

Existing and future start-up software, data, and e-commerce companies.    A number of smaller, early-stage companies offer products that compete directly with one or more of our product lines. Although many of these young companies may have fewer resources than we do, to the extent they are successful in their efforts, we expect to face more effective competition from them in the future, and our financial performance may suffer as a result. In addition, because the market for compensation and performance management software and services, as well as e-commerce compensation products, is nascent and rapidly evolving, we expect additional, as yet unformed, companies to enter our markets in the future. To the extent this occurs, some or all of our product lines will face greater competition in the future, which may materially adversely affect our financial performance.

Intellectual Property and Proprietary Content

We rely on a combination of patent, trademark, copyright and trade secret laws in the United States and other jurisdictions as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our brand. We have one U.S. issued patent (for our proprietary methods for calculating market pricing across our data sets) which expires in 2022 and three pending U.S. patent applications, as well as related patents and patent applications in other jurisdictions. We also enter into confidentiality and proprietary rights agreements with our employees, consultants and other third parties and control access to software, documentation, data and other proprietary information.

We pursue the registration of our trademarks in the United States. Currently, our CompPlanner and Salary Wizard marks are federally registered in the U.S. and we have applied for U.S. registrations for our various other marks.

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We currently license some of the content used to build our compensation data sets from numerous providers pursuant to data reseller, data distribution, and license agreements with these providers. Our data sets are generally derived from market data as collected in salary surveys. This information is used as one of several inputs to our data set calculation methodology. Most of the licenses for this content are non-exclusive. We cannot assure you that the data we require for our data sets will be available from such sources in the future or that the cost of such data will not increase. Because we have content from numerous providers, we do not believe that the loss of any one license would materially affect the quality of our data sets, however, we cannot assure you that any single data set will not be substantially reliant on a single source in the future. Additionally, if a third party successfully asserted a claim that our use of data has violated our agreement with them or infringed upon their copyright, we may be required to remove the applicable data from our data sets and regenerate our data sets without such data.

Although the protection afforded by patent, trademark, copyright and trade secret laws may provide some advantages, we believe that our ability to maintain our competitive position is largely determined by such factors as the technical skills of our personnel, the breadth and depth of our proprietary data sets, new product developments and product enhancements.

Substantial litigation regarding intellectual property rights exists in the software industry. From time to time, in the ordinary course of business, we may be subject to claims relating to our intellectual property rights or those of others, and we expect that third parties may commence legal proceedings or otherwise assert intellectual property claims against us in the future, particularly as we expand the complexity and scope of our business, the number of similar products increases and the functionality of these products further overlap. If a claim is asserted that we have infringed the intellectual property of a third party, we may be required to seek licenses to that technology. In addition, we license third party technologies, primarily from Microsoft, that are incorporated into some elements of our services. Although we do not believe that any one license is material to our operations, licenses from third parties may not continue to be available to us at a reasonable cost, or at all. Additionally, the steps we have taken to protect our intellectual property rights may not be adequate. Third parties may infringe or misappropriate our proprietary rights. Competitors may also independently develop technologies that are substantially equivalent or superior to the technologies we employ in our services.

Employees

At December 31, 2006, we had 206 full-time and part-time employees. In addition, in December 2006, we established a wholly foreign owned enterprise in Shanghai, China and hired 23 employees to carry out software development for us in China. Our employees are not represented by any collective bargaining agreement, and we have never experienced a work stoppage. We believe we have good relations with our employees.

Facilities

Our corporate headquarters, including our principal administrative, marketing, technical support and research and development facilities, are located in Waltham, Massachusetts, where we lease approximately 62,000 square feet under an agreement that expires in 2008. Additionally, concurrent with the establishment of our wholly owned foreign enterprise in China, our lease agreement for approximately 7,500 square feet of office space in Shanghai, which was signed in September 2006, became effective. This lease expires in 2008, but we have an option to extend it through 2010. We believe that our current facilities are suitable and adequate to meet our current needs, and that suitable additional or substitute space will be available as needed to accommodate expansion of our operations. See Note 6 to the notes to our financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations” for information regarding our lease obligations.

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Legal Proceedings

On February 1, 2007, Mercer filed a Complaint against us in the United States District Court for the Southern District of New York. The Complaint alleges copyright infringement, unfair competition, false representation, fraud, breach of contract and tortious interference with business relations. Specifically, the Complaint asserts that our use of Mercer surveys infringes upon Mercer’s copyrights, that we have breached, and induced our customers to breach, license agreements with Mercer, that we have attempted to deceive Mercer in connection with our acquisition of Mercer surveys, and that we have misrepresented our rights to use Mercer’s surveys to our current and potential customers. The Complaint seeks injunctive relief and monetary damages. We believe that our purchase and use of all third party surveys (including Mercer’s) complies with copyright law and any applicable license agreements and we intend to vigorously defend the claims by Mercer. We also intend to pursue several counterclaims against Mercer, including a claim relating to the repeated unauthorized use of our proprietary data sets by Mercer employees. Although Mercer has made similar assertions to us in the past, we have not received any correspondence from Mercer since 2004 on these issues and we have not purchased any Mercer data since that time. This previously acquired data comprises a very small portion of the data we use to generate our proprietary data sets. Our proprietary data sets are not reliant on any one data source and we could remove the data we historically purchased from Mercer from our data sets and regenerate them without materially affecting the quality of our data sets.

On December 29, 2006, we commenced a declaratory judgment action in the Superior Court of Suffolk County, Massachusetts against a former independent consultant to the Company. The former consultant was under contract to Salary.com and assisted us in completing a strategic partnership in 2000. The contract expired by its terms in November 2000. Pursuant to that contract, the former consultant was entitled to a success fee consisting of a right to purchase 33,600 shares of our common stock at a price of thirty-six cents per share, which at the time represented approximately three percent of the Company’s capital stock. In November 2006, after we commenced our initial public offering, the former consultant informed us that he was in possession of a version of a contract that allegedly gave him the right to purchase three percent of the equity of Salary.com as of an unspecified date at a price of thirty-six cents per share. The basis for this claim appears to be certain hand-written changes to the expired contract that we did not make or authorize, and had never seen until the former consultant sent us a copy of a contract containing these changes in November 2006. In the court action, we are seeking to have the court declare that the consultant is not entitled to anything other than the 33,600 options described in the expired contract. In addition, we are seeking damages due to the former consultant’s attempt to defraud us and our stockholders by making these hand-written changes subsequent to the contract’s execution and without our knowledge or consent. We also are seeking damages for tortious interference with business relations as well as for unfair and deceptive business acts and practices. To the extent we are required to issue additional shares of our common stock or options to purchase common stock as a result of this action, we would recognize an expense equal to the difference between the fair value of the common stock on the date of issuance and the price paid for such stock or the exercise price of any such options, as the case may be. If such stock were issued or such options were to be exercised, this could have a material adverse effect on our results of operations and could be dilutive to existing stockholders.

We are not currently, nor have been in the past, subject to any other material legal proceedings. From time to time, however, we may be named as a defendant in legal actions arising from our normal business activities. These claims, even those that lack merit, could result in the expenditure of significant financial and managerial resources.

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MANAGEMENT

Executive Officers, Key Employees and Directors

Our executive officers, key employees and directors and their respective ages and positions as of January 31, 2007 are as follows:

Name	Age	Position
Kent Plunkett(1)	44	Chairman, President and Chief Executive Officer
Yong Zhang(1)	39	Executive Vice President, Chief Operating Officer, Chief Technology Officer, and Director
William H. Coleman(1)	43	Senior Vice President and Chief Compensation Officer
Kenneth S. Goldman(1)	47	Senior Vice President, Chief Financial Officer, Treasurer, and Director
Teresa A. Shipp(1)	45	Senior Vice President of Sales
Christopher J. Fusco(1)	41	Vice President of Compensation and Data Operations
Meredith A. Hanrahan(1)	45	Senior Vice President and Chief Marketing Officer
Andrew Linn	47	Senior Vice President of Global Data Products
Elliot J. Mark	41	Senior Vice President, General Counsel and Secretary
Mark Albrecht	55	Vice President of Product Marketing for Talent Management Solutions
Dana Freeman	45	Vice President of Product Management
John McCammond	47	Vice President of Business Development
Thomas A. Samalis	61	Vice President and Corporate Controller
Dean Vassiliou	37	Vice President of Professional Services
Paul R. Daoust(3)(4)	59	Director
John F. Gregg	43	Director
Edward F. McCauley(2)(3)(5)	67	Director
John R. Sumser	52	Director
Terry Temescu(2)(4)	59	Director
Robert A. Trevisani(2)(3)(4)(6)(7)	73	Director

⁽¹⁾ Executive officer

⁽²⁾ Member of the audit committee

⁽³⁾ Member of the compensation committee

⁽⁴⁾ Member of the nominating and corporate governance committee

⁽⁵⁾ Chairman of the audit committee

⁽⁶⁾ Chairman of the compensation committee

⁽⁷⁾ Chairman of the nominating and corporate governance committee

Kent Plunkett founded Salary.com and has served as our Chairman, President and Chief Executive Officer since 1999. Prior to founding Salary.com, Mr. Plunkett was CEO of Bumblebee Technologies Inc., a career software publisher, from 1996 through 1999, held a leadership role at InfoSpace, Inc., an online content syndication company, including online white and yellow pages, private-label search and mobile entertainment, in 1996 and Director of Business Development for Pro CD, Inc., a CD-ROM electronic

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directory publisher of white pages, yellow pages and mapping content, from 1995 through 1996. Mr. Plunkett holds an A.B. degree from Georgetown University and an M.B.A. from the Harvard Business School and is a Certified Compensation Professional.

Yong Zhang has served as our Chief Technology Officer since April 2000 and as our Executive Vice President and Chief Operating Officer since June 2006. Mr. Zhang has been a member of our board of directors since December 2004. Prior to joining Salary.com, Mr. Zhang held various technical leadership and project management positions at privately held software and healthcare companies, including Iconomy.com, a pioneer of private-label e-commerce solutions, Smart Route System, a traveler information company, and Center for Health and Human Services, Inc., and served as consultant for Aerovox, Inc., a publicly-held capacitor manufacturer. Mr. Zhang holds a B.S. in Physics from Shanghai University of Science and Technology, an M.B.A. from Cornell University and an M.S. in Electrical Engineering as well as an M.S. in Physics from University of Massachusetts at Dartmouth. Mr. Zhang is a Certified Compensation Professional and a Global Remuneration Professional.

William H. Coleman has served as our Senior Vice President and Chief Compensation Officer since November 2006 and served as our Senior Vice President, Compensation from November 2002 until November 2006 and as our Vice President, Compensation from May 2000 until November 2002. Prior to joining us, Mr. Coleman held senior compensation positions with Watson Wyatt Worldwide, a global consulting company, and PricewaterhouseCoopers LLP. Mr. Coleman holds a B.S. in Mathematics from the Massachusetts Institute of Technology and is a Certified Compensation Professional.

Kenneth S. Goldman has served as our Senior Vice President, Chief Financial Officer and Treasurer since March 2006. Mr. Goldman has been a member of our board of directors since November 2006. From April 2004 to March 2006, Mr. Goldman was a Principal with Mirus Capital Advisors, an investment banking firm. From March 2002 to March 2004, Mr. Goldman was Senior Vice President and Chief Financial Officer of Lodestar Corporation, an enterprise software company. From March 2000 through March 2002, Mr. Goldman was Executive Vice President and Chief Financial Officer of Student Advantage, a NASDAQ-traded marketing services company. Prior to 2000, Mr. Goldman served as the chief financial officer of several companies, including MediaMap, a provider of software and content data, ShopLink.com, an online provider of grocery shopping and household consumables, the international division of Liberty Mutual Group, and Goldweitz & Company, a real estate investment and development firm. Mr. Goldman started his career with KPMG and has been a Certified Public Accountant since 1984. Mr. Goldman holds a B.S. in Business Administration from the Whitman School of Management at Syracuse University.

Teresa A. Shipp has served as our Senior Vice President of Sales since May 2003 and served as our Corporate Controller from November 2002 until August 2004. From November 2001 until September 2002, Ms. Shipp was International Finance Manager for LoJack Corporation, a publicly-held provider of vehicle recovery systems. Ms. Shipp holds a B.S. in Electrical Engineering from the University of Notre Dame and an M.B.A. from the Harvard Business School and is a Certified Public Accountant and a Certified Compensation Professional.

Christopher J. Fusco has served as our Vice President of Compensation and Data Operations since July 2006 and served as our Vice President, Business Analysis, from July 2005 to July 2006, our Professional Services Director from March 2004 to July 2005 and our Senior Compensation Consultant from February 2002 to March 2004. From July 1998 through May 2001, Mr. Fusco was a Senior Consultant with William M. Mercer, Inc., a global consulting company. Prior to 1998, Mr. Fusco served in various compensation management positions with companies such as KPMG, an audit, tax and advisory company, W.R. Grace & Co., a global specialty chemicals and materials company, Towers Perrin, a professional services firm, and Interleaf, a provider of software products used for business documents. Mr. Fusco holds a B.S. from the University of Connecticut and an M.B.A. from Northeastern University. Mr. Fusco is a Certified Compensation Professional and Global Remuneration Professional and has

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earned lifetime achievement as a Senior Professional in Human Resources (SPHR) by the Society of Human Resource Management.

Meredith A. Hanrahan has served as our Senior Vice President and Chief Marketing Officer since September 2005. From January 2005 to September 2005, Ms. Hanrahan was a marketing consultant for Yankee Group, a technology research and consulting firm, and also for Boston Beer Company, a publicly-traded beverage company. From November 2003 until November 2004, Ms. Hanrahan was General Manager and Chief Marketing Officer for AG Interactive (the interactive division of American Greetings) and from May 2000 through November 2003, Ms. Hanrahan was Vice President and General Manager for Terra Lycos, a Spanish provider of Internet access. Prior to that, Ms. Hanrahan worked for five years as a strategy consultant for KPMG and McKinsey & Company in New York, and for ten years in senior and management positions at General Mills, Inc., Miller Brewing Company, and Lindt Chocolate USA. Ms. Hanrahan holds a B.A. from the University of New Hampshire and an M.B.A. from the Harvard Business School.

Andrew Linn has served as our Senior Vice President of Global Data Products since July 2005 and served as our Senior Vice President of Product Management from 2000 to July 2005. Prior to 2000, Mr. Linn served in various capacities with One Source Information Services (and its predecessor, Lotus Development Corporation), including Group Product Manager and Product Manager from November 1988 through January 2000, an aggregator of business and company information. Mr. Linn holds a B.S. from the Wharton School at the University of Pennsylvania and is a Chartered Financial Analyst and a Certified Compensation Professional.

Elliot J. Mark has served as our Senior Vice President, General Counsel and Secretary since October 2006. From August 2003 until September 2006, Mr. Mark was Senior Vice President and General Counsel of Viisage Technology, Inc., a NASDAQ-traded identity technology company. During the period from January 2001 to March 2003, Mr. Mark was the General Counsel of eRoom Technology, Inc., an enterprise software company. Prior to that, Mr. Mark held senior legal positions at SimPlayer Sports, Inc., a developer of interactive applications for the sports market, Arthur D. Little, Inc., a global consulting firm, and Molten Metal Technology, Inc., an environmental technology company. Mr. Mark started his career with Goodwin Procter LLP. Mr. Mark holds a B.A. from Wesleyan University and a J.D. from The Georgetown University Law Center.

Mark Albrecht has served as our Vice President of Product Marketing for Talent Management Solutions since March 2006 and from February 2004 to March 2006, he served as our Vice President of Professional Services. From 2002 through 2004, Mr. Albrecht served as Managing Partner of Business Performance Partners, a performance management consulting firm. During the period from 2000 through 2002, Mr. Albrecht was Vice President of Professional Services at Commerce One, a supplier of on demand supply chain management solutions. Mr. Albrecht holds a B.S. from Florida State University, an M.B.A. in Operations Management from Boston University and an M.A. in Psychology from Montclair State College and is a Certified Compensation Professional.

Dana Freeman has served as our Vice President of Product Management since March 2006. From 2003 through 2006, Mr. Freeman was Vice President of Product Management at Deploy Solutions, a human resources management software company. From 1999 through 2003, Mr. Freeman was President and CEO of HRchitect, a human capital management consulting company. Mr. Freeman holds a B.S. in Business Administration from the University of Maine.

John McCammond has served as our Vice President of Business Development since May 2005. From 2001 to 2005, Mr. McCammond was Vice President of Channel Sales at Avaki, a provider of enterprise information integration software systems. Mr. McCammond holds a B.A. from Williams College and an M.B.A. from the Harvard Business School.

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Thomas A. Samalis has served as our Vice President and Corporate Controller since August 2004. From 1994 to July 2004, Mr. Samalis was Vice President and Corporate Controller for OneSource Information Services, Inc., a publicly-held company and provider of business information. Prior to that, he was employed for twenty-three years by Interactive Data Corporation, a provider of business and financial data, where he served as Vice President and Corporate Controller for six years, and in various finance and accounting capacities, including Director of Accounting and Accounting Manager throughout the preceding seventeen years. Mr. Samalis holds a B.S. in Accounting from Suffolk University and an M.B.A. from Bentley College.

Dean Vassiliou has served as our Vice President of Professional Services since October 2006. From November 2005 to October 2006, Mr. Vassiliou was the Vice President of Professional Services at 4DataLink Inc., an enterprise application integration solution provider. From June 2004 to November 2005, he was the Vice President of Product Management and Marketing at Valaran Corporation, an enterprise software company. Prior to that, Mr. Vassiliou held a variety of positions at Lodestar Corporation, an enterprise software company, from 1998 to February 2004, including Senior Vice President of Products, Services and Support from November 2001 to February 2004. Mr. Vassiliou holds a B.S. in Mechanical Engineering from the University of Hartford.

Paul R. Daoust has served on our board of directors since November 2006. Since February 2005, Mr. Daoust has served as chairman of the board and chief executive officer of HighRoads, Inc., a privately-held technology enabled solutions company providing benefits lifecycle management. From August 2003 to January 2005, Mr. Daoust was President of Daoust Consulting, LLC, a provider of management consulting services to early- and mid-stage companies. From October 2000 to July 2003, Mr. Daoust was chairman of the board and chief executive officer of GRX Technologies, Inc., a privately-held software company focused on supply chain management for the commercial insurance industry. Mr. Daoust also served as executive vice president and chief operating officer of Watson Wyatt Worldwide, one of the world’s largest human resource consulting firms, from June 1993 to June 1998. He worked for Watson Wyatt for 28 years and served on their board of directors for nine years. He currently serves on the board of Gevity HR, Inc., a publicly-traded provider of comprehensive employment management solutions, and on the advisory boards of Brodeur Worldwide (part of the Omnicom Group) and LaberMatrix, Inc. Mr. Daoust holds a B.A. in Mathematics from Boston College and a Masters of Actuarial Science with distinction from the University of Michigan and he is a Fellow of the Society of Actuaries.

John F. Gregg has served on our board of directors since November 2006. Mr. Gregg is the founder and Managing Director of Bluewater Ventures Ltd., a private equity firm specializing in turnarounds and investments in the media and telecommunications sectors in Europe, the U.S. and Asia. From January 2003, when he founded Bluewater Ventures, to January 2004, Mr Gregg acted as Chief Restructuring Officer for Cablecom GmbH, Switzerland’s largest cable operator. From 1994 to January 2003, Mr. Gregg held various senior positions at NTL Inc., a publicly-traded European broadband cable operator, including serving as Chief Financial Officer and Senior Vice President from June 1999 to January 2003. In his position as Chief Financial Officer, Mr. Gregg had primary responsibility for oversight of NTL’s successful restructuring, which was commenced upon the filing of a voluntary petition for a pre-arranged joint reorganization plan under Chapter 11 of the U.S. Bankruptcy Code on May 8, 2002 and completed on January 11, 2003. Mr. Gregg holds a B.A. from Georgetown University and an M.B.A. from Harvard Business School.

Edward F. McCauley has served on our board of directors and as Chairman of the Audit Committee of our board since November 2006. Over a thirty-six year career at Deloitte & Touche until his retirement in 2001, Mr. McCauley served as Lead Audit Partner or Advisory Partner for a wide variety of Fortune 500 companies, non-profit and regulated enterprises. Mr. McCauley is a board member of Mac-Gray Corporation, a publicly-traded laundry facilities management business, and is a board member and chairman of the audit committee of Harvard Pilgrim Healthcare, Inc., a health benefits provider. Mr. McCauley holds a B.S. in Accounting from St. Josephs University and is a Certified Public Accountant.

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John R. Sumser rejoined our board of directors in November 2006, having previously served as a member of our board from October 2001 to September 2003. Mr. Sumser is the founder and President of IBN: interbiznet.com, a leading source of analysis for the electronic recruiting industry. Through John Sumser Consulting, Mr. Sumser also provides consulting services regarding business strategy and development to companies in the human resources industry. Mr. Sumser is the author of the Recruiters’ Internet Survival Guide, the Electronic Recruiting Indices and the daily Electronic Recruiting News. Mr. Sumser holds a B.A. from the Catholic University of America.

Terry Temescu has served on our board of directors since 2000. Mr. Temescu is the Chairman and Chief Executive Officer of Iron Leaf Capital Corp., a growth capital investment company, and the founding partner of Lyric Capital, a private equity investment firm, which was formed in 1998. Prior to that, he was an investment banker at Goldman Sachs and Smith Barney, and served as Chief Operating Officer and Chief Financial Officer of Concord General Corp. a diversified financial services company. Mr. Temescu holds a B.S. degree from the State University of New York and an M.B.A. from Cornell University.

Robert A. Trevisani has served on our board of directors since 2005. Since December 2005, Mr. Trevisani has served as President of Southern Cay Consulting, a private consulting firm. From 2003 up to his retirement in June 2006, Mr. Trevisani was Of Counsel at Gadsby Hannah LLP and from 1967 to 2003, he was a partner at that law firm. From 2002 to 2004, Mr. Trevisani was a board member of Computer Horizons, a publicly-traded information technology staffing and services firm that also provides temporary employee management software solutions. From 2000 to 2002, Mr. Trevisani was Chairman of the Legal Practice Section of the International Bar Association. Mr. Trevisani is also currently President and a Trustee of the Commonwealth Charitable Fund, a Trustee of the Institute for Experimental Psychology at the University of Pennsylvania and a member of the Board of Overseers of Boston College Law School. Mr. Trevisani is a past member of the faculty at Boston College Law School and the Boston University Graduate School of Law. Mr. Trevisani holds an A.B. from Boston College, a J.D. from Boston College Law School and an L.L.M. in Taxation from New York University Graduate School of Law.

Board of Directors

We currently have nine directors, each of whom was elected as a director under board composition provisions of a stockholders agreement and our certificate of incorporation. The board composition provisions of the stockholders agreement and our certificate of incorporation will be terminated upon the closing of this offering. Upon the termination of these provisions, there will be no further contractual obligations regarding the election of our directors. Our directors hold office until their successors have been elected and qualified or until the earlier of their resignation or removal.

Following the offering, the board of directors will be divided into three classes with members of each class of directors serving for staggered three-year terms. The board of directors will consist of three Class I directors (currently Yong Zhang, Terry Temescu and John F. Gregg), three Class II directors (currently Paul R. Daoust, Kenneth S. Goldman and Robert A. Trevisani) and three Class III directors (currently Kent Plunkett, Edward F. McCauley and John R. Sumser), whose initial terms will expire at the annual meetings of stockholders held in 2007, 2008 and 2009, respectively. Our classified board could have the effect of making it more difficult for a third party to acquire control of us.

Kent Plunkett, our President and Chief Executive Officer, serves as the Chairman of our board of directors.

Director Compensation

Directors who are also our employees receive no additional compensation for their services as directors. Currently, we pay our non-employee directors a fee of $250 for each in-person board of directors and committee meeting they attend. Following the offering, we will pay our non-employee

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directors a fee of $1,000 for each in-person board of directors and committee meeting they attend and $1,000 for each telephonic board of directors and committee meeting they attend. We also reimburse non-employee directors for reasonable expenses incurred in connection with attending board of directors and committee meetings.

Upon election to the board of directors, non-employee directors are granted an option to purchase shares of our common stock, which option vests in part on the date of grant and in annual installments over the two-year period following the date of grant. Additional grants to our non-employee directors are expected to be made every two years. The exercise price of these stock options is the fair market value of our shares of our common stock as determined by the board of directors as of the date of the option grant. The vesting of these stock options accelerates upon a change of control.

Board Committees

Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. The composition and functioning of all of our committees complies with the rules of the SEC and the Nasdaq Global Market that are currently applicable to us and we intend to comply with additional requirements to the extent that they become applicable to us.

Audit committee. Edward McCauley, Terry Temescu and Robert A. Trevisani currently serve on the audit committee. Mr. McCauley serves as the Chairman of the audit committee. The audit committee’s responsibilities include, but are not limited to:

• appointing, approving the compensation of, and assessing the independence of our independent auditor;

• overseeing the work of our independent auditor, including through the receipt and consideration of certain reports from the independent auditor;

• resolving disagreements between management and our independent auditor;

• pre-approving all auditing and permissible non-audit services (except de minimus non-audit services), and the terms of such services, to be provided by our independent auditor;

• reviewing and discussing with management and the independent auditors our annual and quarterly financial statements and related disclosures;

• coordinating the oversight of our internal control over financial reporting, disclosure controls and procedures and code of business conduct and ethics;

• discussing our risk management policies;

• establishing policies regarding hiring employees from the independent auditor and procedures for the receipt and retention of accounting related complaints and concerns;

• meeting independently with our independent auditors and management; and

• preparing the audit committee report required by SEC rules to be included in our proxy statements.

All of the members of the audit committee are “independent” under the applicable rules of the Nasdaq Global Market and the SEC.

Compensation committee. Paul Daoust, Edward McCauley and Robert A. Trevisani currently serve on the compensation committee. Mr. Trevisani serves as the Chairman of the compensation committee.

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The compensation committee’s responsibilities include, but are not limited to:

• annually reviewing and approving corporate goals and objectives relevant to the compensation of our Chief Executive Officer;

• evaluating the performance of our Chief Executive Officer in light of such corporate goals and objectives and determining the compensation of our Chief Executive Officer;

• overseeing the compensation of our other executive officers;

• overseeing an evaluation of our senior executives;

• overseeing and administering our incentive-based compensation plans and equity-based compensation plans; and

• reviewing and making recommendations to the board with respect to director compensation.

Nominating and corporate governance committee. Paul Daoust, Terry Temescu and Robert A. Trevisani currently serve on the nominating and corporate governance committee. Mr. Trevisani serves as the Chairman of the nominating and corporate governance committee. The nominating and corporate governance committee’s responsibilities include, but are not limited to:

• developing and recommending to the board criteria for board and committee membership;

• establishing procedures for identifying and evaluating director candidates including nominees recommended by stockholders;

• identifying individuals qualified to become board members;

• establishing procedures for stockholders to submit recommendations for director candidates;

• recommending to the board the persons to be nominated for election as directors and to each of the board’s committees;

• developing and recommending to the board a set of corporate governance guidelines;

• serving as the Qualified Legal Compliance Committee in accordance with Section 307 of the Sarbanes-Oxley Act of 2002; and

• overseeing the evaluation of the board and management.

Compensation Committee Interlocks and Insider Participation

None of our executive officers serves as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any other entity that has one or more of its executive officers serving as a member of our board of directors or compensation committee. During the fiscal year ended March 31, 2006, Kent Plunkett, our Chairman, President and Chief Executive Officer, Terry Temescu, who served as our acting Chief Financial Officer in 1999 and 2000, and Walter Conover, who served as our survey services director on a part-time basis in 2004, served on our compensation committee. None of the current members of our compensation committee has ever been an employee of the Company.

Executive Officers

Each of our executive officers has been elected by our board of directors and serves until his or her successor is duly elected and qualified.

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Executive Compensation

The following summarizes the compensation earned during the fiscal year ended March 31, 2006, which we refer to as fiscal 2006, by (i) our Chief Executive Officer, (ii) each of our four other most highly compensated executive officers who were serving as executive officers on March 31, 2006 and whose total compensation exceeded $100,000 and (iii) our Chief Financial Officer and Chief Marketing Officer, who would have been among our most highly compensated executive officers for fiscal 2006 but for the fact that they did not join Salary.com until March 2006 and September 2005, respectively. We refer to these individuals as our “named executive officers.”

Summary Compensation Table

Name and Principal Position	Year	Annual Compensation				Long-Term Compensation
		Salary($)		Bonus($)	Other Annual Compensation($)(1)	Securities Underlying Options(#)
Kent Plunkett     Chairman, President and Chief     Executive Officer	2006	175,000		200,000	—	648,457
Yong Zhang     Executive Vice President, Chief     Operating Officer and Chief     Technology Officer	2006	250,000		125,000	—	70,326
Teresa A. Shipp     Senior Vice President of Sales	2006	155,000	(4)	75,000	—	62,580
William H. Coleman     Senior Vice President and Chief     Compensation Officer	2006	168,233		50,000	—	70,597
Christopher J. Fusco     Vice President of Compensation and     Data Operations	2006	122,521		50,000	—	31,752
Meredith A. Hanrahan(2)     Senior Vice President and Chief     Marketing Officer	2006	83,077		35,000	—	106,400
Kenneth S. Goldman(3)     Senior Vice President, Chief     Financial Officer and Treasurer	2006	7,115		30,000	—	140,000

⁽¹⁾ Excludes benefits and perquisites received by the named executive officers that do not exceed the lesser of $50,000 or 10% of any such named executive officer’s annual compensation reported in this table.

⁽²⁾ Represents actual compensation earned from employment start date, September 26, 2005, through the end of fiscal 2006.

⁽³⁾ Represents actual compensation earned from employment start date, March 20, 2006, through the end of fiscal 2006.

⁽⁴⁾ Includes $55,000 attributable to sales commissions earned in fiscal 2006.

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Option Grants in Last Fiscal Year

The following table presents all grants of stock options during the fiscal year ended March 31, 2006 to each of our named executive officers. We have not granted any stock appreciation rights. The option grants listed below were made under our Second Amended and Restated 2000 Stock Option and Incentive Plan, which we refer to as our 2000 Option Plan, or our First Amended and Restated 2004 Stock Option and Incentive Plan, which we refer to as our 2004 Option Plan, at exercise prices equal to the fair market value of our common stock on the date of grant, as determined by our board of directors. The potential realizable value, if applicable, is calculated based on the term of the option at its time of grant, which is ten years. This value is net of exercise prices and before taxes, and is based on an initial public offering price of $10.50 per share and the assumption that our common stock appreciates at the annual rate shown, compounded annually, from the date of grant until its expiration date. These numbers are calculated based on SEC requirements and do not reflect our projection or estimate of future stock price growth. Actual gains, if any, on stock option exercises will depend on the future performance of the common stock and the date on which the options are exercised.

The percentage of total options granted to employees in fiscal 2006 shown in the table below is based on options to purchase an aggregate of 3,079,811 shares of common stock granted in fiscal 2006. Percentage of total options granted to employees in fiscal 2006 representing less than 1% is denoted with an asterisk (*).

Option Grants in Last Fiscal Year

Name	Individual Grants
	Number of Securities Underlying Options Granted (#)		% of Total Options Granted to Employees in Fiscal 2006		Exercise Price Per Share ($/Sh)		Expiration Date	Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term
								5%		10%
Kent Plunkett	177,618	(1)	5.77	%	$	0.223	6/30/2015	$	2,973,352	$	4,734,566
	252,415	(2)	8.20			0.223	12/31/2015		4,225,465		6,728,347
	218,424	(1)	7.09			0.223	3/31/2016		3,656,451		5,822,286
Yong Zhang	19,040	(2)	*			0.223	11/8/2015		318,732		507,528
	28,000	(3)	*			0.223	11/8/2015		468,724		746,365
	11,200	(1)	*			0.223	3/31/2016		187,490		298,546
	214	(1)(5)	*			0.223	10/15/2010		3,582		5,704
	784	(1)(5)	*			0.223	4/2/2011		13,124		20,898
	11,088	(1)(5)	*			0.223	3/31/2012		185,615		295,561
Teresa A. Shipp	280	(4)	*			0.223	8/31/2015		4,687		7,464
	9,184	(2)	*			0.223	11/8/2015		153,742		244,808
	35,616	(3)	1.16			0.223	11/8/2015		596,217		949,376
	11,200	(1)	*			0.223	3/31/2016		187,490		298,546
	6,300	(1)(5)	*			0.223	11/4/2012		105,463		167,932

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Name	Individual Grants
	Number of Securities Underlying Options Granted (#)		% of Total Options Granted to Employees in Fiscal 2006	Exercise Price Per Share ($/Sh)	Expiration Date	Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term
						5%		10%
William H. Coleman	12,768	(2)	*	0.223	11/8/2015	$	213,738	$	340,342
	28,000	(3)	*	0.223	11/8/2015		468,724		746,365
	10,080	(1)	*	0.223	3/31/2016		168,741		268,691
	7,840	(1)	*	0.223	3/31/2016		131,243		208,982
	1,437	(1)(5)	*	0.223	4/2/2011		24,056		38,305
	10,472	(1)(5)	*	0.223	3/31/2012		175,303		279,140
Christopher J. Fusco	7,728	(2)	*	0.223	11/8/2015		129,368		205,997
	16,800	(3)	*	0.223	11/8/2015		281,235		447,819
	4,704	(1)	*	0.223	3/31/2016		78,746		125,389
	2,520	(1)(5)	*	0.223	2/25/2012		42,185		67,173
Meredith A. Hanrahan	67,200	(1)	2.18	0.223	9/30/2015		1,124,938		1,791,276
	28,000	(3)	*	0.223	11/8/2015		468,724		746,365
	11,200	(1)	*	0.223	3/31/2016		187,490		298,546
Kenneth S. Goldman	112,000	(1)	3.64	0.223	3/20/2016		1,874,897		2,985,460
	28,000	(3)	*	0.223	3/20/2016		468,724		746,365

⁽¹⁾ These options are immediately exerciseable, with the shares issuable upon exercise being subject to a right of repurchase that lapses in equal monthly installments over five years from the date of grant. See “— Employee Benefit Plans — 2000 Option Plan” and “— Employee Benefit Plans — 2004 Option Plan.”

⁽²⁾ These options are immediately exercisable, with 88 ¹/3% of the shares underlying such option being subject to a right of repurchase that lapses in equal monthly installments over five years from the date of grant. See “— Employee Benefit Plans — 2000 Option Plan” and “— Employee Benefit Plans — 2004 Option Plan.”

⁽³⁾ These options are immediately exerciseable, with the shares issuable upon exercise being subject to a right of repurchase that lapses in equal monthly installments over ten years from June 30, 2007. See “— Employee Benefit Plans — 2000 Option Plan” and “— Employee Benefit Plans — 2004 Option Plan.”

⁽⁴⁾ These options are immediately exercisable, and the shares issuable upon exercise are not subject to any right of repurchase. See “— Employee Benefit Plans — 2000 Option Plan” and “— Employee Benefit Plans — 2004 Option Plan.”

⁽⁵⁾ Represents options that were granted prior to fiscal 2006 but are included in the table as a result of the repricing of such options in March 2006.

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Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

The following table sets forth certain information concerning the number and value of options exercised by the named executive officers during fiscal 2006, if any, and the number and value of any unexercised options held by the named executive officers at March 31, 2006. There was no public market for our common stock as of March 31, 2006. Accordingly, the value of unexercised in-the-money options, if applicable, represents the total gain that would be realized if all in-the-money options held at March 31, 2006 were exercised, determined by multiplying the number of shares underlying the options by the difference between an initial public offering price of $10.50 per share and the per share option exercise price.

Name	Number of Shares Acquired on Exercise	Value Realized	Number of Securities Underlying Unexercised Options at March 31, 2006		Value of Unexercised In-the-Money Options at March 31, 2006
			Exerciseable	Unexerciseable	Exerciseable		Unexerciseable
Kent Plunkett	1,514,662	—	—	—	$	—	—
Yong Zhang	156,930	—	11,200	—		115,102.40	—
Teresa A. Shipp	138,646	—	11,200	—		115,102.40	—
William H. Coleman	126,083	—	7,840	—		80,571.68	—
Christopher J. Fusco	67,508	—	4,704	—		48,343.01	—
Meredith A. Hanrahan	95,200	—	11,200	—		115,102.40	—
Kenneth S. Goldman	140,000	—	—	—		—	—

Employee Benefit Plans

2000 Option Plan

Under our 2000 Option Plan, we are authorized to grant incentive stock options, within the meaning of Section 422(b) of the Internal Revenue Code of 1986, as amended, to employees and officers and directors who are also employees and non-qualified stock options to officers, directors, employees, consultants and advisors.

Our 2000 Option Plan is administered by our board of directors, which may delegate its administration authority to a committee of our board of directors and its ability to grant options to one or more executive officers to the extent permitted by law. The administrator has the full authority and discretion to, among other things, determine who is eligible to receive option grants, determine the time at which options may be granted, determine the option price of the shares subject to each option, determine the type of option granted and prescribe and rescind rules and regulations thereunder. No options may be granted under our 2000 Option Plan more than 10 years after the date the board of directors adopted such plan.

The award agreements governing options issued under our 2000 Option Plan provide that options may be exercised immediately for shares of common stock that are subject to a right of repurchase in favor of us. Our repurchase right on these shares lapses over time, on the same vesting schedule that applied to the option that was exercised.

Our 2000 Option Plan provides that if we are consolidated with or acquired by another entity then each outstanding option or other award issued under our 2000 Option Plan becomes immediately vested and exercisable, except with respect to shares that would have vested on the final 12 vesting dates under such option or other award. Holders of options or other awards who remain employed by us or by our successor for 1 year following the acquisition, or whose employment terminates without cause or with good reason within the first year following the acquisition, receive full acceleration of vesting on the remaining portion of their options or other awards on the first anniversary of the acquisition or the date their employment with us or our successor is terminated. Our board of directors is required to provide for the continuation or assumption of all outstanding options and other awards by the acquiring entity in an acquisition, or for the substitution of comparable options or other awards.

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The number of shares underlying an option or other award issued pursuant to our 2000 Option Plan may be reduced to the extent necessary to ensure that the holder of such option or other award does not receive an “excess parachute payment” under Section 280G of the Internal Revenue Code, unless the fair value of the reduction is greater than the tax that would be imposed on the grantee in connection with such excess parachute payment.

Our 2000 Option Plan was first adopted by our board of directors on January 12, 2000 and approved by our stockholders on January 12, 2000, and was subsequently amended and restated by our board of directors on February 9, 2006 and June 29, 2006, which amendments and restatements were approved by our stockholders on March 31, 2006 and July 26, 2006, respectively. We have reserved 3,696,000 shares of our common stock for issuance of awards under our 2000 Option Plan. This number is subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization. As of December 31, 2006, there were outstanding options to purchase a total of 100,464 shares of our common stock under our 2000 Option Plan.

We do not intend to grant additional options under our 2000 Option Plan after this offering and the aggregate number of shares to be issued under our 2000 Option Plan will be reduced to 100,464, which represents the total number of shares issuable upon exercise of outstanding options granted under our 2000 Option Plan.

2004 Option Plan

Under our 2004 Option Plan, we are authorized to grant incentive stock options, within the meaning of Section 422(b) of the Internal Revenue Code of 1986, as amended, to employees and officers and directors who are also employees and non-qualified stock options to officers, directors, employees, consultants and advisors.

Our 2004 Option Plan is administered by our board of directors, which may delegate its administration authority to a committee of our board of directors and its ability to grant options to one or more executive officers to the extent permitted by law. The administrator has the full authority and discretion to, among other things, determine who is eligible to receive option grants, determine the time at which options may be granted, determine the option price of the shares subject to each option, determine the type of option granted and prescribe and rescind rules and regulations thereunder.

Under our 2004 Option Plan, the exercise price of incentive stock options must not be less than 100% of the fair market value of our common stock on the date of such grant or, in the case of a grant to a 10% stockholder, not less than 110% of the fair market value of our common stock on the date of such grant. Additionally, the term of any incentive stock option granted under the 2004 Option Plan may not exceed 10 years from the date of grant (5 years in the case of a 10% stockholder). No options may be granted under the 2004 Option Plan more than 10 years after the date the board of directors adopted such plan.

The award agreements governing options issued under our 2004 Option Plan provide that options may be exercised immediately for shares of common stock that are subject to a right of repurchase in favor of us. Our repurchase right on these shares lapses over time, on the same vesting schedule that applied to the option that was exercised.

The 2004 Option Plan provides that if we are consolidated with or acquired by another entity then each outstanding option or other award issued under our 2004 Option Plan becomes immediately vested and exercisable, except with respect to shares that would not have vested until the final year of the vesting term of such option or other award. Our board of directors may then provide that such options or other awards must be exercised prior to the consummation of the acquisition. In addition, our board of directors or the board of directors of the successor entity may terminate the outstanding options or

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other awards in exchange for cash in respect of the vested portion of such options or other awards. Alternatively, our board of directors or that of the successor entity may provide for the continuation of options and other awards by the successor entity in the acquisition.

Our 2004 Option Plan was first adopted by our board of directors on December 17, 2004 and approved by our stockholders on January 12, 2005, and was subsequently amended and restated by our board of directors on June 29, 2006, which amendment and restatement was approved by our stockholders on July 26, 2006. Our 2004 Option Plan provides that the number of shares of our common stock that may be issued under our 2004 Option Plan at any time shall equal 37.5% of the total number of our shares then issued and outstanding on a fully-diluted basis. As of December 31, 2006, there were outstanding options to purchase a total of 1,181,667 shares of our common stock under our 2004 Option Plan.

We do not intend to grant additional options under our 2004 Option Plan after this offering and the aggregate number of shares to be issued under our 2004 Option Plan will be reduced to 1,772,568, which represents the total number of shares issuable upon exercise of outstanding options granted under our 2004 Option Plan and shares issuable upon exercise of options that we plan to grant prior to the completion of this offering.

2007 Option Plan

Our 2007 Stock Option and Incentive Plan, or 2007 Option Plan, was adopted by our board of directors and approved by our stockholders in January 2007 and will become effective upon effectiveness of this registration statement. The 2007 Option Plan permits us to make grants of incentive stock options, non-qualified stock options, stock appreciation rights, deferred stock awards, restricted stock awards, unrestricted stock awards, and dividend equivalent rights. We reserved 3,000,000 shares of our common stock for the issuance of awards under the 2007 Option Plan. This number is subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization. Generally, shares that are forfeited or canceled from awards under the 2007 Option Plan also will be available for future awards. In addition, awards that are returned to our 2000 Option Plan or 2004 Option Plan as a result of their expiration, cancellation, termination or repurchase are automatically made available for issuance under our 2007 Option Plan. No awards have been granted under the 2007 Option Plan.

The 2007 Option Plan is administered by our compensation committee, or another committee of at least two non-employee directors who are independent. The administrator of the 2007 Option Plan has full power and authority to select the participants to whom awards will be granted, to make any combination of awards to participants, to accelerate the exercisability or vesting of any award and to determine the specific terms and conditions of each award, subject to the provisions of the 2007 Option Plan.

All full-time and part-time officers and other employees, non-employee directors and other key persons (including consultants and prospective employees) are eligible to participate in the 2007 Option Plan, subject to the discretion of the administrator. There are certain limits on the number of awards that may be granted under the 2007 Option Plan. For example, no more than 900,000 shares of stock may be granted in the form of stock options or stock appreciation rights to any one individual during any one-calendar-year period under the 2007 Option Plan.

The exercise price of stock options awarded under the 2007 Option Plan may not be less than the fair market value of the common stock on the date of the option grant and the term of each option may not exceed 10 years from the date of grant. The administrator will determine at what time or times each option may be exercised and, subject to the provisions of the 2007 Option Plan, the period of time, if any, after retirement, death, disability or other termination of employment during which options may be exercised.

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To qualify as incentive options, stock options must meet additional federal tax requirements, including a $100,000 limit on the value of shares subject to incentive options which first become exercisable in any one calendar year, and a shorter term and higher minimum exercise price in the case of certain large stockholders. No incentive stock option awards may be granted under the 2007 Option Plan after January 17, 2017.

Stock appreciation rights may also be granted under our 2007 Option Plan. Stock appreciation rights allow the recipient to receive the appreciation in the fair market value of our common stock between the exercise date and the date of grant. The administrator determines the terms of stock appreciation rights, including when such rights become exercisable and whether to pay the increased appreciation in cash or with shares of our common stock, or a combination thereof. The exercise price of stock appreciation rights granted under our 2007 Option Plan may not be less than the fair market value of our common stock on the date of grant.

Restricted stock may also be granted under our 2007 Option Plan. Restricted stock awards are shares of our common stock that vest in accordance with terms and conditions established by the administrator. The administrator will determine the number of shares of restricted stock granted to any recipient. The administrator may impose whatever vesting conditions it determines to be appropriate. For example, the administrator may set restrictions based on the achievement of specific performance goals. Shares of restricted stock that do not vest are subject to our right of repurchase or forfeiture.

Deferred and unrestricted stock awards may also be granted under our 2007 Option Plan. Deferred stock awards are units entitling the recipient to receive shares of stock paid out on a deferred basis, and subject to such restrictions and conditions, as the administrator shall determine. Certain grantees, including directors, will be permitted to defer their compensation and receive deferred stock awards in lieu of current cash compensation. All deferred compensation will be structured to meet the requirements of Section 409A of the Internal Revenue Code. Our 2007 Option Plan also gives the administrator discretion to grant stock awards free of any restrictions.

Dividend equivalent rights may be granted under our 2007 Option Plan. Dividend equivalent rights are awards entitling the grantee to current or deferred payments equal to dividends on a specified number of shares of stock. Dividend equivalent rights may be settled in cash or shares and subject to other conditions, as the administrator shall determine.

In the event of a merger, sale or dissolution of the Company, or a similar “sale event,” all stock options and stock appreciation rights granted under the 2007 Option Plan will automatically become fully exercisable and all other awards granted under the 2007 Option Plan will become fully vested and non-forfeitable. In addition, upon the effective time of any such sale event, the 2007 Option Plan and all awards will terminate unless the parties to the transaction, in their discretion, provide for appropriate substitutions or assumptions of outstanding awards.

Our board of directors may amend or discontinue the 2007 Option Plan at any time and the administrator may amend or cancel any outstanding award for the purpose of satisfying changes in law or for any other lawful purpose. No such amendment may adversely affect the rights under any outstanding award without the holder’s consent. Other than in the event of a necessary adjustment in connection with a change in our stock or a merger or similar transaction, the administrator may not “reprice” or otherwise reduce the exercise price of outstanding stock options. Further, amendments to the 2007 Option Plan will be subject to approval by our stockholders if the amendment (1) increases the number of shares available for issuance under the 2007 Option Plan, (2) expands the types of awards available under, the eligibility to participate in, or the duration of, the plan, (3) materially changes the method of determining fair market value for purposes of the 2007 Option Plan, (4) is required by the Nasdaq Global Market rules or (5) is required by the Internal Revenue Code to ensure that incentive options are tax-qualified.

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Employee Stock Purchase Plan

Our 2007 Employee Stock Purchase Plan, or 2007 ESPP, was adopted by our board of directors and approved by our stockholders in January 2007 and will become effective upon the completion of this offering. We have reserved a total of 500,000 shares of our common stock for issuance to participating employees under the 2007 ESPP.

All of our employees, including our directors who are employees and all employees of any of our participating subsidiaries, who are employees on the first day of the offering period, and whose customary employment is for more than twenty hours a week, will be eligible to participate in the 2007 ESPP. Employees who would, immediately after being granted an option to purchase shares under the 2007 ESPP, own 5% or more of the total combined voting power or value of our common stock will not be eligible to participate in the 2007 ESPP.

We will make one or more offerings to our employees to purchase stock under the purchase 2007 ESPP. Offerings will begin on each April 1 and October 1, or the first business day thereafter and end on the last business day occurring on or before the following September 30 and March 31, respectively. During each offering period, payroll deductions will be made and held for the purchase of the common stock at the end of the offering period.

On the first day of a designated payroll deduction period, or offering period, we will grant to each eligible employee who has elected to participate in the 2007 ESPP an option to purchase shares of our common stock. The employee may authorize deductions from 1% to 10% of his compensation for each payroll period during the offering period. On the last day of the offering period, the employee will be deemed to have exercised the option, at the option exercise price, to the extent of accumulated payroll deductions. Under the terms of the 2007 ESPP, the option exercise price shall be equal to 90% of the lower of the closing price of the common stock on the first day of the offering period and the last day of the offering period.

An employee who is not a participant on the last day of the offering period will not be entitled to exercise any option, and the employee’s accumulated payroll deductions will be refunded. An employee’s rights under the 2007 ESPP will terminate upon voluntary withdrawal from the 2007 ESPP at any time, or when the employee ceases employment for any reason, except that upon termination of employment because of death, the balance in the employee’s account will be paid to the employee’s beneficiary.

401(k) Plan

We maintain a tax-qualified retirement plan that provides all regular employees with an opportunity to save for retirement on a tax-advantaged basis. Under our 401(k) Plan, participants may elect to defer a portion of their compensation on a pre-tax basis and have it contributed to the plan subject to applicable annual Internal Revenue Code limits. Pre-tax contributions are allocated to each participant’s individual account and are then invested in selected investment alternatives according to the participant’s directions. Employee elective deferrals are 100% vested at all times. Our 401(k) Plan allows for discretionary matching contributions to be made by us. As a tax-qualified retirement plan, contributions to our 401(k) Plan and earnings on those contributions are not taxable to the employees until distributed to them from our 401(k) Plan and all contributions are deductible by us when made.

Agreements with Executive Officers

In December 2006, the Compensation Committee of our Board of Directors and Kent Plunkett, our President and Chief Executive Officer, mutually agreed to terminate Mr. Plunkett’s then existing employment agreement and begin negotiation of the terms of a new employment agreement. We intend

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to enter into a new employment agreement with Mr. Plunkett prior to the closing of this offering. The new employment agreement will be effective as of January 1, 2007 and will have a three year term. Under the agreement, Mr. Plunkett will receive:

• an initial annual salary of $250,000;

• an annual target bonus equal to 100% of his annual salary;

• grants of equity compensation as determined annually in the sole discretion of the Compensation Committee;

• benefits under our employee benefit plans consistent with those provided to our other executive officers;

• in the event of termination without cause or resignation for good reason, immediate vesting of all of his unvested options and other stock-based awards which were granted prior to December 31, 2006, immediate vesting of the portion of his unvested options and other stock-based awards which were granted after January 1, 2007 and would have vested during the 18-month period after the termination date, plus a payment equal to one and one-half times his base salary and his average bonus for the previous two fiscal years; and

• in certain circumstances, upon a change in control, immediate vesting of all of his unvested options and other stock-based awards plus a payment equal to two times his base salary and his average bonus for the previous two fiscal years. Mr. Plunkett also would be entitled to an additional payment equal to the amount of any excise tax payable by him pursuant to the Internal Revenue Code.

The agreement will include a provision prohibiting Mr. Plunkett, during his employment and for one year thereafter, from engaging in certain business activities and from soliciting our employees and customers.

In connection with the negotiation of the new employment agreement, on January 19, 2007, the Compensation Committee granted Mr. Plunkett an option to purchase 400,000 shares of common stock, which is exercisable at a per share price equal to the initial public offering price set forth on the cover of this prospectus, has a term of ten years and vests annually over five years commencing March 31, 2008. Also in connection with the negotiation of the new employment agreement, on February 7, 2007, the Compensation Committee accelerated the vesting of 854,449 shares of restricted stock held by Mr. Plunkett. These shares had been issued to Mr. Plunkett in March 2006 upon the exercise of stock options granted to him between June 2003 and March 2006 under the 2000 Option Plan and the 2004 Option Plan. We will recognize a non-cash compensation charge of approximately $1.3 million in the quarter ending March 31, 2007 as a result of this acceleration.

In March 2006, we entered into a letter agreement with Kenneth Goldman, pursuant to which we offered Mr. Goldman the position of Senior Vice President and Chief Financial Officer. The agreement provides that we will pay Mr. Goldman an annual base salary of $185,000, subject to annual review by the compensation committee, and that he is eligible to receive a performance-based cash bonus. In addition, during Mr. Goldman’s employment with us and for a period of one year after the termination of his employment, he is restricted from engaging in any business that competes with our business and from soliciting any of our employees. Mr. Goldman also has agreed to maintain the confidentiality of our business information. The agreement further provides that Mr. Goldman will receive an option under the 2004 Option Plan to purchase 112,000 shares of Common Stock with an exercise price of $0.223, vesting monthly over five years, and an option to purchase 28,000 shares of Common Stock with an exercise price of $0.223, vesting monthly over ten years commencing in June 2007, provided that vesting of all but the final year of such options will be accelerated if there is a change in control of the Company. Additionally, the agreement provides that we will pay Mr. Goldman severance equal to twelve months’ salary and bonus if his employment is terminated following an acquisition of the Company.

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Each of our named executive officers, other than Kent Plunkett, has signed a Noncompetition, Nondisclosure and Developments Agreement. These agreements include a provision prohibiting the executive, during his employment and for one year thereafter, from engaging in certain business activities and from soliciting our employees or customers.

Limitation of Liability and Indemnification

As permitted by the Delaware General Corporation Law, we have adopted provisions in our certificate of incorporation and by-laws to be in effect at the effectiveness of this registration statement that limit or eliminate the personal liability of our directors and officers. Consequently, neither our directors nor officers will be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duty as a director or officer, except for liability for:

• any breach of the director’s or officer’s duty of loyalty to us or our stockholders;

• any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

• any unlawful payments related to dividends or unlawful stock repurchases, redemptions or other distributions; or

• any transaction from which the director or officer derived an improper personal benefit.

These limitations of liability do not alter director or officer liability under the federal securities laws and do not affect the availability of equitable remedies such as an injunction or rescission.

In addition, our by-laws provide that:

• we will indemnify our directors, officers and, in the discretion of our board of directors, employees to the fullest extent permitted by the Delaware General Corporation Law; and

• we will advance expenses, including attorneys’ fees, to our directors and, in the discretion of our board of directors, to officers and employees, in connection with legal proceedings, subject to limited exceptions.

We intend to enter into indemnification agreements with each of our directors and certain of our officers contemporaneously with the offering. These agreements provide that we will indemnify these directors and officers to the fullest extent permitted by law and our certificate of incorporation and by-laws, and advance expenses to each indemnitee in connection with any proceeding in which indemnification is available. These agreements will become effective contemporaneously with the offering.

We also intend to obtain, contemporaneously with the offering, insurance which covers certain liabilities of our directors and officers arising out of claims based on acts or omissions in their capacities as directors or officers, including liabilities under the Securities Act of 1933. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors or officers of the Company, or persons controlling the Company pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act of 1933 and is therefore unenforceable.

These indemnification provisions may discourage stockholders from bringing a lawsuit against our directors or officers for breach of their fiduciary duty. These indemnification provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, a stockholder’s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. We believe that these provisions, the indemnification agreements and the insurance are necessary to attract and retain talented and experienced directors and officers.

At present, there is no pending litigation or proceeding involving any of our directors or officers where indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification.

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PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information with respect to the beneficial ownership of our common stock, as of January 31, 2007 and as adjusted to reflect the sale of common stock offered by us in this offering, for:

• each beneficial owner of more than 5% of our outstanding common stock;

• each of our named executive officers;

• each of our directors;

• all of our executive officers and directors as a group; and

• the selling stockholders.

Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of January 31, 2007 are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to such securities. Except as otherwise indicated, all of the shares reflected in the table are shares of our common stock and all persons listed below have sole voting and investment power with respect to the shares beneficially owned by them, subject to applicable community property laws. Ownership calculations below are based on 10,089,598 shares of common stock outstanding as of January 31, 2007, assuming the conversion of all of the shares of our convertible preferred stock, and 14,988,041 shares of common stock outstanding upon completion of this offering.

We and the selling stockholders have granted to the underwriters the option to purchase up to 855,000 additional shares of common stock at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments, if any. Unless otherwise indicated in the footnotes, information in the following table assumes that the underwriters do not exercise their over-allotment option. Except as set forth in the footnotes below, no selling stockholder has had a material relationship with us in the past three years or is a broker-dealer or an affiliate of a broker-dealer.

Name and Address of Beneficial Owner(1)	Beneficial Ownership Prior to Offering			Shares Being Offered		Beneficial Ownership After Offering
	Shares Beneficially Owned	Percentage				Shares Beneficially Owned	Percentage
5% Stockholders
Gregory Kent Plunkett and Julianne Pemberton 2005 Gifting Trust(2)	896,000	8.88	%	—		896,000	5.98	%
Lyric Ventures, L.P.(3)	704,321	6.89		165,300	(32)	539,021	3.56
Named Executive Officers
Kent Plunkett(4)	3,209,320	30.20		361,323	(33)	2,847,997	18.35
Yong Zhang(5)	330,835	3.26		29,120	(33)	301,715	2.01
Teresa A. Shipp(6)	199,478	1.97		16,800	(33)	182,678	1.22
William H. Coleman(7)	237,327	2.35		22,400	(33)	214,927	1.43
Christopher J. Fusco(8)	97,952	*		—		97,952	*
Meredith A. Hanrahan(9)	126,400	1.25		—		126,400	*
Kenneth S. Goldman(10)	160,000	1.58		—		160,000	1.07
Directors
Paul Daoust	20,160	*		—		20,160	*
John Gregg(11)	126,699	1.25		—		126,699	*
Edward McCauley	22,400	*		—		22,400	*
John Sumser(12)	47,600	*		—		47,600	*
Terry Temescu(13)	735,681	7.17		165,300	(32)	570,381	3.76
Robert Trevisani(14)	22,973	*		—		22,973	*
All executive officers and directors as a group (13 persons)(15)	5,336,825	48.51		594,943		4,741,882	29.82

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Name and Address of Beneficial Owner(1)	Beneficial Ownership Prior to Offering		Shares Being Offered		Beneficial Ownership After Offering
	Shares Beneficially Owned	Percentage			Shares Beneficially Owned	Percentage
Selling Stockholders
David Allio	15,069	*	2,261		12,808	*
Robert Allio	40,423	*	9,574		30,849	*
Ascendant Partners L.P.(16)	105,641	1.05	105,641		0	*
Cathal Sean Brown(17)	152,980	1.52	33,600		119,380	*
Marsha, Michael, Benjamin & Zachary Brown(18)	191,758	1.90	186,158		5,600	*
Philip M. Byrne	44,894	*	6,720		38,174	*
Richard J. Cellini(19)	95,104	*	29,493		65,611	*
Timothy N. Driver(20)	101,853	1.01	23,224		78,629	*
Eva G. Gardner	975	*	975		0	*
Marybeth Gilmartin(21)	7,890	*	4,518		3,372	*
Kevin J. Hanna	3,988	*	598		3,390	*
Kevin R. Jenkins(22)	18,038	*	2,700		15,338	*
Cynthia & Jeffrey Leach(23)	70,509	*	7,005		63,504	*
Andrew I. Linn(24)	201,162	1.99	19,600	(33)	181,562	1.21
James J. Mahoney, Jr.	41,577	*	11,200		30,377	*
James B. McIntyre(25)	61,029	*	20,160		40,869	*
Mintz Levin Investments, LLC(26)	7,977	*	3,055		4,922	*
Gregory P. Murdock	22,400	*	4,480		17,920	*
Rhoda Schild	10,669	*	10,669		0	*
Christian O. Schlegel(27)	16,546	*	2,482		14,064	*
Saleh F. Shahrabani	92,973	*	22,400		70,573	*
Ralph J. Spuehler	77,058	*	19,264		57,794	*
Strachan Family Trust(28)	66,250	*	22,400		43,850	*
Susan Teeman(29)	7,890	*	6,024		1,866	*
Kay Torshen	8,569	*	1,285		7,284	*
James Vitous	16,800	*	2,520		14,280	*
WPSW Investments Inc.(30)	46,200	*	46,200		0	*
Winston Wren	11,200	*	1,680		9,520	*
J.C. Younghans	27,009	*	2,371		24,638	*
Nicholas Zaldastani	22,400	*	16,800		5,600	*
Axel Zdarsky(31)	183,460	1.82	86,800		96,660	*

  * Represents less than 1% of the outstanding shares of common stock.

⁽¹⁾ Except as otherwise indicated, addresses are c/o Salary.com, 195 West Street, Waltham, Massachusetts 02451.

⁽²⁾ The address of the trust is Christopher L. Plunkett, Trustee, c/o Christopher L. Plunkett P.C., 265 Essex Street, Salem Massachusetts 01970. Does not include 3,209,320 shares held by Kent Plunkett. Christopher L. Plunkett, the trustee of the Gregory Kent Plunkett and Julianne Pemberton 2005 Gifting Trust, has sole voting and dispositive power over the securities held by the trust.

⁽³⁾ The address of Lyric Ventures is 5 Eden Lane, Tiburon, California 94920. Includes 363,185 shares held by Lyric Ventures, L.P., 110,152 shares held by Lyric Overseas, L.P. and 98,453 shares held by Lyric Capital Partners, L.P. Also includes 121,332 shares of common stock issuable to Lyric Ventures, L.P. upon exercise of warrants, 5,914 shares of common stock issuable to Lyric Overseas, L.P. upon exercise of warrants and 5,285 shares of common stock issuable to Lyric Capital Partners, L.P. upon exercise of warrants. Terry Temescu, one of our directors, is a managing member of Lyric Capital Managers LLC and Lyric Venture Managers LLC, which are the general partners of each of Lyric Ventures, L.P., Lyric Overseas, L.P. and Lyric Capital Partners, L.P., and as such may be deemed to share voting and dispositive power with respect to all shares held by such entities. Mr. Temescu disclaims beneficial ownership of such shares except to the extent of his pecuniary interest, if any. Terry Temescu, Mark Bode and Greg Horn have shared voting power with respect to securities held by Lyric Ventures, L.P. Messrs. Temescu and Bode have shared voting power with respect to securities held by Lyric Overseas, L.P. and Lyric Capital Partners, L.P. Messrs. Temescu, Bode and Horn have shared dispositive power with respect to securities held by Lyric Ventures, L.P., Lyric Overseas, L.P. and Lyric Capital Partners, L.P.

⁽⁴⁾ Does not include 17,290 shares held by Julianne Pemberton, Mr. Plunkett’s spouse, or 896,000 shares held by the Gregory Kent Plunkett and Julianne Pemberton 2005 Gifting Trust, over which Mr. Plunkett does not have voting or dispositive power. Includes 536,161 shares of common stock issuable to Mr. Plunkett upon exercise of stock options.

⁽⁵⁾ Includes 51,200 shares of common stock issuable to Mr. Zhang upon exercise of stock options.

⁽⁶⁾ Includes 31,200 shares of common stock issuable to Ms. Shipp upon exercise of stock options.

⁽⁷⁾ Includes 7,840 shares of common stock issuable to Mr. Coleman upon exercise of stock options.

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⁽⁸⁾ Includes 24,704 shares of common stock issuable to Mr. Fusco upon exercise of stock options.

⁽⁹⁾ Includes 31,200 shares of common stock issuable to Ms. Hanrahan upon exercise of stock options.

⁽¹⁰⁾ Includes 20,000 shares of common stock issuable to Mr. Goldman upon exercise of stock options.

⁽¹¹⁾