UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K /A

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the year ended December 31, 2007
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-33755

SuccessFactors, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware
(State or Other Jurisdiction of
Incorporation or Organization) 7372
(Primary Standard Industrial
Classification Code Number) 94-3398453
(I.R.S. Employer
Identification Number)

1500 Fashion Island Blvd., Suite 300

San Mateo, CA 94404

(Address of Principal Executive Offices)

(650) 645-2000

(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of Each Class

Common Stock, $0.001 par value Name of Each Exchange on Which Registered

The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Exchange Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o     No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10 K-A.  þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer þ
(Do not check if smaller reporting company) Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b 2 of the Exchange Act).  Yes o     No þ

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant at February 29, 2008, based on the closing price of such stock on the NASDAQ Global Market on such date, was approximately $193.9 million. The number of shares of the registrant’s common stock outstanding on February 29, 2008, was 52,366,807.

Portions of the registrant’s Proxy Statement relating to the registrant’s 2008 Annual Meeting of Stockholders to be held on or about May 23, 2008 are incorporated by reference into Part III of this Report.

EXPLANATORY NOTE

Items 7 and 15 of the Registrant’s Annual Report on Form 10-K are hereby amended to reflect changes to the sections entitled “Management’s Discussion and Analysis and Financial Condition and Results of Operations — Overview,” “— Critical Accounting Policies and Estimates — Accounting for Stock-Based Awards” and Note 7 to the Registrant’s Consolidated Financial Statements.” The purpose of these changes is to revise certain of the disclosures in these sections. The amounts set forth in the Registrant’s Consolidated Financial Statements have not changed. Each of these sections have been repeated in their entirety as set forth in this Form 10-K/A.

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to facilitate an understanding of our business and results of operations. You should read the following discussion and analysis of our financial condition in conjunction with the consolidated financial statements and notes thereto for the year ended December, 31, 2007 included in Item 8, “Financial Statements and Supplementary Data,” in this annual report on Form 10-K. The information contained in this discussion and analysis or set forth elsewhere in this annual report on Form 10-K, including without limitation information with respect to our plans and strategy of our business and our financial condition, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. You should review the section titled “Risk Factors” included in Item 1A of Part I of this annual report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

SuccessFactors provides on-demand performance and talent management software that enables organizations to optimize the performance of their people to drive business results. Our application suite includes the following modules and capabilities: Performance Management; Goal Management; Compensation Management; Succession Management; Learning and Development; Recruiting Management; Analytics and Reporting; Employee Profile; 360-Degree Review; Employee Survey; and proprietary and third-party content. We deliver our application suite to organizations of all sizes across all industries and geographies. Since we were formed in 2001, our customer base has grown to over 1,750 customers, across over 60 industries with more than three million end users in over 156 countries using our application suite in 22 languages.

We sell subscriptions to our application suite pursuant to agreements that cover a specified number of modules and a specified number of users per module. Our customer agreements typically have terms of one to three years, with some agreements having durations of up to five years. We provide configuration services, typically for a fixed fee, and other consulting services. We also offer standard customer support services as part of our subscriptions, with enhanced levels of support available for additional fees. We recognize revenue for all of these services ratably over the term of the subscription agreement.

We generally invoice our customers on an annual basis even if the term of the subscription agreement is longer than one year. Amounts that have been invoiced but that have not yet been recognized as revenue are typically recorded as deferred revenue. Accordingly, the portion of the total contract value that is not yet invoiced is not reflected on our consolidated balance sheet as deferred revenue but instead treated as backlog.

For agreements with a term of more than one year, backlog initially represents the future subscription fee commitments that are payable more than one year after the initial invoice for the first 12 months of service. When a subsequent invoice for the succeeding 12 months of service is sent to a customer, the amount invoiced then is reflected in our deferred revenue, with the backlog amount decreasing by a like amount. Also excluded from backlog are fees for our other services, such as configuration services, which are reflected as current deferred revenue for the amount expected to be recognized within the following 12 months, and non current deferred revenue for the remainder. Typically, our initial agreements with larger customers tend to have longer terms, while renewal agreements and our initial agreements with small-sized customers typically have shorter durations. As of

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December 31, 2007, we had backlog of approximately $89.9 million compared with backlog of approximately $42.7 million as of December 31, 2006 due largely to the increased number of new customers. Because revenue for any period is a function of revenue recognized from deferred revenue and backlog under contracts in existence at the beginning of the period as well as contract renewals and new customer contracts during the period, backlog at the beginning of any period is not necessarily indicative of future performance. Our presentation of backlog may differ from other companies in our industry.

Costs associated with generating customer agreements are generally incurred up front. These upfront costs exclude direct incremental sales commissions, which are recognized ratably over the term of the customer agreement. Although we expect customers to be profitable over the duration of the customer relationship, in earlier periods these upfront costs may exceed related revenue. Accordingly, an increase in the mix of new customers as a percentage of total customers may initially negatively impact our operating results. On the other hand, we expect that a decrease in the mix of new customers as a percentage of total customers will positively impact our operating results. Based on an analysis of the customers that we added in 2004, we recognized revenue from subscriptions to our software of approximately $1.1 million in the aggregate from these customers in 2004 and we incurred significant costs during 2004 to generate this revenue and support these customers, creating a significant negative contribution margin, as defined below, from these customers in 2004. During 2007, we recognized revenue of approximately $5.1 million in the aggregate from the customers that were added in 2004, including revenue from renewals and licensing of additional modules and users, and we estimate that our costs to support these customers and generate this revenue during 2007 was approximately $1.6 million, resulting in a contribution margin of approximately 68%. We define contribution margin for a period as the excess of the revenue recognized from subscriptions to our software from these customers for the period over the estimated expenses for the period associated with, in the case of 2004, adding these customers or, in the case of 2007, supporting these customers and renewing the contracts or licensing them additional modules and users, expressed as a percentage of associated revenue. We estimated the expenses of supporting these customers and generating this revenue based on an analysis of personnel time, costs from operational areas and an overhead allocation that was proportional to that time and those costs. Although we believe the estimates and assumptions we used to estimate the expenses are reasonable, the estimated expenses and resulting contribution margin could vary significantly from the amounts disclosed above had we used different estimates and assumptions. Moreover, we cannot assure you that we will experience similar contribution margins from customers added in other years or in future periods. You should not rely on the estimated expenses or contribution margin as being indicative of our future performance. Because the size of our customer base has grown substantially in recent periods and we expect to continue to add new customers, we expect that at many times, large numbers of our customers could be in the early stages of their subscription term. Accordingly, we may not generate positive contribution margins. We define contribution margin for a period as the excess of the revenue recognized from subscriptions to our software from these customers for the period over the estimated expenses for the period. In addition, we may not achieve profitability even if we generate positive contribution margins from customers. We encourage you to read our consolidated financial statements that are included in this annual report on Form 10-K.

We generate sales primarily through our global direct sales organization and, to a much lesser extent, indirectly through channel partners, with sales through channel partners constituting approximately 10%, 11% and 3% of revenue in 2007, 2006 and 2005, respectively. For 2007, 2006 and 2005, we did not have any single customer that accounted for more than 5% of our revenue. Historically, we primarily targeted our sales and marketing efforts at large enterprises, and beginning in 2004, we expanded our sales and marketing efforts to also target small and mid-sized organizations.

Historically, most of our revenue has been from sales of our application suite to organizations located in the United States. For 2007, 2006 and 2005, the percentage of our revenue generated from customers in the United States was 90%, 93% and 96%, respectively. As part of our growth strategy, we expect the percentage of our revenue generated outside of the United States to continue to increase as we invest in and enter new markets.

We have historically experienced significant seasonality in sales of subscriptions to our application suite, with a higher percentage of our customers renewing or entering into new subscription agreements in the fourth quarter of the year. Also, a significant percentage of our customer agreements within a given quarter are typically entered into during the last month of the quarter. To date, we have derived a substantial majority of our historical revenue from

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sales of our Performance Management and Goal Management modules, but the percentage of revenue from these modules has decreased over time as customers have purchased additional modules that we have introduced.

We have experienced rapid growth in recent periods. Our customer base has grown from 175 customers at December 31, 2004 to over 1,750 customers as of December 31, 2007. Our revenue has increased from $4.1 million in 2003 to $63.4 million in 2007, representing a compound annual growth rate of approximately 98%. For the year ended December 31, 2007, our revenue was $63.4 million, which represented an increase of approximately 95% from the year ended December 31, 2006. As of December 31, 2007, we had total deferred revenue of $101.0 million.

Our operating expenses have also increased substantially during the three years ended December 31, 2007, as we have invested heavily in sales and marketing in order to increase our customer base, with sales and marketing expenses generally exceeding the amount of our revenue in historical periods. During this period, we increased our marketing efforts directed at small and medium-sized organizations. As a result, demand from these customers has increased at a faster rate than our traditional enterprise customers. Because these smaller customers tend to have smaller purchases, revenue has not grown at the same rate as the number of our customers. We have also incurred significant losses since inception. Our net loss increased from $5.3 million in 2004 to $20.8 million in 2005 to $32.0 million in 2006 and we had a net loss of $75.5 million for the year ended December 31, 2007.

We believe the market for performance and talent management is large and underserved. Accordingly, we plan to incur significant additional operating expenses, particularly for sales and marketing activities, to pursue this opportunity. We expect operating losses to continue to increase as we intend to continue to aggressively pursue new customers for the foreseeable future. We also anticipate increased operating expenses in other areas as we expect to incur additional general and administrative expenses as a result of being a public company and as we continue to expand our business.

Sources of Revenue

We generate revenue from subscription fees from customers accessing our application suite and other services fees, which primarily consist of fees for configuration services and, to a lesser extent, fees for enhanced support, business consulting and other services. Our subscription agreements are noncancelable, though customers typically have the right to terminate their agreements for cause if we materially fail to perform. During 2005 through 2007, our customer retention rate was greater than 90%, which rate excludes our Manager’s Edition application which provides us with an insignificant amount of revenue. We calculate our customer retention rate by subtracting our attrition rate from 100%. We calculate our attrition rate for a period by dividing the number of customers lost during the period by the sum of the number of customers at the beginning of the period and the number of new customers acquired during the period. Although historically there has been very little variability in our retention rates, any decrease in our retention rates would negatively impact our results of operations in future periods.

Cost of Revenue

Cost of revenue primarily consists of costs related to hosting our application suite and delivering our professional services. These costs include salaries, benefits, bonuses and stock-based compensation of our data center and professional services staff, outside service provider costs, data center and networking expenses, and allocated overhead and depreciation expenses. Prior to 2006, our cost of revenue also included amortization of acquired technology, which was fully amortized by the end of 2005. We allocate overhead such as rent, information technology costs and employee benefits costs to all departments based on relative headcount. As such, general overhead expenses are reflected in cost of revenue and each operating expense category. The costs associated with providing professional services are significantly higher as a percentage of revenue than the costs associated with delivering our application suite due to the labor costs associated with providing professional services. As such, the costs of implementing a new customer on our application suite or adding new modules for an existing customer are more significant than renewing a customer on existing modules.

Our cost of revenue has generally increased in absolute dollars and cost of revenue as a percentage of revenue has generally decreased during 2005, 2006 and 2007. Our cost of revenue as a percentage of revenue was 59% in 2005, 44% in 2006 and 42% in 2007. We expect that in the future, cost of revenue will increase in absolute dollars as our revenue increases. We also expect that cost of revenue as a percentage of revenue will continue to decrease over

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time to the extent that a higher percentage of our revenue is attributable to renewals and we are able to achieve economies of scale in our business. However, cost of revenue as a percentage of revenue could fluctuate from period to period depending on growth of our professional services business and any associated costs relating to the delivery of professional services and the timing of significant expenditures. To the extent that our customer base grows, we intend to continue to invest additional resources in expanding the delivery capability of our application suite and other services. The timing of these additional expenses could affect our cost of revenue, both in terms of absolute dollars and as a percentage of revenue, in any particular quarterly or annual period.

Operating Expenses

We classify our operating expenses as follows:

Sales and Marketing.  Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing staff, including salaries, benefits, bonuses and stock-based compensation, commissions, travel costs, and marketing and promotional events, corporate communications, advertising, other brand building and product marketing expenses, and allocated overhead. Our sales and marketing expenses have increased in absolute dollars each year. As a percentage of revenue, our sales and marketing expenses were 127% in 2005, 99% in 2006 and 112% in 2007, primarily due to our ongoing substantial investments in customer acquisition. We intend to continue to invest heavily in sales and marketing and increase the number of direct sales personnel in order to add new customers and increase penetration within our existing customer base, build brand awareness, and sponsor additional marketing events. Accordingly, we expect sales and marketing expenses to increase in absolute dollars and continue to be our largest operating expense. Over the long term, we believe that sales and marketing expenses as a percentage of revenue will decrease, but vary depending on the mix of revenue from new and existing customers and from small, mid-sized and enterprise customers, as well as the productivity of our sales and marketing programs.

Research and Development.  Research and development expenses consist primarily of personnel and related expenses for our research and development staff, including salaries, benefits, bonuses and stock-based compensation, the cost of certain third-party service providers and allocated overhead. Research and development expenses as a percentage of revenue were 47% in 2005, 33% in 2006 and 26% in 2007. We have focused our research and development efforts on expanding the functionality and enhancing the ease of use of our application suite. We expect research and development expenses to increase in absolute dollars in the future as we intend to release new features and functionality on a frequent basis, expand our content offerings and continue to localize our application suite in various languages, upgrade and extend our service offerings, and develop new technologies.

General and Administrative.  General and administrative expenses consist primarily of personnel and related expenses for executive, legal, finance and human resources, including wages, benefits, bonuses and stock-based compensation, professional fees, insurance premiums, other corporate expenses and allocated overhead. General and administrative expenses as a percentage of revenue were 28% in 2005, 23% in 2006 and 30% in 2007. We expect general and administrative expenses to increase in absolute dollars as we continue to add general and administrative personnel and incur additional professional fees and other expenses resulting from continued growth and the compliance requirements of operating as a public company, including Section 404 of the Sarbanes-Oxley Act. We currently anticipate that we will be required to comply with Section 404 of the Sarbanes-Oxley Act for the year ending December 31, 2008.

Income Taxes

As part of the process of preparing our consolidated financial statements we are required to estimate our taxes in each of the jurisdictions in which we operate. We estimate actual current tax expense together with assessing temporary differences resulting from differing treatment of items, such as accruals and allowances not currently deductible for tax purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in our consolidated statements of operations become deductible expenses under applicable income tax laws, or loss, or credit carry forwards are utilized. Accordingly, realization of our deferred tax assets is dependent on future taxable income against which these deductions, losses and credits can be utilized. We

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must assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not more likely than not, we must establish a valuation allowance.

Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our net deferred tax assets. We recorded a full valuation allowance as of December 31, 2007 and 2006, because, based on the available evidence, we believed at that time it was more likely than not that we would not be able to utilize all of our deferred tax assets in the future. We evaluate the realization of our deferred tax assets each quarter. We intend to maintain the valuation allowance until sufficient evidence exists to support the reversal of the valuation allowance. We make estimates and judgments about our future taxable income that are based on assumptions that are consistent with our plans and estimates. Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially impacted.

Critical Accounting Policies and Estimates

Our consolidated financial statements and the related notes included elsewhere in this Form 10-K are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. On an ongoing basis, we evaluate our estimates and assumptions. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

We believe that the following critical accounting policies involve a greater degree of judgment and complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

Revenue Recognition

Revenue consists of fees for subscriptions to our on-demand software and the provision of other services. We commence revenue recognition when: there is persuasive evidence of an arrangement; the subscription or services have been delivered to the customer; the collection of related fees is reasonably assured; and the amount of related fees is fixed or determinable.

Signed agreements are used as evidence of an arrangement. If cash is not collected in advance of services, we use our judgment to assess cash collectability based on a number of factors, such as past collection history with the customer. If we determine that collectability is not reasonably assured, we defer the revenue until collectability becomes reasonably assured, generally upon receipt of cash. We also use our judgment to assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. Our arrangements are generally noncancelable and fees paid under the arrangements are nonrefundable and do not contain general rights of return.

Our other services include configuration assistance, including installation and training related to our application suite. These other services are generally sold in conjunction with our subscriptions. Because we have determined that we do not have objective and reliable evidence of fair value for each element of our arrangements, these other services are not accounted for separately from our subscriptions. As these other services do not qualify for separate accounting, we recognize the other services revenue together with the subscription revenue ratably over the non-cancelable term of the subscription agreement. The term typically commences on the later of the start date specified in the subscription arrangement, the “initial access date” of the customer’s instance in our production environment, or when all of the revenue recognition criteria have been met. We consider delivery to have occurred on the initial access date, which is the point in time that a customer is provided access to use our on-demand application suite. Evaluating objective and reliable evidence of fair value requires significant judgment. If we had determined that we had such evidence, the other services revenue would have been recognized as performed.

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Accounting for Commission Payments

We defer commissions that are the incremental costs that are directly associated with noncancelable service contracts and consist of sales commissions paid to our direct sales force. The commissions are deferred and amortized over the noncancelable terms of the related customer agreements. The deferred commission amounts are recoverable from the future revenue streams under the customer agreements. We believe this is the appropriate method of accounting, as the commission costs are so closely related to the revenue from the customer agreements that they should be recorded as an asset and charged to expenses over the same period that the related revenue is recognized. If we did not defer these commission payments, we would expense them up front upon entering into the customer agreement. Amortization of deferred commissions is included in sales and marketing expenses.

During 2006, we capitalized $5.3 million of deferred commissions and amortized $2.0 million to sales and marketing expenses. During 2007, we capitalized $10.0 million of deferred commissions and amortized $4.1 million to sales and marketing expenses. As of December 31, 2007, deferred commissions on our consolidated balance sheet totaled $11.5 million.

Accounting for Stock-Based Awards

We adopted, retroactively to inception, Statement of Financial Accounting Standards No. 123(R), Accounting for Stock-Based Compensation, or SFAS No. 123(R), which requires all share-based payments to employees, including grants of stock options, to be measured based on the grant date fair value of the awards and recognized in our consolidated statement of operations over the period during which the employee is required to perform services in exchange for the award (generally over the vesting period of the award). We amortize the fair value of share-based payments on a straight-line basis. We have never capitalized stock-based employee compensation cost or recognized any tax benefits related to these costs.

To estimate the fair value of an award, we use the Black-Scholes pricing model. This model requires inputs such as expected term, expected volatility and risk-free interest rate. Further, the forfeiture rate also affects the amount of aggregate compensation. These inputs are subjective and generally require significant analysis and judgment to develop. Prior to 2006, we generally used the simplified method in accordance with the provisions of Staff Accounting Bulletin No. 107, Share-Based Payment (SAB 107), or the SEC shortcut method, to calculate the expected term for employee grants and used the contractual life of ten years as the expected term for non-employee grants. In 2006, we used the SEC shortcut method to calculate the expected term for our employee grants, except in instances where we did not qualify for its use because the underlying stock option awards were not deemed to have been “at the money” for financial reporting purposes and, accordingly, did not qualify as “plain vanilla” options as defined by SAB 107. For those grants that did not qualify for the shortcut method in 2006 and for all grants during 2007, we calculated the expected term based on a study of publicly-traded industry peer companies and based on our historical experience from previous stock option grants. Had we used the SEC shortcut method to determine the expected term for all of our stock option grants during 2006, our stock-based compensation expense would have increased by an insignificant amount. Had we used the SEC shortcut method to determine the expected term for all of our stock option grants during 2007, our stock-based compensation expense would have increased by approximately $0.5 million. Because we have little information on the volatility of the price of our common stock as a result of having a limited trading history, we have estimated the volatility data based on a study of publicly-traded industry peer companies. For purposes of identifying those peer companies, we considered the industry, stage of development, size and financial leverage of potential comparable companies. We used judgment in selecting these companies, as well as in evaluating the available historical and implied volatility for these companies. The estimated forfeiture rate is derived primarily from our historical data, and the risk-free interest rate is based on the yield available on U.S. Treasury zero-coupon issues similar in duration to the expected term of our stock options.

In the future, as we gain historical data for volatility in our own stock and more data on the actual term employees hold their options, the expected volatility and expected term may change, which could substantially change the grant date fair value of future awards of stock options and ultimately the expense we record. Higher volatility and longer expected lives result in an increase to stock-based compensation expense determined at the date of grant. In addition, quarterly changes in the estimated forfeiture rate can have a significant effect on reported stock-based compensation expense, as the cumulative effect of adjusting the rate for all expense amortization is

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recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in the consolidated financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognized in the consolidated financial statements. These adjustments affect our cost of revenue; sales and marketing expense; research and development expense; and general and administrative expense.

The effect of forfeiture adjustments in 2006 and 2007 was insignificant. We expect the potential impact from cumulative forfeiture adjustments to increase in future periods. We will continue to use judgment in evaluating the expected term, volatility and forfeiture rate related to our own stock-based compensation on a prospective basis, and incorporating these factors into the Black-Scholes pricing model.

Given the absence of an active market for our common stock prior to our initial public offering, our Board of Directors determined the fair value of our common stock in connection with our grant of stock options and stock awards. Prior to May 2006, our Board of Directors did not obtain an unrelated third-party valuation of our common stock. Instead, our Board of Directors based its determinations on:

•  prices for our convertible preferred stock that we sold to outside investors in arm’s-length transactions, and the rights, preferences and privileges of our convertible preferred stock and our common stock;

•  our actual financial condition and results of operations during the relevant period;

•  developments in our business;

•  hiring of key personnel;

•  status of product development and sales efforts;

•  growth in customer bookings;

•  the status of strategic initiatives;

•  forecasts of our financial results and market conditions affecting our industry;

•  the fact that the stock option grants involved illiquid securities in a private company; and

•  the likelihood of achieving a liquidity event for the shares of common stock underlying the stock options, such as an initial public offering, or IPO, or sale of our company, given prevailing market conditions and our relative financial condition at the time of grant.

In May 2006, a valuation of our common stock was performed in order to assist our Board of Directors in determining the fair value of our common stock. The valuation report valued our common stock as of May 16, 2006. Subsequently, contemporaneous valuations as of October 16, 2006, December 31, 2006, April 9, 2007, July 13, 2007 and September 10, 2007 were performed.

A market-comparable approach and the income approach were used to estimate our aggregate enterprise value at each valuation date. The market-comparable approach estimates the fair market value of a company by applying market multiples of publicly-traded firms in the same or similar lines of business to the results and projected results of the company being valued. When choosing the market-comparable companies to be used for the market-comparable approach, we focused on companies providing enterprise software solutions. Some of the specific criteria used to select comparable companies within the enterprise software segment included a focus on human capital management, high near-term growth rates and software as a service business model. The comparable companies remained largely unchanged during the valuation process. The income approach involves applying an appropriate risk-adjusted discount rate to projected debt-free cash flows, based on forecasted revenue and costs.

We also prepared financial forecasts for each valuation report date used in the computation of the enterprise value for both the market-comparable approach and the income approach. The financial forecasts were based on assumed revenue growth rates that took into account our past experience and future expectations. The risks associated with achieving these forecasts were assessed in selecting the appropriate cost of capital rates, which ranged from 20% to 25%.

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The average of the values derived under the market-comparable approach and the income approach resulted in an initial estimated value. The initial estimated value was then subjected to the probability weighted expected return method which derived the per share value utilizing a probability weighted scenario analysis. The per share value was based on four possible scenarios: liquidation scenario, IPO scenario, sale scenario and private company scenario. The per share value under each scenario was then probability weighted and the resulting weighted values per share were summed to determine the fair value per share of our common stock. In the liquidation scenario, sale scenario and private company scenario, the per share value was allocated taking into account the liquidation preferences and participation rights of our convertible preferred stock consistent with the method outlined in the AICPA Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. In the IPO scenario, it was assumed that all outstanding shares of our convertible preferred stock would convert to common stock. Over time, as we achieved certain milestones, the probabilities were adjusted accordingly, with the probability of a liquidity event such as an IPO or sale increasing from 25-30% and 10-15%, respectively, in May 2006 to 70-75% and 15-20%, respectively, in September 2007 while the probability of remaining a private company decreased accordingly from 50-65% in May 2006 to 5-15% in September 2007.

Also, we considered the fact that our stockholders could not freely trade our common stock in the public markets. The estimated fair value of our common stock at each grant date reflected a non-marketability discount partially based on the anticipated likelihood and timing of a future liquidity event. The non-marketability discount was not applied in the IPO scenario. In addition, the non-marketability discount was not applied to cash in either the market-comparable approach or the income approach.

The non-marketability discount was 38% in May 2006 and decreased over time to 19% in September 2007. However, as the IPO scenario did not include a non-marketability discount, the effect of the non-marketability discount on the valuation declined over time from a weighted non-marketability discount of 21% in May 2006 to 7% in September 2007 when weighted over the four possible scenarios.

There is inherent uncertainty in these forecasts and projections and if we had made different assumptions and estimates than those described above, the amount of our stock-based compensation expense, net loss and net loss per share amounts could have been materially different.

Also in connection with the preparation of our consolidated financial statements, we reassessed the fair value of our common stock for financial reporting purposes at interim dates between the valuations. For these interim periods we adjusted the fair value based on market conditions and whether we achieved company milestones, secured new customers and hired key personnel, when we deemed appropriate. Over 2006 and through our initial public offering in November 2007, we had a number of developments in our business that we believe contributed to increases in the fair value of our common stock as discussed below.

The May 16, 2006 valuation was used to determine the fair value of our common stock as of May 17, July 21 and September 8, 2006. The valuation used a risk-adjusted discount of 25%, a non-marketability discount of 38% and an estimated time to a liquidity event of greater than 12 months. The expected outcomes were weighted more toward remaining as a private company (50-65%), with lower weights for an IPO (25-30%) and a sale (10-15%), and with the lowest weight given to a liquidation scenario (0-5%). This valuation indicated a fair value of $1.30 per share for our common stock. We reassessed the fair value per share of our common stock from $1.30 per share as of July 21, 2006 to $1.40 per share at September 8, 2006, due largely to the fact that our customer base had grown over this period, and continued to significantly increase. In addition, we had recently added our Learning and Development module in the second quarter of 2006.

On October 16, 2006, another valuation was performed in order to update the determination of the fair value for our common stock as of November 3, November 6, November 15 and December 7, 2006 and January 16, 2007. The valuation used a risk-adjusted discount of 25%, a non-marketability discount of 36% and an estimated time to a liquidity event of greater than 12 months. The expected outcomes were weighted more toward remaining as a private company (50-65%), with lower weights for an IPO (25-30%) and a sale (10-15%), and with the lowest weight given to a liquidation scenario (0-5%). This valuation indicated a fair value of $1.60 per share for our common stock. The increase in the fair value between September 8, 2006 and the date of this valuation relates mostly to our filling of an executive-level open position with the hiring of our Vice President, General Counsel and the release of additional features to our application suite during the third quarter of 2006.

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On April 9, 2007, another valuation was performed which we used in determining the fair value of our common stock as of April 19, 2007 due to the proximity of the valuation date to the grant date. The valuation used a risk-adjusted discount of 25%, a non-marketability discount of 27% and an estimated time to a liquidity event between six and 12 months. The expected outcomes were then weighted more toward an IPO (50-60%), with lower weights for remaining as a private company (20-30%) and a sale (15-20%), and with the lowest weight given to a liquidation scenario (0-5%). This valuation indicated a fair value of $4.95 per share for our common stock. The increase in the fair value between the valuation performed on October 16, 2006 and the date of this valuation relates to the change in the weightings of the different probabilities more toward an IPO and away from remaining as a private company due to a change in the Board of Director’s outlook regarding the potential success and timing of an IPO. The increase also relates to continued significant increases in the number of our customers, reaching 850 as of December 31, 2006 and 1,300 as of March 31, 2007, and continued significant growth of our revenue during the fourth quarter of 2006 resulting in a change in management’s and the Board of Director’s future expectations due to faster than anticipated growth from rapid customer acquisition. We also hired our Chief Financial Officer and two other Vice Presidents and released the SMART Goal wizard, our Recruiting Management module, as well as other features during this period.

In connection with the preparation of our consolidated financial statements in anticipation of a potential initial public offering and due to the increase in value between the October 16, 2006 contemporaneous valuation and the April 9, 2007 contemporaneous valuation, a retrospective valuation of our common stock was performed as of December 31, 2006. The retrospective valuation used a risk-adjusted discount of 25%, a non-marketability discount of 34% and an estimated time to a liquidity event of greater than 12 months. The expected outcomes were still weighted more toward remaining as a private company (45-50%) with lower weights for an IPO (30-35%) and a sale (15-20%), with the lowest weight given to a liquidation scenario (0-5%), but the differences between the probability of remaining a private company and a sale or IPO are decreasing when compared to the probabilities used for the October 16, 2006 contemporaneous valuation. This retrospective valuation resulted in a reassessed fair value of $3.60 per share for our common stock as of December 31, 2006. We used this amount for the reassessed value for the stock option grant made on January 16, 2007 due to the proximity of the grant date to December 31, 2006 retrospective valuation.

Following the retrospective valuation performed as of December 31, 2006, we reviewed the fair value of our common stock used for stock option grants between this retrospective valuation and the contemporaneous valuation performed on October 16, 2006. During this review, it was determined that the fair values used for the grants of our stock options in November 2006 did not have to be reassessed. This decision was determined mostly due to the proximity of the timing between the November 3, 2006 grant and the date of the contemporaneous valuation on October 16, 2007 and the size of the grants on November 6 and 15, 2006 consisting of options to purchase 8,000 and 11,500 shares, respectively. In addition, we had high expectations for our growth in customers, bookings and revenues for the fourth quarter of 2006 and, at the time of the grants during November 2006, our results were progressing as planned. It was not until later in November and early December 2006 that the picture of the fourth quarter became more clear and we realized that customers, bookings and revenues were going to experience significant growth. As such, it was determined that the fair value of our common stock used for the grant of our stock options as of December 7, 2006 should be reassessed to $3.00 per share due to the significant growth of our revenues that were occurring at the time of grant.

On July 13, 2007, another valuation was performed which we used in determining the fair value of our common stock as of July 18 and 19, 2007 due to the proximity of the valuation date to the grant dates. The valuation used a risk-adjusted discount of 20%, a non-marketability discount of 19% and an estimated time to a liquidity event between 1 and 3 months. The expected outcomes were weighted more toward an IPO (60-65%), with lower weights for remaining as a private company (15-20%) and a sale (15-25%), and with no weight given to a liquidation scenario (0%). This valuation indicated a fair value of $8.50 per share for our common stock. The increase in the fair value between the contemporaneous valuation performed on April 9, 2007 and the date of this contemporaneous valuation relates to the change in the weightings of the different probabilities even more toward the IPO and away from remaining as a private company, our continued growth in the number of our customers from 1,300 as of March 31, 2007 to 1,400 as of June 30, 2007, and the continued growth in our revenue during the second quarter of 2007.

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On September 10, 2007, another valuation was performed which we used in determining the fair value of our common stock as of September 14 and October 3, 2007. The valuation used a risk-adjusted discount of 20%, a non-marketability discount of 19% and an estimated time to a liquidity event between 1 and 3 months. The expected outcomes were weighted significantly more toward an IPO (70-75%), with lower weights for remaining as a private company (5-15%) and a sale (15-20%), and with no weight given to a liquidation scenario (0%). This valuation indicated a fair value of $8.75 per share for our common stock.

Information regarding our stock option grants to our employees and non-employees along with the exercise price, which equals the originally assessed fair value of the underlying common stock, and the reassessed fair value of the underlying common stock for stock options issued during 2006 and through November 20, 2007 (the date of our initial public offering) is summarized as follows:

			Exercise Price
	Shares		and		Reassessed
	Subject to		Original Fair		Fair		Intrinsic
	Options		Value per		Value per		Value per
Grant Date	Granted		Common Share		Common Share		Common Share
May 17, 2006		1,643,500	$	1.30	$	1.30	$	—
July 21, 2006		255,500		1.30		1.30		—
September 8, 2006		1,041,500		1.30		1.40		0.10
November 3, 2006		779,000		1.60		1.60		—
November 6, 2006		8,000		1.60		1.60		—
November 15, 2006		11,500		1.60		1.60		—
December 7, 2006		714,000		1.60		3.00		1.40
January 16, 2007(1)		251,500		1.60		3.60		2.00
April 19, 2007		1,042,400		4.95		4.95		—
July 18, 2007		1,521,100		8.50		8.50		—
July 19, 2007		2,124,100		8.50		8.50		—
September 14, 2007		1,841,700		8.75		8.75		—
October 3, 2007		280,000		8.75		8.75		—
October 31, 2007		602,000		9.00		9.00		—
November 17, 2007		131,300		9.00		9.00		—

(1) In August 2007, we offered the employees who were granted stock options on January 16, 2007 the right to modify the exercise price of those stock options from the originally assessed fair value of $1.60 per share to the reassessed fair value of $3.60 per share and to receive additional stock options equal to 20% of those stock options. As a result, holders of an aggregate of 198,500 options to purchase common stock had their exercise price increased to $3.60 per share and received additional stock options on September 14, 2007.

We recorded stock-based compensation of $0.2 million, $0.8 million and $4.4 million during 2005, 2006 and 2007, respectively. In future periods, stock-based compensation expense is expected to increase as a result of our existing unrecognized stock-based compensation and as we issue additional equity-based awards to continue to attract and retain employees and non-employee directors. Additionally, SFAS No. 123(R) requires that we recognize compensation expense only for the portion of stock options that are expected to vest. If the actual rate of forfeitures differs from that estimated by management, we may be required to record adjustments to stock-based compensation expense in future periods. As of December 31, 2007, we had $18.3 million of unrecognized stock-based compensation costs related to stock options granted under our 2001 Stock Option Plan. The unrecognized compensation cost is expected to be recognized over an average period of 3.2 years.

Based on our closing price of $11.82 per share on December 31, 2007, the aggregate intrinsic values of vested and unvested options to purchase shares of our common stock outstanding as of December 31, 2007 was $37.7 million and $48.0 million, respectively.

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Sales and Use Taxes

Historically, we have not collected sales and use taxes from our customers nor did we submit our sales and use taxes from the services that we provided to these customers to the appropriate authorities. Accordingly, we have established a reserve for these liabilities. A variety of factors could affect the liability, which factors include our estimated recovery of amounts from customers and any changes in relevant statutes in the various states in which we have done business. To the extent that the actual amount of our liabilities for sales and use taxes materially differs from the amount we have reserved on our consolidated balance sheet, our future results of operations and cash flows could be negatively affected. In the fourth quarter of 2007, we began assessing customers in certain states with sales and use taxes.

Allowance for Doubtful Accounts

Based on a review of the current status of our existing accounts receivable and historical collection experience, we have established an estimate of our allowance for doubtful accounts. We make judgments as to our ability to collect outstanding receivables and provide allowances for the portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, provisions are provided based on our collection history and current economic trends. As a result, if our actual collections are lower than expected, additional provisions for doubtful accounts may be needed and our future results of operations and cash flows could be negatively affected. Write-offs of accounts receivable and recoveries were insignificant during each of 2005, 2006 and 2007.

Results of Operations

The following table sets forth selected consolidated statements of operations data for the specified periods as a percentage of revenue for each of those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.

	Year Ended December 31,
	2007			2006			2005
Revenue		100	%		100	%		100	%
Cost of revenue		42			44			59
Gross margin		58			56			41
Operating expenses:
Sales and marketing		112			99			127
Research and development		26			33			47
General and administrative		30			23			28
Total operating expenses		168			155			201
Loss from operations		(110	)		(99	)		(160	)
Interest and other income (expense), net		(8	)		1			—
Loss before provision for income taxes		(118	)		(98	)		(160	)
Provision for income taxes		(1	)		—			—
Net loss		(119	)%		(98	)%		(160	)%

Due to rounding to the nearest percent, totals may not equal the sum of the line items in the table above.

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Year Ended December 31, 2007, 2006 and 2005

Revenue

	Year Ended December 31,
	2007		2006		2005
	(Dollars in thousands)
Revenue	$	63,350	$	32,570	$	13,028

2007 Compared to 2006.  Revenue increased $30.8 million, or 95%, from 2006 to 2007, primarily due to a $18.7 million increase in revenue from existing customers and a $12.1 million increase in new business. As of December 31, 2007, we had over 1,750 customers, as compared to 850 at December 31, 2006.

Revenue from customers in the United States accounted for $57.3 million or 90%, of revenue in 2007, compared to $30.3 million, or 93% of revenue, in 2006.

2006 Compared to 2005.  Revenue increased $19.5 million, or 150%, from 2005 to 2006, primarily due to a $12.2 million increase in new business and a $7.3 million increase in revenue from existing customers. As of December 31, 2006, we had 850 customers, as compared to 341 at December 31, 2005.

Revenue from customers in the United States accounted for $30.3 million, or 93%, of revenue in 2006, compared to $12.5 million, or 96%, of revenue in 2005.

Cost of Revenue and Gross Margin

	Year Ended December 31,
	2007			2006			2005
	(Dollars in thousands)
Revenue	$	63,350		$	32,570		$	13,028
Cost of revenue		26,341			14,401			7,635
Gross profit	$	37,009		$	18,169		$	5,393
Gross margin		58	%		56	%		41	%

2007 Compared to 2006.  Cost of revenue increased $11.9 million, or 83%, from 2006 to 2007, primarily due to increases of $7.1 million in employee-related costs, which includes $0.4 million of stock-based compensation expenses, due to increased professional services personnel, $2.1 million in outsourced professional services costs, $0.6 million in travel costs, $0.6 million in allocated overhead costs, $0.4 million in data center-related costs and $0.3 million in depreciation expense. The increase in both internal and external professional services costs was the result of growing our capacity to meet the growth in new customers and an increase in the number of customers with more complex configuration requirements. Gross margin increased from 56% for 2006 to 58% for 2007. This increase in gross margin was primarily due to increased revenue, increased renewals, which have lower cost of revenue as a percentage of revenue, and a larger customer base over which to spread fixed costs.

2006 Compared to 2005.  Cost of revenue increased $6.8 million, or 89%, from 2005 to 2006, primarily due to increases of $4.5 million in employee-related costs, $0.9 million in outsourced professional services costs, $0.5 million in data center-related costs and $0.4 million in allocated overhead costs, partially offset by $0.3 million for the completion in 2005 of the amortization of acquired technology. The increase in both internal and external professional services costs was the result of growing our capacity to meet the growth in new customers and an increase in the number of customers with more complex configuration requirements. Gross margin increased from 41% for 2005 to 56% for 2006. This increase in gross margin was primarily due to increased revenue, increased renewals, which have lower cost of revenue as a percentage of revenue, and a larger customer base over which to spread fixed costs.

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Sales and Marketing

	Year Ended December 31,
	2007			2006			2005
	(Dollars in thousands)
Sales and marketing	$	70,963		$	32,317		$	16,540
Percent of revenue		112	%		99	%		127	%

2007 Compared to 2006.  Sales and marketing expenses increased $38.6 million, or 120%, from 2006 to 2007, primarily due to increases of $21.2 million in employee-related costs, which includes $1.9 million of stock-based compensation expenses, due to increased sales and marketing personnel, $7.5 million in sales commission expenses as a result of increased revenue, $4.1 million in marketing and promotional spending, $2.4 million in increased travel and related expenses, $1.4 million of facilities and related costs and $1.4 million in allocated overhead costs.

2006 Compared to 2005.  Sales and marketing expenses increased $15.8 million, or 95%, from 2005 to 2006, primarily due to increases of $8.6 million in employee-related costs due to increased sales and marketing personnel, $2.8 million in sales commission expenses as a result of increased revenue, $1.6 million in marketing and promotional spending, $0.8 million of professional and outside service costs, $0.7 million in allocated overhead costs, and $0.5 million in increased travel and related expenses.

Research and Development

	Year Ended December 31,
	2007			2006			2005
	(Dollars in thousands)
Research and development	$	16,725		$	10,622		$	6,120
Percent of revenue		26	%		33	%		47	%

2007 Compared to 2006.  Research and development expenses increased $6.1 million, or 57%, from 2006 to 2007, primarily due to an increase of $4.9 million in employee-related costs, which includes $0.4 million of stock-based compensation expenses, as we increased personnel in research and development to expand the functionality and localize our application suite into various languages, an increase of $0.8 million in outside services, and an increase of $0.3 million in allocated expenses.

2006 Compared to 2005.  Research and development expenses increased $4.5 million, or 74%, from 2005 to 2006, primarily due to an increase of $4.1 million in employee-related costs as we increased personnel in research and development to expand the functionality and localize our application suite into various languages.

General and Administrative

	Year Ended December 31,
	2007			2006			2005
	(Dollars in thousands)
General and administrative	$	19,091		$	7,483		$	3,624
Percent of revenue		30	%		23	%		28	%

2007 Compared to 2006.  General and administrative expenses increased $11.6 million, or 155%, from 2006 to 2007, primarily due to an increase of $5.7 million in employee-related costs, which includes $0.9 million of stock-based compensation expenses, due to increased general and administrative personnel, and $5.2 million in professional and outside service costs. These increases were due to increased personnel and infrastructure and due to the incremental expenses of preparing to become a public company.

2006 Compared to 2005.  General and administrative expenses increased $3.9 million, or 106%, from 2005 to 2006, primarily due to an increase of $2.3 million in employee-related costs and $1.5 million in professional and outside service costs. These increases were due to increased personnel and infrastructure and due to the incremental expenses of preparing to become a public company.

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Interest and Other Income (Expense), Net

	Year Ended December 31,
	2007			2006			2005
	(Dollars in thousands)
Interest income	$	1,055		$	637		$	213
Interest expense		(3,692	)		(458	)		(123	)
Other income (expense), net		(2,622	)		70			(10	)
Total	$	(5,259	)	$	249		$	80
Percent of revenue		(8	)%		1	%		—	%

2007 Compared to 2006.  Interest income increased $0.4 million from 2006 to 2007 which was primarily due to higher cash balances in 2007 resulting from the proceeds from our initial public offering in the fourth quarter of 2007 and an advance of $10.0 million from our line of credit in both December 2006 and September 2007. We paid off the line of credit in full in November 2007. Interest expense increased $3.2 million from 2006 to 2007 primarily due to the advances on our line of credit. We had $2.2 million of costs related to warrant amortization, prepayment penalties and debt issuance costs and $0.9 million of interest expense related to our line of credit and another $0.5 million of interest related to sales and use taxes. Other income (expense), net in 2007 includes $2.5 million of adjustments to the fair value of our convertible preferred stock warrants, as compared to a credit of $54,000 in 2006, which were re-measured in accordance with SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. Upon completion of our initial public offering we made a final adjustment to the fair value of these warrants at which time all convertible preferred stock warrants were converted into warrants to purchase common stock and, accordingly, the liability was reclassified to additional paid-in capital.

2006 Compared to 2005.  Interest income increased $0.4 million from 2005 to 2006 and interest expense increased $0.3 million from 2005 to 2006. The increase in interest income was primarily due to higher cash balances in 2006 resulting from $24.9 million in net proceeds from our May 2006 Series E convertible preferred stock financing. The increase in interest expense was due to interest expense and amortization expense related to a warrant issued to a lender in connection with the loan and security agreement we entered into in June 2006. Other income (expense), net in 2006 was primarily comprised of adjustments to the fair value of the preferred stock warrants, as described above.

Provision for Income Taxes

We have incurred operating losses in all periods to date and, accordingly, have not recorded a provision for income taxes for any of the periods presented other than provisions for certain state taxes and foreign income taxes. As of December 31, 2007, we had net operating loss carryforwards for federal and state income tax purposes of approximately $110.3 million and $115.5 million, respectively. As of December 31, 2007, we also had federal and state research and development tax credit carryforwards of approximately $1.2 million and $1.0 million, respectively. Realization of deferred tax assets depends upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, we have offset all of our net deferred tax assets by a valuation allowance. If not utilized, our federal net operating loss and tax credit carryforwards will begin to expire in 2021, and our state net operating losses will begin to expire in 2013. Our state tax credit carryforwards will carry forward indefinitely if not utilized. The utilization of our net operating loss could be subject to substantial annual limitation as a result of certain future events, such as acquisition or other significant equity events, which may be deemed as a “change in ownership” under the provisions of the Internal Revenue Code of 1986, as amended and similar state provisions. The annual limitations could result in the expiration of net operating losses and tax credits before utilization.

Liquidity and Capital Resources

To date, substantially all of our operations have been financed through the sale of equity securities. Through December 31, 2007, we had received net cash proceeds of $149.9 million from the issuance of preferred and common stock, including net cash proceeds in connection with our initial public offering of common stock completed in the fourth quarter of 2007 of approximately $104.6 million, after deducting underwriting discounts

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and commissions and offering costs. As of December 31, 2007, we had $82.3 million of cash and cash equivalents and $8.5 million of marketable securities. As of December 31, 2007, we had working capital of $25.9 million, while at December 31, 2006, we had a working capital deficiency of $5.1 million; working capital included $84.6 million and $42.0 million of deferred revenue at December 31, 2007 and 2006, respectively, within current liabilities. Restricted cash, consisting of letters of credit for our credit cards and facility lease agreements, is included in long-term assets, and was $1.0 million and $0.9 million at December 31, 2007 and December 31, 2006, respectively. As of December 31, 2007, we had an accumulated deficit of $141.3 million.

In June 2006, we entered into a loan and security agreement with a lender. Under the terms of the agreement, the lender committed to lend us up to $20.0 million at an interest rate equal to the annual prime rate plus 0.25% per annum, subject to adjustment. The line of credit plus accrued interest had a maturity date of June 1, 2010 and was secured by all of our assets other than our intellectual property. The line of credit was subject to a repayment fee of 1.5% of the outstanding principal and accrued interest if the loan was prepaid prior to May 31, 2008. The line of credit was terminated as we repaid the entire amount of the line of credit, including accrued interest and prepayment penalties, upon completion of our initial public offering in November 2007.

The following table sets forth a summary of our cash flows for the periods indicated (in thousands):

	Year Ended December 31,
	2007			2006			2005
Net cash used in operating activities	$	(28,468	)	$	(13,811	)	$	(5,945	)
Net cash used in investing activities		(14,018	)		(2,741	)		(1,365	)
Net cash provided by financing activities		98,541			35,013			8,360

Net Cash Used in Operating Activities

Our cash flows from operating activities are significantly influenced by the amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business, increases in the number of customers using our application suite and the amount and timing of customer payments. Cash used in operating activities has historically resulted from losses from operations, the add back of non-cash expense items such as depreciation and amortization of fixed assets, amortization of deferred commissions, and expense associated with stock-based compensation awards, and changes in working capital accounts.

We used $28.5 million of cash in operating activities during 2007. The cash usage was primarily from a net loss of $75.5 million due primarily to the significant investments we incurred to grow our business, adjusted for $6.6 million of non-cash depreciation, amortization and stock-based compensation expenses, a $4.1 million non-cash expense for the amortization of deferred commissions, a $2.5 million charge associated with the increase to the fair value of our convertible preferred stock warrants and $1.9 million of amortization of debt issuance costs. During 2007, we experienced significant increases in accounts receivable, deferred commissions, deferred revenue and accrued employee compensation as a result of the growth in our business. The increase in our deferred revenue of $48.7 million contributed to cash provided by operating activities, although this was partially offset by a $10.0 million increase in deferred commissions. The increase in accounts receivable used cash of $19.3 million while the increase in accrued employee compensation related to the expansion of our work force provided $6.7 million to partially offset the increase in accounts receivable. Increases in accrued expenses and accounts payable related to increased operating costs and our better utilization of payment terms contributed $6.0 million to cash.

We used $13.8 million of cash in operating activities during 2006. The cash usage was primarily from a net loss of $32.0 million, adjusted for $1.7 million of non-cash depreciation, amortization and stock-based compensation expenses and a $2.0 million non-cash expense for the amortization of deferred commissions related to the increase in deferred commissions. During 2006, we experienced significant increases in accounts receivable, deferred commissions, deferred revenue and accrued employee compensation as a result of the growth in our business. The increase in our deferred revenue of $27.1 million contributed to cash provided by operating activities, although partially offset by a $5.3 million increase in deferred commissions. The increase in accounts receivable related to our increase in customers used cash of $13.4 million while the increase in accrued employee compensation related to the expansion of our work force provided $5.0 million to partially offset the increase in accounts receivable. Cash

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used in operating activities was also positively impacted by a $1.2 million increase in other liabilities related to a convertible preferred stock warrant and the related liability, although this amount was fully offset by a $1.2 million decrease in other assets related to the debt issuance cost for this warrant.

We used $5.9 million of cash in operating activities during 2005. The cash usage was primarily from a net loss of $20.8 million, adjusted for $0.9 million of non-cash depreciation, amortization and stock-based compensation expenses and a $1.0 million non-cash expense for the amortization of deferred commissions related to the increase in deferred commissions. During 2005, we also experienced significant increases in accounts receivable, deferred commissions, deferred revenue and accrued employee compensation due to the growth in our business. The increase in our deferred revenue of $14.4 million contributed to cash, although partially offset by a $2.8 million increase in deferred commissions. The increase in accounts receivable related to our increase in customers used cash of $3.3 million, while the increase in accrued employee compensation related to the expansion of our work force provided $3.9 million to more than offset the increase in accounts receivable.

Net Cash Used in Investing Activities

Historically, our primary investing activities have consisted of capital expenditures associated with our data centers and computer equipment and furniture and fixtures in support of expanding our infrastructure and work force as well as restricted cash related to leased space and credit cards. During 2007, we also had purchases and sales of available-for-sale securities. As our business grows, we expect our capital expenditures and our investment activity to continue to increase.

We used $14.0 million of cash in investing activities during 2007. This use of cash primarily resulted from $11.2 million of purchases of available-for-sale securities, partially offset by $2.7 million in sales of available-for-sale securities, and $5.5 million in capital expenditures related to purchases of additional equipment for our expanding infrastructure and work force.

During 2005 and 2006, we used $1.4 million and $2.7 million in cash for investing activities, respectively. Of the cash used for investing activities, a significant majority, or $1.2 million and $2.1 million, was used for capital expenditures during 2005 and 2006, respectively. Other uses of cash for investing activities related to restricted cash for leased space and credit cards during these years.

Net Cash Provided by Financing Activities

In the fourth quarter of 2007, we completed our initial public offering issuing 11,618,500 shares of common stock and had net proceeds of approximately $104.6 million, after deducting underwriting discounts and commissions and offering costs. Historically, we had principally funded our operations through issuances of convertible preferred stock, with aggregate net proceeds of $33.3 million during the two years ended December 31, 2006. During 2006, we had entered into a loan and security agreement for a line of credit to borrow up to $20.0 million. We borrowed $10.0 million under this agreement in September 2007. We re-paid the entire principal amount of $20.0 million plus interest and prepayment penalties of $1.3 million upon completion of our initial public offering. We also generated an additional $5.2 million in proceeds received from the exercise of stock options including $4.7 million from the early exercise of stock options.

During 2006, we generated $35.0 million of cash from financing activities, primarily due to $24.9 million of net proceeds from the sale of our Series E convertible preferred stock and $10.0 million of proceeds from borrowings under our loan and security agreement. During 2005, we generated approximately $8.4 million of cash from financing activities, primarily due to $8.4 million of net proceeds from the sale of our Series D convertible preferred stock.

Capital Resources

We believe our existing cash, cash equivalents and marketable securities and currently available resources will be sufficient to meet our working capital and capital expenditure needs over the next 24 months. Our future capital requirements will depend on many factors, including our rate of revenue and bookings growth, the level of our sales and marketing activities, the timing and extent of spending to support product development efforts and expansion

17

into new territories, the timing of introductions of new services and enhancements to existing services, the timing of general and administrative expenses as we grow our administrative infrastructure, and the continuing market acceptance of our application suite. Our capital expenditures in 2008 are expected to grow in line with business activities. To the extent that existing cash and cash from operations are not sufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Although we are currently not a party to any agreement or letter of intent with respect to potential investments in, or acquisitions of, complementary businesses, services or technologies, we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

Off-Balance Sheet Arrangements

We do not have any special purpose entities and, other than operating leases for office space and computer equipment which are described below, we do not engage in off-balance sheet financing arrangements.

Contractual Obligations

Our principal commitments consist of obligations under leases for our office space, computer equipment and furniture and fixtures; and contractual commitments for hosting and other support services. The following table summarizes our contractual obligations as of December 31, 2007:

	Payment Due by Period
			Less than		1-3		3-5		More than
	Total		1 Year		Years		Years		5 Years
	(In thousands)
Capital lease obligations	$	90	$	34	$	56	$	—	$	—
Operating lease obligations		5,782		2,209		2,889		684		—
Contractual commitments		494		397		97		—		—
Total	$	6,366	$	2,640	$	3,042	$	684	$	—

Also, as discussed in Note No. 9 of the Notes to Consolidated Financial Statements, effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” At December 31, 2007, we had unrecognized tax benefits of $1.1 million and an accrual for the payment of related interest totaling $19,000. Due to the uncertainties related to these tax matters, we are unable to make a reasonably reliable estimate when cash settlement with a taxing authority will occur.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, or SFAS 157, which defines fair value, establishes a framework for measuring fair value and requires additional disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 with early adoption permitted; in November, 2007, the FASB agreed to defer the effective date of SFAS 157 for one year for all nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Generally, the provisions of this statement should be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied. We are currently evaluating the effect, if any, the adoption of SFAS 157 will have on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities- including an Amendment of FASB Statement No. 115 (SFAS 159), which allows an entity to choose to measure certain financial instruments and liabilities at fair value. Subsequent measurements for the financial instruments and liabilities an entity elects to fair value will be recognized in earnings. SFAS 159 also establishes additional disclosure requirements. SFAS 159 is effective for us beginning January 1, 2008. We are currently evaluating the potential impact of the adoption of SFAS 159 on our consolidated financial position, results of operations or cash flows.

18

In December 2007, the FASB issued SFAS No. 141 (revised 2007) (SFAS No. 141R), Business Combination and SFAS No. 160 (SFAS No. 160), Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51. SFAS No. 141R will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS No. 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS No. 141R and SFAS No. 160 will be effective beginning in the first quarter of fiscal 2009. The adoption of SFAS No. 141(R) will change our accounting treatment for business combinations on a prospective basis beginning in the first quarter of fiscal year 2009 and the adoption of SFAS No. 160 will not impact our consolidated financial statements.

19

PART IV

Item 15.   Exhibits and Financial Statement Schedules

(a)(1) Financial Statements

The following financial statements are filed as part of this report:

	Page
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm		21
Consolidated Balance Sheets		22
Consolidated Statements of Operations		23
Consolidated Statements of Convertible Preferred Stock, Stockholders’ Equity (Deficit)		24
Consolidated Statements of Cash Flows		25
Notes to Consolidated Financial Statements		26
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

20

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

SuccessFactors, Inc.

We have audited the accompanying consolidated balance sheets of SuccessFactors, Inc. as of December 31, 2007 and 2006, and the related consolidated statements of operations, convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SuccessFactors, Inc. at December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 9 to the consolidated financial statements, SuccessFactors, Inc. changed its method of accounting for uncertain tax positions as of January 1, 2007.

/s/  Ernst & Young LLP

San Francisco, California

February 28, 2008

21

SUCCESSFACTORS, INC.

Consolidated Balance Sheets

	As of December 31,
	2007			2006
	(In thousands, except per share data)
ASSETS:
Current assets:
Cash and cash equivalents	$	82,274		$	26,172
Marketable securities		8,513			—
Accounts receivable, net of allowance for doubtful accounts of $481 and $98		42,072			22,804
Deferred commissions		4,199			2,532
Prepaid expenses and other current assets		2,347			1,038
Total current assets		139,405			52,546
Restricted cash		964			934
Property and equipment, net		6,532			3,082
Deferred commissions, net of current portion		7,343			3,115
Other assets		300			1,067
Total assets	$	154,544		$	60,744
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT):
Current liabilities:
Accounts payable	$	3,595		$	1,608
Accrued expenses and other current liabilities		7,016			2,400
Accrued employee compensation		18,265			11,566
Deferred revenue		84,624			42,023
Current portion of capital lease obligations		34			36
Total current liabilities		113,534			57,633
Capital lease obligations, net of current portion		56			90
Long-term debt		—			9,711
Deferred revenue, net of current portion		16,386			10,331
Convertible preferred stock warrant liability		—			1,496
Other long-term liabilities		4,625			289
Total liabilities		134,601			79,550
Commitments and contingencies
Convertible preferred stock, $0.001 par value, issuable in series; none and 33,143 shares authorized as of December 31, 2007 and 2006, respectively; none and 32,546 shares issued and outstanding as of December 31, 2007 and 2006, respectively		—			45,289
Stockholders’ equity (deficit):
Common stock, $0.001 par value; 200,000 and 50,400 shares authorized as of December 31, 2007 and 2006, respectively; 51,350 and 2,792 shares issued and outstanding (excluding 679 and 2,916 legally issued and outstanding) as of December 31, 2007 and 2006, respectively		51			6
Additional paid-in capital		161,150			1,758
Notes receivable from stockholders		—			(9	)
Accumulated other comprehensive income		55			9
Accumulated deficit		(141,313	)		(65,859	)
Total stockholders’ equity (deficit)		19,943			(64,095	)
Total liabilities, convertible preferred stock and stockholders’ equity (deficit)	$	154,544		$	60,744

See accompanying notes to consolidated financial statements.

22

SUCCESSFACTORS, INC.

Consolidated Statements of Operations

	Year Ended December 31,
	2007			2006			2005
	(In thousands, except per share data)
Revenue	$	63,350		$	32,570		$	13,028
Cost of revenue(1)		26,341			14,401			7,635
Gross profit		37,009			18,169			5,393
Operating expenses:(1)
Sales and marketing		70,963			32,317			16,540
Research and development		16,725			10,622			6,120
General and administrative		19,091			7,483			3,624
Total operating expenses		106,779			50,422			26,284
Loss from operations		(69,770	)		(32,253	)		(20,891	)
Interest income		1,055			637			213
Interest expense		(3,692	)		(458	)		(123	)
Other income (expense)		(2,622	)		70			(10	)
Loss before provision for income taxes		(75,029	)		(32,004	)		(20,811	)
Provision for income taxes		(425	)		(42	)		(9	)
Net loss	$	(75,454	)	$	(32,046	)	$	(20,820	)
Net loss per common share, basic and diluted	$	(8.35	)	$	(13.39	)	$	(14.29	)
Shares used in computing net loss per common share, basic and diluted		9,036			2,393			1,457

(1) Amounts include stock-based compensation expenses in accordance with SFAS 123(R) as follows:

	Year Ended December 31,
	2007		2006		2005
Cost of revenue	$	448	$	94	$	22
Sales and marketing		2,269		351		129
Research and development		512		77		26
General and administrative		1,189		295		34

See accompanying notes to consolidated financial statements.

23

SUCCESSFACTORS, INC.

Consolidated Statements of Convertible Preferred
Stock and Stockholders’ Equity (Deficit)

													Notes			Accumulated					Total
	Convertible										Additional		Receivable			Other					Stockholders’
	Preferred Stock						Common Stock				Paid-in		from			Comprehensive		Accumulated			Equity
	Shares			Amount			Shares		Amount		Capital		Stockholders			Income		Deficit			(Deficit)
	(In thousands)
Balances at December 31, 2004		22,819		$	11,941			1,163	$	4	$	466	$	(8	)	$	—	$	(12,993	)	$	(12,531	)
Issuance of common stock upon exercise of stock options		—			—			522		—		51		—			—		—			51
Issuance of convertible preferred stock, net of issuance costs of $58		4,524			8,442			—		—		—		—			—		—			—
Stock-based compensation		—			—			—		—		211		—			—		—			211
Net loss and comprehensive loss		—			—			—		—		—		—			—		(20,820	)		(20,820	)
Balances at December 31, 2005		27,343			20,383			1,685		4		728		(8	)		—		(33,813	)		(33,089	)
Issuance of common stock upon exercise of stock options		—			—			761		1		143		—			—		—			144
Issuance of common stock upon exercise of warrant		—			—			346		1		69		—			—		—			70
Issuance of convertible preferred stock, net of issuance costs of $94		5,203			24,906			—		—		—		—			—		—			—
Stock-based compensation		—			—			—		—		817		—			—		—			817
Amounts related to notes receivable from stockholders		—			—			—		—		1		(1	)		—		—			—
Comprehensive loss:
Foreign currency translation adjustment, net of tax		—			—			—		—		—		—			9		—			9
Net loss		—			—			—		—		—		—			—		(32,046	)		(32,046	)
Comprehensive loss		—			—			—		—		—		—			—		—			(32,037	)
Balances at December 31, 2006		32,546			45,289			2,792		6		1,758		(9	)		9		(65,859	)		(64,095	)
Issuance of common stock upon exercise of stock options		—			—			1,242		1		412		—			—		—			413
Issuance of convertible preferred stock upon exercise of preferred stock warrant		4			20			—		—		25		—			—		—			25
Stock-based compensation		—			—			—		—		4,418		—			—		—			4,418
Conversion of convertible preferred stock into common stock		(32,550	)		(45,309	)		32,550		32		45,277		—			—		—			45,309
Conversion of preferred stock warrant liability into additional paid-in capital		—			—			—		—		4,534		—			—		—			4,534
Issuance of common stock in connection with initial public offering, net of issuance costs incurred		—			—			11,619		12		104,045		—			—		—			104,057
Repayment of notes receivable from stockholder		—			—			2,916		—		134		9			—		—			143
Vesting of stock option shares exercised early		—			—			231		—		547		—			—		—			547
Comprehensive loss:
Foreign currency translation adjustment, net of tax		—			—			—		—		—		—			37		—			37
Unrealized gain on marketable securities		—			—			—		—		—		—			9		—			9
Net loss		—			—			—		—		—		—			—		(75,454	)		(75,454	)
Comprehensive loss		—			—			—		—		—		—			—		—			(75,408	)
Balances at December 31, 2007		—		$	—			51,350	$	51	$	161,150	$	—		$	55	$	(141,313	)	$	19,943

See accompanying notes to consolidated financial statements.

24

SUCCESSFACTORS, INC.

Consolidated Statements of Cash Flows

	Year Ended December 31,
	2007			2006			2005
	(In thousands)
Cash flows from operating activities:
Net loss	$	(75,454	)	$	(32,046	)	$	(20,820	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,173			868			432
Loss on retirement and write-off of fixed assets		156			—			6
Amortization of deferred commissions		4,063			2,042			1,019
Stock-based compensation expenses		4,418			817			211
Amortization of debt issuance costs		1,916			177			—
Adjustment to fair value of convertible preferred stock warrants		2,510			(54	)		—
Issuance of preferred stock warrants in connection with executive search		—			13			—
Amortization of acquired intangibles		—			—			262
Changes in assets and liabilities:
Accounts receivable		(19,268	)		(13,372	)		(3,272	)
Deferred commissions		(9,958	)		(5,295	)		(2,821	)
Prepaid expenses and other current assets		(1,309	)		(554	)		(227	)
Other assets		(296	)		(1,241	)		1
Accounts payable		1,791			805			498
Accrued expenses and other current liabilities		4,165			675			482
Accrued employee compensation		6,699			4,964			3,913
Other liabilities		1,270			1,248			—
Deferred revenue		48,656			27,142			14,371
Net cash used in operating activities		(28,468	)		(13,811	)		(5,945	)
Cash flows from investing activities:
Restricted cash		(30	)		(639	)		(168	)
Capital expenditures		(5,475	)		(2,102	)		(1,197	)
Purchase of available-for-sale securities		(11,218	)		—			—
Sale of available-for-sale securities		2,705			—			—
Net cash used in investing activities		(14,018	)		(2,741	)		(1,365	)
Cash flows from financing activities:
Proceeds from the issuance of convertible preferred stock, net of issuance costs		—			24,906			8,442
Proceeds from exercise of stock options		553			144			51
Proceeds from early exercise of stock options, net		4,674			—			—
Proceeds from exercise of common stock warrants		—			70			—
Proceeds from exercise of preferred stock warrants		20			—			—
Proceeds from initial public offering, net of offering costs		104,602			—			—
Proceeds from advance on line of credit		10,000			10,000			—
Repayment of line of credit		(21,272	)		—			—
Principal payments on capital lease obligations		(36	)		(107	)		(133	)
Net cash provided by financing activities		98,541			35,013			8,360
Effect of exchange rate changes on cash and cash equivalents		47			9			—
Net increase in cash and cash equivalents		56,102			18,470			1,050
Cash and cash equivalents at beginning of year		26,172			7,702			6,652
Cash and cash equivalents at end of year	$	82,274		$	26,172		$	7,702
Supplemental cash flow disclosure:
Cash paid during the period for:
Interest	$	946		$	14		$	17
Income taxes		4			1			—
Noncash financing and investing activities:
Assets acquired under capital lease	$	—		$	—		$	134

See accompanying notes to consolidated financial statements.

25

SUCCESSFACTORS, INC.

Notes to Consolidated Financial Statements

1.   Organization and Significant Accounting Policies

Organization

Success Acquisition Corporation was incorporated in Delaware in 2001. In April 2007, the name was changed to SuccessFactors, Inc. (the Company). The Company provides on-demand performance and talent management software that enable organizations to optimize the performance of their people to drive business results. The Company’s application suite includes the following modules and capabilities; Performance Management; Goal Management; Compensation Management; Succession Management; Learning and Development; Recruiting Management; Analytics and Reporting; Employee Profile; 360-Degree Review; Employee Survey; and proprietary and third-party content. The Company’s headquarters are located in San Mateo, California. The Company conducts its business worldwide with additional locations in Europe and Asia.

Initial Public Offering

In November 2007, the Company completed its initial public offering (IPO) of common stock in which it sold 11,618,500 shares of its common stock, including 1,618,500 shares sold pursuant to the underwriters’ full exercise of their over-allotment option at an initial public offering price of $10.00 per share. The Company raised a total of $116.2 million from the IPO, or $104.6 million in net proceeds after deducting underwriting discounts and commissions of $8.3 million and other offering expenses of $3.8 million. At December 31, 2007, approximately $545,000 of these offering expenses remained accrued on the accompanying consolidated balance sheet. Upon the closing of the IPO, all of the Company’s outstanding convertible preferred stock was converted into 32,550,241 shares of common stock. In addition, the convertible preferred stock warrant liability of $4.5 million was reclassified to additional paid-in capital.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts in the financial statements and accompanying notes. These estimates form the basis for judgments the Company makes about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company bases its estimates and judgments on historical experience and on various other assumptions that the Company believes are reasonable under the circumstances. GAAP requires the Company to make estimates and judgments in several areas, including those related to revenue recognition, recoverability of accounts receivable, collectability of sales tax from customers and the fair market value of stock options, including forfeiture estimates. These estimates are based on management’s knowledge about current events and expectations about actions the Company may undertake in the future. Actual results could differ materially from those estimates.

Segments

The Company’s chief operating decision maker is its Chief Executive Officer, who reviews financial information presented on a consolidated basis. Accordingly, in accordance with Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company has determined that it has a single reporting segment and operating unit structure, specifically the provision of on-demand software and associated services for employee performance and talent management.

26

SUCCESSFACTORS, INC.

Notes to Consolidated Financial Statements — (Continued)

Revenue Recognition

Revenue consists of subscription fees for the Company’s on-demand software and the provision of other services. The Company’s customers do not have the contractual right to take possession of software in substantially all of the transactions. Instead, the software is delivered on an on-demand basis from the Company’s hosting facility. Therefore, these arrangements are treated as service agreements and the Company follows the provisions of Securities and Exchange Commission Staff (SEC) Accounting Bulletin (SAB) No. 104, Revenue Recognition, Emerging Issues Task Force (EITF) Issue No. 00-3, Application of AICPA Statement of Position 97-2 (SOP 97-2) to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware, and EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. The Company commences revenue recognition when all of the following conditions are met:

•  there is persuasive evidence of an arrangement;

•  the subscription or services have been delivered to the customer;

•  the collection of related fees is reasonably assured; and

•  the amount of related fees is fixed or determinable.

Signed agreements are used as evidence of an arrangement. The Company assesses cash collectability based on a number of factors such as past collection history with the customer. If the Company determines that collectability is not reasonably assured, the Company defers the revenue until collectability becomes reasonably assured, generally upon receipt of cash. The Company assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. The Company’s arrangements are noncancelable, though customers typically have the right to terminate their agreement if the Company fails to perform.

The Company’s other services include configuration assistance, including installation and training related to the application suite. These other services are generally sold in conjunction with the Company’s subscriptions. In applying the provisions of EITF Issue No. 00-21, the Company has determined that it does not have objective and reliable evidence of fair value for each element of its arrangements. As a result, these other services are not accounted for separately from the Company’s subscriptions. As these other services do not qualify for separate accounting, the Company recognizes the other services revenue together with the subscription fees ratably over the noncancelable term of the subscription agreement, generally one to three years although terms can extend to as long as five years, commencing on the later of the start date specified in the subscription arrangement, the “initial access date” of the customers’ instance in the Company’s production environment or when all of the revenue recognition criteria have been met. The Company considers delivery to have occurred on the initial access date, which is the point in time that a customer is provided access to use the Company’s on-demand application suite. In the infrequent circumstance in which a customer of the Company has the contractual right to take possession of the software, the Company has applied the provisions noted in EITF Issue No. 00-3 and determined that the customers would incur a significant penalty to take possession of the software. Therefore, these agreements have been accounted for as service contracts outside the scope of SOP 97-2.

Deferred Revenue

Deferred revenue consists of billings or payments received in advance of revenue recognition from the Company’s subscription and other services described above and is recognized when all of the revenue recognition criteria are met. For subscription arrangements with terms of over one year, the Company generally invoices its customers in annual installments. Accordingly, the deferred revenue balance does not represent the total contract value of these multi-year, noncancelable subscription agreements. The Company’s other services, such as configuration assistance, are generally sold in conjunction with the subscriptions. The Company recognizes revenue from these other services, together with the subscriptions, ratably over the noncancelable term of the subscription

27

SUCCESSFACTORS, INC.

Notes to Consolidated Financial Statements — (Continued)

agreement which can extend to as long as five years. The portion of deferred revenue that the Company anticipates will be recognized during the succeeding 12-month period is recorded as current deferred revenue and the remaining portion is recorded as non-current deferred revenue.

Cost of Revenue

Cost of revenue primarily consists of costs related to hosting the Company’s application suite, compensation and related expenses for data center and professional services staff, payments to outside service providers, data center and networking expenses and allocated overhead and depreciation expenses. Allocated overhead includes rent, information technology costs and employee benefits costs and is apportioned to all departments based on relative headcount.

Deferred Commissions

Deferred commissions are the incremental costs that are directly associated with noncancelable subscription agreements and consist of sales commissions paid to the Company’s direct sales force. The commissions are deferred and amortized over the noncancelable terms of the related customer contracts, typically one to three years, with some agreements having durations of up to five years. The deferred commission amounts are recoverable from the future revenue streams under the noncancelable subscription agreements. The Company believes this is the appropriate method of accounting, as the commission costs are so closely related to the revenue from the noncancelable subscription agreements that they should be recorded as an asset and charged to expense over the same period that the subscription revenue is recognized. Amortization of deferred commissions is included in sales and marketing expense in the accompanying consolidated statements of operations.

During the year ended December 31, 2007, the Company capitalized $10.0 million of deferred commissions and amortized $4.1 million to sales and marketing expense. As of December 31, 2007, deferred commissions on the Company’s consolidated balance sheet totaled $11.5 million.

Research and Development

The Company expenses the cost of research and development as incurred. Research and development expenses consist primarily of expenses for research and development staff, the cost of certain third-party service providers and allocated overhead.

Software Development Costs

The Company follows the guidance set forth in Statement of Position 98-1, Accounting for the Cost of Computer Software Developed or Obtained for Internal Use (SOP 98-1), in accounting for costs incurred in the development of its on-demand application suite. SOP 98-1 requires companies to capitalize qualifying computer software costs that are incurred during the application development stage and amortize them over the software’s estimated useful life. Due to the Company’s delivery of product releases on a monthly basis, there have been no material qualifying costs incurred during the application development stage in any of the periods presented.

Convertible Preferred Stock Warrants

Freestanding warrants related to shares that are redeemable were accounted for in accordance with SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS 150). Under SFAS 150, the freestanding warrants that are related to the Company’s convertible preferred stock are classified as liabilities on the Company’s consolidated balance sheet. The convertible preferred stock warrants are subject to re-measurement at each balance sheet date, and any change in fair value is recognized as a component of other income (expense). All convertible preferred stock warrants were converted into warrants to

28

SUCCESSFACTORS, INC.

Notes to Consolidated Financial Statements — (Continued)

purchase common stock in conjunction with the closing of the Company’s IPO in November 2007, and, accordingly, the liability was reclassified to additional paid-in capital as of December 31, 2007.

Comprehensive Loss

Comprehensive loss consists of net loss and other comprehensive income (loss). Other comprehensive (loss) income includes certain changes in equity that are excluded from net loss. Specifically, cumulative foreign currency translation adjustments, net of tax, are included in accumulated other comprehensive income (loss). Comprehensive income (loss) has been reflected in the consolidated statements of convertible preferred stock and stockholders’ equity (deficit).

Income Taxes

The Company accounts for income taxes under the asset and liability approach. Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax reporting purposes, net operating loss carryforwards and other tax credits measured by applying currently enacted tax laws. Valuation allowances are provided when necessary to reduce deferred tax assets to an amount that is more likely than not to be realized.

Compliance with income tax regulations requires the Company to make decisions relating to the transfer pricing of revenue and expenses between each of its legal entities that are located in several countries. The Company’s determinations include many decisions based on management’s knowledge of the underlying assets of the business, the legal ownership of these assets, and the ultimate transactions conducted with customers and other third parties. The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations in multiple tax jurisdictions. The Company may be periodically reviewed by domestic and foreign tax authorities regarding the amount of taxes due. These reviews may include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the exposure associated with various filing positions, the Company records estimated reserves when it is not probable that an uncertain tax position will be sustained upon examination by a taxing authority. These estimates are subject to change. See Note 9 for a discussion of the effect of the Company’s adoption of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of SFAS No. 109.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents, which consist of cash on deposit with banks and money market funds, are stated at cost, which approximates fair value.

Marketable Securities

The Company classifies its marketable securities as available-for-sale in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115). In accordance with SFAS 115, available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity (deficit). Fair value is determined based on quoted market rates. The cost of securities sold is based on the specific-identification method. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included as a component of interest income (expense). Interest on securities classified as available-for-sale is included as a component of interest income. As these securities are considered by the Company as available to support current operations, these securities have been classified as current assets on the consolidated balance sheets in accordance with Accounting Research Bulletin No. 43, Chapter 3A, Working Capital-Current Assets and Liabilities.

29

SUCCESSFACTORS, INC.

Notes to Consolidated Financial Statements — (Continued)

Restricted Cash

The Company’s restricted cash balances at December 31, 2007 and 2006 were as follows (in thousands):

	As of
	December 31,
	2007		2006
Certificates of deposit and guarantees in connection with corporate leases	$	640	$	421
Certificate of deposit in connection with telephone system lease		150		150
Employee funds withheld for Section 125 benefits		67		56
Credit card deposits		107		307
	$	964	$	934

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, marketable securities, restricted cash, accounts receivable, accounts payable and other accrued expenses, approximate their respective fair values due to their relatively short period of time to maturity. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of debt and capital lease obligations approximate their respective fair value.

Allowance for Doubtful Accounts

The Company has established an allowance for doubtful accounts based on a review of the current status of existing accounts receivable and historical collection experience. The allowance for doubtful accounts increased by $383,000 in the year ended December 31, 2007 and $52,000 in the year ended December 31, 2006. Write-offs of accounts receivable and recoveries were insignificant during each of the years ended December 31, 2007 and 2006.

Impairment of Long-Lived Assets

The Company evaluates the recoverability of its long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, by comparing the projected undiscounted net cash flows associated with the related asset, or group of assets, over the remaining lives against their respective carrying amounts. Long-lived assets are reviewed for possible impairment whenever events or circumstances indicate that the carrying amounts of these assets may not be recoverable. If this review indicates that the carrying amount of long-lived assets is not recoverable, the carrying amount of these assets is reduced to its fair value.

In addition to the recoverability assessment, the Company routinely reviews the remaining estimated useful lives of its long-lived assets. Any reduction in the useful life assumption would result in increased depreciation and amortization expense in the period when those determinations are made, as well as in subsequent periods.

Leases

The Company leases office space and equipment under noncancelable operating and capital leases. The terms of certain lease agreements provide for rental payments on a graduated basis. The Company recognizes rent expense on a straight-line basis over the lease period and accrues for rent expense incurred but not yet paid.

Under certain leases, the Company also received allowances for leasehold improvements. These allowances are lease incentives, which have been recognized as a liability and are being amortized on a straight-line basis over the term of the lease as a component of minimum rental expense. The leasehold improvements are included in property and equipment and are being amortized over the shorter of the respective estimated useful lives of the improvements or the lease term.

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SUCCESSFACTORS, INC.

Notes to Consolidated Financial Statements — (Continued)

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, generally three to five years. Equipment under capital leases and leasehold improvements are amortized over their respective estimated useful lives or the remaining lease term, whichever is shorter.

When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from their respective accounts and any gain or loss on that sale or retirement is reflected in other income (expense).

Warranties and Indemnification

The Company’s on-demand application suite is generally warranted to perform in a manner consistent with industry standards and materially in accordance with the Company’s on-line help documentation under normal use and circumstances.

Additionally, the Company’s arrangements generally include provisions for indemnifying customers against liabilities if its services infringe a third party’s intellectual property rights or a breach by the Company of its confidentiality obligations harms a third party. To date, the Company has not incurred any material costs as a result of those indemnifications and has not accrued any liabilities related to these obligations in the accompanying consolidated financial statements.

The Company has entered into service level agreements with a majority of its customers warranting defined levels of uptime reliability and performance and permitting those customers to receive service credits or discounted future services, or to terminate their agreements in the event that the Company fails to meet those levels. To date, the Company has not experienced any significant failures to meet defined levels of reliability and performance as a result of those agreements and, accordingly, has not accrued any liabilities related to these agreements in the accompanying consolidated financial statements.

Concentrations of Credit Risk and Significant Customers and Suppliers

Financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities, restricted cash and accounts receivable. The Company maintains an allowance for doubtful accounts. The allowance is based upon historical loss patterns, the number of days that billings are past due and an evaluation of the potential risk of loss associated with problem accounts. The Company does not require its customers to provide collateral. Credit risk arising from accounts receivable is mitigated due to the large number of customers comprising the Company’s customer base and their dispersion across various industries. No customer represented more than 10% of revenue in any of the three years in the period ended December 31, 2007.

Prior to 2006, the Company had operations only in the United States. In 2006 and 2007, the Company established subsidiaries in Denmark, United Kingdom, France, Germany, Australia, Hong Kong, Korea, Italy, Singapore, Australia, Switzerland and the Philippines. Long-lived assets at these subsidiaries were not significant as of December 31, 2007 or December 31, 2006. Revenue by geographic region, based on billing address of the customer, was as follows (in thousands):

	Year Ended December 31,
	2007		2006		2005
Americas	$	58,934	$	31,372	$	12,819
Europe		2,940		912		136
Asia Pacific		1,476		286		73
	$	63,350	$	32,570	$	13,028

31

SUCCESSFACTORS, INC.

Notes to Consolidated Financial Statements — (Continued)

The Company’s revenue from customers based in the United States was $57.3 million, $30.3 million and $12.5 million for the years ended December 31, 2007, 2006 and 2005 and these amounts are included in the Americas line in the table above.

The Company’s cash balances are maintained at several banks. Accounts located in the United States are insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. Certain operating cash accounts may exceed the FDIC limits.

The Company serves its customers and users from three hosting facilities, one located in New Jersey and two in Europe. The Company has internal procedures to restore services in the event of disasters at its current hosting facilities. Even with these procedures for disaster recovery in place, the Company’s service could be significantly interrupted during the implementation of the procedures to restore services.

Foreign Currency Translation

The functional currency of the Company’s foreign subsidiaries is the local currency. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are recorded as a separate component of stockholders’ equity (deficit). Income and expense accounts are translated into U.S. dollars at average rates of exchange prevailing during the periods presented. Foreign currency transaction gains and losses are included in net loss and have not been material during any of the periods presented. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the respective exchange rates in effect on the consolidated balance sheet dates.

Advertising Expenses

Advertising is expensed as incurred as a component of sales and marketing expenses on the consolidated statement of operations. Advertising expense was $4.7 million, $2.3 million and $1.4 million for the years ended December 31, 2007, 2006 and 2005, respectively.

Accounting for Stock-Based Compensation

The Company adopted, retroactively to inception, SFAS No. 123(R), Share-Based Payment (SFAS 123(R)), which requires all share-based payments, including grants of stock options, to be measured based on the fair value of the stock options on the grant date and recognized in the Company’s consolidated statement of operations over the period during which the recipient is required to perform service in exchange for the stock options (generally over the vesting period of the options). In accordance with SFAS No. 123(R), the Company uses the Black-Scholes pricing model to determine the fair values of the stock options on the grant dates. The Company amortizes the fair values of share-based payments on a straight-line basis.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), which defines fair value, establishes a framework for measuring fair value and requires additional disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 with early adoption permitted; in November, 2007, the FASB agreed to defer the effective date of SFAS 157 for one year for all nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Generally, the provisions of this statement should be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied. The Company is currently evaluating the effect, if any, the adoption of SFAS 157 will have on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities- including an Amendment of FASB Statement No. 115 (SFAS 159), which allows an entity to choose to measure certain financial instruments and liabilities at fair value. Subsequent measurements for the financial

32

SUCCESSFACTORS, INC.

Notes to Consolidated Financial Statements — (Continued)

instruments and liabilities an entity elects to fair value will be recognized in earnings. SFAS 159 also establishes additional disclosure requirements. SFAS 159 is effective for the Company beginning January 1, 2008. The Company is currently evaluating the potential impact of the adoption of SFAS 159 on its consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141 (revised 2007) (SFAS No. 141R), Business Combinations and SFAS No. 160 (SFAS No. 160), Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51. SFAS No. 141R will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS No. 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS No. 141R and SFAS No. 160 will be effective for the Company beginning in the first quarter of fiscal 2009. The adoption of SFAS No. 141(R) will change the Company’s accounting treatment for business combinations on a prospective basis beginning in the first quarter of fiscal year 2009 and the adoption of SFAS No. 160 is not expected to impact the Company’s consolidated financial statements.

2.   Balance Sheet Accounts

Property and Equipment

Property and equipment as of December 31, 2007 and 2006 consisted of (in thousands):

	As of December 31,
	2007			2006
Computers, equipment and software	$	5,829		$	3,246
Furniture and fixtures		1,563			377
Vehicles		396			170
Leasehold improvements		2,436			839
		10,224			4,632
Less accumulated depreciation and amortization		(3,692	)		(1,550	)
	$	6,532		$	3,082

Depreciation and amortization expense totaled $2.2 million, $868,000 and $432,000 for the years ended December 31, 2007, 2006 and 2005, respectively. Depreciation and amortization expense for the year ended December 31, 2005 includes $4,000 related to the retirement of certain equipment. No equipment was retired during the years ended December 31, 2007 and December 31, 2006.

Property and equipment as of December 31, 2007 and 2006 included a total of $306,000 of equipment acquired under capital lease agreements. Accumulated amortization relating to equipment under capital leases totaled $272,000 and $194,000 as of December 31, 2007 and 2006, respectively. Amortization of assets under capital leases is included in depreciation and amortization expense.

33

SUCCESSFACTORS, INC.

Notes to Consolidated Financial Statements — (Continued)

Cash, Cash Equivalents and Marketable Securities

Cash, cash equivalents and marketable securities as of December 31, 2007, consists of the following (in thousands):

	As of December 31, 2007
			Gross		Gross		Estimated
			Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Cash	$	2,904	$	—	$	—	$	2,904
Cash equivalents:
Money market funds		39,220		—		—		39,220
Commercial paper		10,276		—		—		10,276
U.S. government notes and bonds		29,865		9				29,874
Total cash equivalents		79,361		9		—		79,370
Total cash and cash equivalents		82,265		9		—		82,274
Marketable securities:
U.S. government notes and bonds		8,513		—		—		8,513
Total marketable securities		8,513		—		—		8,513
Total cash, cash equivalents, and marketable securities	$	90,778	$	9	$	—	$	90,787

The Company did not have any marketable securities as of December 31, 2006. The Company did not realize any significant gains or losses during the years ended December 31, 2007, 2006 and 2005. All of the Company’s marketable securities as of December 31, 2007 mature within one year.

Other Assets

Other assets as of December 31, 2007 and 2006 consisted of (in thousands):

	As of December 31,
	2007		2006
Debt issuance costs	$	—	$	1,063
Long-term prepaid expenses		195		—
Long-term deposits		105		4
	$	300	$	1,067

During 2007, the Company was amortizing the debt issuance cost ratably over the expected term of the loan. In November 2007, the entire amount of the loan was repaid, consequently, the Company amortized the entire remaining balance of the debt issuance cost to interest expense.

34

SUCCESSFACTORS, INC.

Notes to Consolidated Financial Statements — (Continued)

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities as of December 31, 2007 and 2006 consisted of (in thousands):

	As of December 31,
	2007		2006
Accrued royalties	$	238	$	170
Accrued partner referral fees		189		118
Accrued other liabilities		2,930		278
Accrued taxes payable		613		189
Deferred rent		246		117
Sales and use taxes		2,800		1,528
	$	7,016	$	2,400

Based on the services provided to customers in certain states, and research of the applicable statutes, regulations and rulings, the Company determined that it is both probable and estimable that the Company owes sales and use tax in various states and local jurisdictions. Historically, the Company did not collect sales and use taxes from its customers and, accordingly, has provided for these amounts as well as any applicable penalties and interest, net of any reasonably estimable amounts that are considered recoverable from customers. During the fourth quarter of 2007, the Company began assessing sales and use taxes on its customers in certain states.

Accrued employee compensation as of December 31, 2007 and 2006 consisted of (in thousands):

	As of December 31,
	2007		2006
Accrued bonus payable	$	7,231	$	5,592
Accrued commission payable		7,249		4,397
All other accrued employee compensation payable		3,785		1,577
	$	18,265	$	11,566

3.   Commitments and Contingencies

Lease Commitments

The Company leases office space and equipment under noncancelable operating and capital leases with various expiration dates through September 2012. In 2007 and 2006, the Company established wholly-owned subsidiaries in Australia, United Kingdom, Denmark, France, Germany, Hong Kong, Korea, Italy and Singapore. In connection with the establishment of these subsidiaries, the Company entered into lease agreements for office space in certain of these countries.

In August 2006, the Company entered into a three-year lease agreement for its corporate headquarters in San Mateo, California and in January 2007 it began occupancy. In connection with the move to the new headquarters, the Company sublet a portion of its previously occupied corporate headquarters starting in February 2007. In September 2007, the Company entered into a three-year lease agreement for a sales office in San Francisco, California and began occupancy in November 2007.

The Company has entered into various capital lease arrangements to obtain equipment for its operations. These agreements are typically for two to five years with interest rates ranging from 5.3% to 10.8% per year. The leases are secured by the underlying equipment.

35

SUCCESSFACTORS, INC.

Notes to Consolidated Financial Statements — (Continued)

As of December 31, 2007, future minimum lease payments under noncancelable operating and capital leases were as follows (in thousands):

	Capital		Operating
Year Ending December 31:	Leases		Leases
2008	$	39	$	2,209
2009		39		1,951
2010		20		938
2011		—		387
2012		—		297
Thereafter		—		—
Total minimum lease payments		98	$	5,782
Less: amount representing interest		8
Present value of capital lease obligations		90
Less: current portion		34
Capital lease obligations, net of current portion	$	56

Rent expense for the years ended December 31, 2007, 2006 and 2005 was $1,837,000, $627,000, and $404,000, respectively. Sublease income for 2007 was $103,000. In the table above, operating leases are shown net of sublease income to be received of $118,000 and $26,000 in the years ending December 31, 2008 and 2009, respectively.

Legal Proceedings

The Company is involved in various legal proceedings arising from the normal course of its business activities. In management’s opinion, resolution of these matters is not expected to have a material adverse effect on the Company’s results of operations, cash flows or financial position. However, depending on the nature and timing of any such dispute, an unfavorable resolution of a matter could materially affect the Company’s results of operations, cash flows or financial position in a future period.

4.   Debt

On June 7, 2006, the Company entered into a loan and security agreement with a lender that provided the Company a line of credit to borrow up to $20.0 million. Under terms of the agreement, the loan commitment by the lender expired if the Company failed to borrow the entire commitment amount by December 31, 2007 and expired upon the Company’s initial public offering. To calculate the interest on the loan as of December 31, 2006, the Company used the interest rate of the prime rate plus 0.25% as noted in the loan agreement, or 8.5%. The loan plus accrued interest had a maturity date of June 1, 2010 and was secured by substantially all of the assets of the Company. The agreement restricted the Company’s ability to pay dividends. The Company was subject to a prepayment fee in the amount of 1.5% of the outstanding principal and accrued interest being prepaid if the prepayment is made after May 31, 2007 but before May 31, 2008. The Company was in compliance with all covenants as of December 31, 2006 and throughout 2007. The Company repaid the entire amount of the loan, which included $20.0 million of principal and $1.3 million of accrued interest and prepayment penalties, upon the completion of its initial public offering in November 2007.

In connection with the loan and security agreement, the Company issued a warrant agreement to the lender for the purchase of up to 499,535 shares of Series E convertible preferred stock at a purchase price of approximately $4.80 per share. The warrant expired on June 7, 2013. Upon execution of the loan and security agreement, 333,023 of the 499,535 shares of the Series E convertible preferred stock became immediately available for purchase and

36

SUCCESSFACTORS, INC.

Notes to Consolidated Financial Statements — (Continued)

were valued at $1.2 million using the Black-Scholes pricing model with the following assumptions: expected volatility of 84%, risk-free interest rate of 4.98%, contractual life of 7 years and no dividend yield. The $1.2 million was recorded as a debt issuance cost and was being amortized to interest expense using the straight line method over the loan term. A total of $1.0 million, the entire remaining balance, was charged to interest expense in 2007, when the loan was repaid in full; $177,000 was amortized to interest expense during the year ended December 31, 2006. Upon the completion of the Company’s initial public offering, the warrant was converted into a warrant to purchase shares of common stock.

On December 29, 2006, the Company drew down $10.0 million under the loan and security agreement and the number of shares of Series E convertible preferred stock exercisable under the warrant agreement increased by 83,256. These shares were valued at $297,000 using the Black-Scholes pricing model with the following assumptions: expected volatility of 81%, risk-free interest rate of 4.70%, contractual life of 6.5 years and no dividend yield. The $297,000 was recorded as a debt discount and was being amortized to interest expense using the straight line method over the loan term. Amortization of the debt discount during the year ended December 31, 2006 was insignificant. In 2007, when the loan was repaid, the entire remaining balance was charged to interest expense.

On September 27, 2007, the Company drew down $10.0 million under the loan and security agreement and the number of shares of Series E convertible preferred stock exercisable under the warrant agreement increased by 83,256. These shares were valued at $556,000 using the Black-Scholes pricing model with the following assumptions: expected volatility of 73.6%, risk-free rate of 4.23%, contractual life of 5.69 years and no dividend yield. The $556,000 was recorded as a debt discount and was being amortized to interest expense using the straight-line method over the loan term. In 2007 when the loan was repaid, the entire remaining balance was charged to interest expense.

Under SFAS 150, the initial fair values of the exercisable shares of Series E convertible preferred stock under the warrant agreement were classified as liabilities and were being revalued each reporting period that the warrant remained outstanding, with the changes in fair value included in other income (expense) in the accompanying consolidated statements of operations. Upon the completion of the Company’s initial public offering, the warrant was converted into a warrant to purchase shares of common stock and was revalued at that date. The changes in carrying amount of this Series E preferred stock warrant resulted in expense of $2.5 million in 2007 and in a credit of $54,000 during the year ended December 31, 2006.

5.   Convertible Preferred Stock

All shares of convertible preferred stock were converted into 32,550,241 common shares upon the Company’s initial public offering in November 2007.

In May 2006, the Company sold 5,203,500 shares of Series E convertible preferred stock for aggregate proceeds of $25.0 million before issuance costs.

The authorized, issued and outstanding shares of convertible preferred stock by series were as follows as of December 31, 2006 (in thousands):

	Shares
			Issued and		Net
	Authorized		Outstanding		Proceeds
Series A		10,650		10,650	$	2,103
Series B		7,752		7,752		4,900
Series C		4,417		4,417		4,938
Series D		4,524		4,524		8,442
Series E		5,800		5,203		24,906
		33,143		32,546	$	45,289

37

SUCCESSFACTORS, INC.

Notes to Consolidated Financial Statements — (Continued)

Convertible Preferred Stock Warrants

In June 2006, in conjunction with a loan and security agreement, the Company issued a warrant to a lender for the purchase of up to 499,535 shares of the Company’s Series E convertible preferred stock at a price of approximately $4.80 per share. Upon execution of the loan and security agreement, 333,023 shares of Series E convertible preferred stock were available for purchase under the terms of the warrant. Additional shares become available under the warrant agreement at each draw down date. In December 2006, the Company drew down $10.0 million and, therefore, an additional 83,256 shares of Series E convertible preferred stock, also at a price of approximately $4.80 per share, became available for purchase under the warrant. In September 2007, the Company drew down $10.0 million and therefore, an additional 83,256 shares of Series E convertible preferred stock, also at a price of approximately $4.80 per share, became available for purchase under the warrant.

In October 2006, as partial compensation for an executive search fee, the Company committed to issue a warrant to an executive search firm for the purchase of 4,162 shares of Series E convertible preferred stock at a price of approximately $4.80 per share. The warrant was nonforfeitable, fully vested and exercisable upon grant. The fair value of the warrant was determined to be $13,000 using the Black-Scholes pricing model with the following assumptions: expected volatility of 73%, risk-free interest rate of 4.77%, contractual life of 5.5 years and no dividend yield. In August 2007, the executive search firm exercised the convertible preferred stock warrant in full for approximately $20,000.

The fair value of the warrants was recorded as a convertible preferred stock warrant liability and was being re-measured quarterly using the Black-Scholes pricing model with the changes in fair value included in other income (expense) in the accompanying consolidated statements of operations. Upon the completion of the Company’s initial public offering, the warrant was converted into a warrant to purchase shares of common stock and was revalued at that date. The changes in the carrying amount of these Series E convertible preferred stock warrants resulted in a credit of $54,000 during the year ended December 31, 2006 and an expense of $2.5 million in the year ended December 31, 2007.

6.   Stockholders’ Equity (Deficit)

Common Stock

The Company is authorized to issue 200,000,000 shares of common stock with a par value of $0.001 per share. Holders of common stock are entitled to one vote per share on all matters to be voted upon by stockholders of the Company.

Notes Receivable from Stockholders

During the year ended December 31, 2004, an executive officer of the Company executed a nonrecourse note in connection with the exercise of an option to purchase 2,615,947 shares of common stock. The note had an interest rate of 5% per annum. During the year ended December 31, 2006, the same officer also executed a nonrecourse note, which had an interest rate of 10% per annum, in connection with the exercise of an option to purchase 300,000 shares of the Company’s common stock. In January 2007, another executive officer of the Company executed a nonrecourse note in connection with the exercise of an option to purchase 400,000 shares of the Company’s common stock. The note had an interest rate of 8.25% per annum. These notes and the related accrued interest were repaid in full in July 2007. The Company recorded notes receivable of zero and $136,000 as of December 31, 2007 and 2006. In accordance with SFAS 123(R), stock options that are exercised with the proceeds from a note provided by the Company should be excluded from common stock issued and outstanding. As such, legally issued and outstanding shares in the amount of 2,915,947 were excluded from the Company’s issued and outstanding common stock as of December 31, 2006.

The Company’s founders, including a current executive officer, acquired stock at inception with notes payable to the Company, which had a balance of zero as of December 31, 2007 and $9,000 as of December 31, 2006. These

38

SUCCESSFACTORS, INC.

Notes to Consolidated Financial Statements — (Continued)

notes had an interest rate of 7% per annum. These notes and the related accrued interest were repaid in full in July 2007.

7.   Stock-Based Compensation

Common Stock Warrants

The Company issued a warrant to an investor in December 2002 to purchase 345,793 shares of the Company’s common stock at an exercise price of $0.20 per share. In April 2006, the investor exercised the warrant in full.

Stock Plans

In June 2001, the Company’s Board of Directors adopted and its stockholders approved the 2001 Stock Option Plan, and in November 2007, the Company’s Board of Directors adopted and its stockholders approved the 2007 Equity Incentive Plan (collectively, the “Plans”). The Plans provide for the issuance of incentive and nonstatutory stock options to employees and non-employees of the Company, and the 2007 Equity Incentive Plan additionally provides for the issuance of restricted stock awards, stock bonus awards, stock appreciation rights and restricted stock units. Options issued under the Plans are generally for periods not to exceed ten years and must be issued at prices not less than 85% of the estimated fair value of the shares of common stock on the date of grant as determined by the Board of Directors. The Plans provides for grants of immediately exercisable options. Options become vested and exercisable at such times and under such conditions as determined by the Board of Directors at the date of grant. Options, or shares issued upon early exercise of options, generally vest over four years, with 25% vesting after one year and the balance vesting monthly over the remaining period. Any shares exercised prior to vesting may be repurchased by the Company at the original option exercise price in the event of the employee’s termination. The right to repurchase unvested shares lapses at the rate of the vesting schedule. Prior to December 31, 2006, there had been no options considered to have been exercised early under the provisions of SFAS 123(R). As of December 31, 2007, there were 679,167 shares legally issued and outstanding as a result of the early exercise of stock options. 425,000 of these shares were exercised early by members of the Board of Directors. 254,167 of these shares were exercised early by an executive officer of the Company. Therefore, cash received for exercised and unvested shares is recorded as a liability on the accompanying consolidated balance sheet and transferred to common stock and additional paid-in capital as the shares vest. As of December 31, 2007, in accordance with SFAS 123(R), 679,167 shares have been excluded from the Company’s consolidated financial statements as the underlying shares of common stock are unvested. As of December 31, 2007, the Company had recorded a long-term liability of $4.2 million for these options.

To estimate the fair value of an option, the Company uses the Black-Scholes pricing model. This model requires inputs such as expected term, expected volatility, dividend yield and risk-free interest rate. Further, the forfeiture rate also affects the amount of aggregate compensation. These inputs are subjective and generally require significant analysis and judgment to develop. Volatility data were obtained from a study of publicly-traded industry peer companies. The forfeiture rate is derived primarily from the Company’s historical data and the risk-free interest rate is based on the yield available on U.S. Treasury zero-coupon issues. Through December 31, 2006, the Company generally used the simplified method in accordance with the provisions of Staff Accounting Bulletin No. 107, Share-Based Payment (SAB 107), or the SEC shortcut method, to calculate the expected term for employee grants except in instances where the Company did not qualify for the use of this method because the stock option award was not deemed to have been “at-the-money” for financial reporting purposes and, accordingly, did not qualify as a “plain vanilla” option as defined in SAB 107. For grants during the year ended December 31, 2006 in which the Company was unable to use the SEC shortcut method and for all of the option grants during 2007 the Company calculated the expected term based on a study of publicly-traded industry peer companies and the Company’s historical experience.

Had the Company continued to utilize the SEC shortcut method rather than the study of publicly-traded industry peer companies and its own historical experience to calculate the expected term for employee grants during

39

SUCCESSFACTORS, INC.

Notes to Consolidated Financial Statements — (Continued)

2007, stock-based compensation expense would have increased by approximately $490,000, resulting in a loss from operations of $70.3 million, a net loss of $75.9 million and a net loss per common share, basic and diluted, of $8.40.

In accordance with SFAS 123(R), the fair value of options granted to employees during the years ended December 31, 2007, 2006 and 2005 were determined using the following weighted-average assumptions for employee grants:

	Year Ended December 31,
	2007			2006			2005
Expected life from grant date (in years)		4.29			5.92			6.09
Risk-free interest rate		4.29	%		4.03	%		4.16	%
Expected volatility		47	%		77	%		88	%
Dividend yield		—			—			—
Weighted-average estimated fair value of options granted during the period	$	3.31		$	1.20		$	0.36

During 2007, the Company granted a total of 500,000 options to members of its Board of Directors at $8.75 per share which vest quarterly over a two year period but expired if not exercised within six months of grant. In accordance with SFAS 123(R), the fair value of these options granted was based on the following assumptions: expected life from grant date (in years) of 0.27 years; risk-free interest rate of 3.32%; expected volatility of 44.85%; dividend yield of 0% for a weighted average estimated fair value of $0.84 per share.

During 2007, the Company granted a total of 280,000 options to outside members of its Board of Director at $8.75 per share which vest over a two year period. In accordance with SFAS 123(R), the fair value of these options granted was based on the following assumptions: expected life from grant date (in years) of 2.73 years; risk-free interest rate of 3.35%; expected volatility of 46.15%; dividend yield of 0% for a weighted average estimated fair value of $2.88 per share.

Given the absence of an active market for the Company’s common stock, the Company’s Board of Directors historically determined the fair value of the Company’s common stock in connection with the Company’s grant of stock options and stock awards. The Company’s Board of Directors made these determinations based on the business, financial and venture capital experience of the individual directors along with input from management. In May 2006, a valuation was prepared in order to assist the Board of Directors in determining the fair value of the Company’s common stock. The valuation report valued the Company’s common stock as of May 2006. Subsequently, contemporaneous valuations as of October 16, 2006, April 9, 2007, July 13, 2007 and September 10, 2007 were performed. The Company also retrospectively valued the Company’s common stock as of December 31, 2006. Management also reassessed the fair market value of its common stock for financial statement reporting purposes at interim dates during the two years ended December 31, 2007.

40

SUCCESSFACTORS, INC.

Notes to Consolidated Financial Statements — (Continued)

Information regarding the Company’s stock option grants to employees and non-employees including the grant date; the number of stock options issued with each grant; the exercise price, which equals the originally assessed fair value of the underlying common stock; and the reassessed fair value of the underlying common stock for each grant of stock options from January 1, 2006 through November 20, 2007 (the date of the Company’s initial public offering) is summarized as follows:

	Shares
	Subject to		Exercise Price and		Reassessed
	Options		Original Fair Value per		Fair Value per
Grant Date	Granted		Common Share		Common Share
May 17, 2006		1,643,500	$	1.30	$	1.30
July 21, 2006		255,500		1.30		1.30
September 8, 2006		1,041,500		1.30		1.40
November 3, 2006		779,000		1.60		1.60
November 6, 2006		8,000		1.60		1.60
November 15, 2006		11,500		1.60		1.60
December 7, 2006		714,000		1.60		3.00
January 16, 2007(1)		251,500		1.60		3.60
April 19, 2007		1,042,400		4.95		4.95
July 18, 2007		1,521,100		8.50		8.50
July 19, 2007		2,124,100		8.50		8.50
September 14, 2007		1,841,700		8.75		8.75
October 3, 2007		280,000		8.75		8.75
October 31, 2007		602,000		9.00		9.00
November 17, 2007		131,300		9.00		9.00

(1) In August 2007, the Company offered the employees who were granted stock options on January 16, 2007 the right to modify the exercise price of those stock options from the originally assessed fair value of $1.60 per share to the reassessed fair value of $3.60 per share and to receive additional stock options equal to 20% of those stock options. As a result, holders of an aggregate of 198,500 options to purchase common stock had their exercise price increased to $3.60 per share and received additional stock options on September 14, 2007. There was no change to the Company’s stock-based compensation as a result of the modification in accordance with SFAS 123(R).

41

SUCCESSFACTORS, INC.

Notes to Consolidated Financial Statements — (Continued)

A summary of the Company’s stock option activity for the years ended December 31, 2007, 2006 and 2005 is as follows:

							Weighted-
				Shares			Average
				Subject to			Exercise
	Shares Available			Options			Price
	for Grant			Outstanding			per Share
	(Shares in thousands)
Balance at December 31, 2004		1,048			6,869		$	0.09
Additional shares authorized		760			—
Granted		(1,757	)		1,757			0.31
Exercised		—			(522	)		0.10
Canceled/forfeited		714			(714	)		0.13
Balance at December 31, 2005		765			7,390			0.14
Additional shares authorized		4,100			—
Granted		(4,453	)		4,453			1.40
Exercised		—			(761	)		0.19
Canceled/forfeited		528			(528	)		0.56
Balance at December 31, 2006		940			10,554			0.65
Additional shares authorized		12,137			—
Granted		(7,839	)		7,839			7.99
Exercised		—			(4,389	)		0.25
Canceled/forfeited		920			(920	)		3.16
Balance at December 31, 2007		6,158			13,084			5.00

Additional information regarding options outstanding as of December 31, 2007, is as follows:

	Options Outstanding						Options Exercisable(1)
			Weighted-Average		Weighted-				Weighted-
			Remaining		Average				Average
Range of	Shares Subject		Contractual Life		Exercise Price		Shares Subject		Exercise Price
Exercise Prices	to Options		(in years)		per Share		to Options		per Share
	(In thousands)						(In thousands)
$0.02 - $0.05		512		5.17	$	0.04		508	$	0.04
0.20 - 0.33		1,719		7.11		0.25		1,059		0.25
1.30 - 1.60		3,395		8.63		1.39		2,140		1.40
3.60 - 4.95		1,094		9.26		4.71		21		4.15
8.50 - 9.00		6,319		9.64		8.64		1,381		8.60
12.53		45		9.97		12.53		—		—
Total		13,084		8.84		5.00		5,109		2.98

(1) Certain options under the Plans may be exercised prior to vesting but are subject to repurchase at the original issuance price in the event the optionees’ employment is terminated.

Options exercisable at December 31, 2007 had a weighted-average remaining contractual life of 8.22 years and an aggregate intrinsic value of $45.2 million.

42

SUCCESSFACTORS, INC.

Notes to Consolidated Financial Statements — (Continued)

Options outstanding that have vested and are expected to vest as of December 31, 2007 are as follows:

			Weighted-
			Average		Weighted-Average		Aggregate
	Number of		Exercise Price		Remaining		Intrinsic
	Shares		per Share		Contractual Term		Value(1)
	(In thousands)				(In years)		(In thousands)
Vested		3,809	$	1.91		7.86	$	37,726
Expected to vest		8,701		6.30		9.24		48,041
Total vested and expected to vest		12,510		4.97		8.82	$	85,767
Not expected to vest		574
		13,084

(1) The aggregate intrinsic value was calculated as the difference between the exercise price of the underlying stock options and the closing price of the Company’s common stock of $11.82 as of December 31, 2007.

The total intrinsic value of stock options exercised during the years ended December 31, 2007, 2006 and 2005 was $33.5 million, $459,000 and $142,000, respectively. The total grant date fair value of stock options that vested during the years ended December 31, 2007, 2006 and 2005 was $2.2 million, $651,000 and $151,000, respectively.

There was no capitalized stock-based employee compensation cost and there were no recognized stock-based compensation tax benefits during the years ended December 31, 2007, 2006 and 2005.

As of December 31, 2007, there was $18.3 million of unrecognized stock-based compensation cost related to stock options granted under the Plan. The unrecognized compensation cost is expected to be recognized over an average period of 3.2 years.

Stock Awards Issued to Non-employees

The Company accounts for stock awards issued to non-employees in accordance with EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. During the years ended December 31, 2007, 2006 and 2005, the Company granted options to purchase 10,000, 14,000 and 11,500 shares of common stock, respectively, to non-employees. Expense for these awards was calculated using the Black-Scholes pricing model. The Company recorded stock-based compensation expense of $27,000, $15,000 and $5,000 for the fair value of stock options granted to non-employees during the years ended December 31, 2007, 2006 and 2005, respectively. At December 31, 2007, there were 16,001 shares subject to unvested awards held by non-employees with a weighted-average exercise price of $5.83 and an average remaining vesting period of 2.9 years.

43

SUCCESSFACTORS, INC.

Notes to Consolidated Financial Statements — (Continued)

Common Stock

The Company had reserved shares of common stock for future issuance as follows (in thousands):

	As of December 31,
	2007		2006
The Plans:
Options outstanding		13,084		10,554
Stock available for future grants		6,158		940
Preferred stock warrants		—		500
Common stock warrants		500		—
Convertible preferred stock		—		32,546
		19,742		44,540

8.   Net Loss Per Common Share

Basic net loss per common share is computed by dividing the net loss by the weighted-average number of common shares outstanding for the period. Diluted net loss per common share is computed by giving effect to all potentially dilutive common shares, including options, warrants and convertible preferred stock. Basic and diluted net loss per common share were the same for all periods presented as the impact of all potentially dilutive securities outstanding was anti-dilutive.

The following table sets forth the computation of net loss per common share (in thousands, except per share data):

	Year Ended December 31,
	2007			2006			2005
Net loss	$	(75,454	)	$	(32,046	)	$	(20,820	)
Weighted average common shares outstanding, net of weighted-average shares subject to repurchase		9,036			2,393			1,457
Net loss per common share, basic and diluted	$	(8.35	)	$	(13.39	)	$	(14.29	)

The following weighted-average outstanding shares subject to options and warrants and convertible preferred stock were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an antidilutive effect (in thousands):

	Year Ended December 31,
	2007		2006		2005
Convertible preferred stock (as converted basis)		29,427		30,564		26,822
Options to purchase common stock and shares subject to repurchase		11,471		8,374		7,058
Warrants (as converted basis)		504		398		346

44

SUCCESSFACTORS, INC.

Notes to Consolidated Financial Statements — (Continued)

9.   Income Taxes

The Company’s geographical breakdown of its loss before provision for income taxes is as follows (in thousands):

	Year Ended December 31,
	2007			2006			2005
Domestic	$	(75,669	)	$	(32,115	)	$	(20,811	)
Foreign		640			111			—
Loss before provision for income taxes	$	(75,029	)	$	(32,004	)	$	(20,811	)

The components of the provision for income taxes is as follows (in thousands):

	Year Ended December 31,
	2007			2006		2005
Current provision:
Federal	$	—		$	—	$	—
State		(40	)		9		9
Foreign		465			33		—
Total current provision		425			42		9
Deferred provision:
Federal		—			—		—
State		—			—		—
Foreign		—			—		—
Total deferred provision		—			—		—
Total	$	425		$	42	$	9

A reconciliation of the benefit for income taxes at the statutory rate to the Company’s provision for income taxes is as follows (in thousands):

	Year Ended December 31,
	2007			2006			2005
Tax benefit at federal statutory rate	$	(26,260	)	$	(11,201	)	$	(7,284	)
State taxes, net of federal benefit		(4,422	)		(1,681	)		(1,086	)
Research and development credits		(911	)		(340	)		(201	)
Foreign operations taxes at different rates		(71	)		23			—
Foreign withholding taxes		274			—			—
Nondeductible expenses		2,290			519			548
Change in valuation allowance		29,525			12,722			8,032
Provision for income taxes	$	425		$	42		$	9

45

SUCCESSFACTORS, INC.

Notes to Consolidated Financial Statements — (Continued)

Significant components of the Company’s net deferred tax assets are as follows (in thousands):

	As of December 31,
	2007			2006
Deferred tax assets:
Reserves and accruals	$	7,685		$	3,550
Deferred revenue		—			2,496
Depreciation and amortization		982			953
Net operating loss carryforwards		42,363			17,427
Other items		696			—
Tax credit carryforwards		2,072			787
Total deferred tax assets		53,798			25,213
Deferred tax liabilities		—			—
Gross deferred tax assets		53,798			25,213
Valuation allowance		(53,798	)		(25,213	)
Net deferred tax assets	$	—		$	—

Recognition of deferred tax assets is appropriate when realization of these assets is determined to be more likely than not. Based upon the weight of available evidence, which includes the Company’s historical operating performance and the recorded cumulative net losses in all prior fiscal periods, the Company has provided a full valuation allowance against its U.S. deferred tax assets. The Company’s valuation allowance increased by $28.6 million, $12.1 million and $8.0 million in the years ended December 31, 2007, 2006 and 2005, respectively.

As of December 31, 2007, the Company had U.S. federal and state net operating losses of approximately $110.3 million and $115.5 million, respectively. The U.S. federal net operating loss carryforwards will expire at various dates beginning in 2021 through 2027 if not utilized. Most state net operating loss carryforwards will expire at various dates beginning in 2013 through 2017.

As of December 31, 2007, the Company had U.S. federal and state tax credit carryforwards of approximately $1.2 million and $1.0 million, respectively. The federal credit will expire at various dates beginning in 2021 through 2027, if not utilized. California state research and development credits can be carried forward indefinitely.

Net operating loss carryforwards and credit carryforwards reflected above may be limited due to ownership changes as provided in the Internal Revenue Code and similar state provisions.

The Company does not provide for U.S. federal income and state income taxes on all of the non-U.S. subsidiaries’ undistributed earnings of $91,000 as of December 31, 2007, because these earnings are intended to be indefinitely reinvested. In the event of any distribution of those earnings in the form of dividends or otherwise, the Company would be subject to nominal U.S. federal and state income taxes.

Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (FIN 48). There was not a material impact on the Company’s consolidated financial position and results of operations as a result of the adoption of the provisions of FIN 48. At adoption, the Company had gross unrecognized tax benefits of approximately $1.4 million, of which $83,000 would impact the effective tax rate if recognized. As of December 31, 2007, the Company had gross unrecognized tax benefits of approximately $1.1 million, of which $47,000 would impact the effective tax rate if recognized. While it is often difficult to predict the final outcome of any particular uncertain tax position, management does not believe that it is reasonably possible that the estimates of unrecognized tax benefits will change significantly in the next twelve months.

46

SUCCESSFACTORS, INC.

Notes to Consolidated Financial Statements — (Continued)

The Company recognizes interest accrued and penalties related to unrecognized tax benefits in its income tax provision. As of December 31, 2007, the Company accrued no penalties and $19,000 of interest in income tax expense.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the year ended December 31, 2007, is as follows (in thousands):

Balance at January 1, 2007	$	1,427
Additions based on tax positions taken during a prior period		—
Reductions based on tax positions taken during a prior period		(676	)
Additions based on tax positions taken during the current period		383
Reductions based on tax positions taken during the current period		—
Balance at December 31, 2007	$	1,134

In many cases the Company’s uncertain tax positions are related to tax years that remain subject to examination by tax authorities. The following describes the open tax years, by major tax jurisdiction, as of December 31, 2007:

United States — Federal	2003 — present
United States — State	2003 — present
Foreign	2005 — present

10.   Employee Benefit Plans

The Company has a 401(k) plan covering all eligible employees. The Company is not required to contribute to the plan and has made no contributions through December 31, 2007.

11.   Related-Party Transactions

During the year ended December 31, 2005, the Company leased office space from an investor. During that year, the investor’s ownership interest in the Company represented more than 10% of the Company’s total outstanding shares of common stock. The Company paid rent to the investor of $33,000 during 2005. The Company moved its headquarters to another location had no liability to the investor for rent as of December 31, 2007 or 2006.

During the years ended December 31, 2007, 2006 and 2005, certain executive officers of the Company executed nonrecourse notes in connection with the exercise of common stock options. See Note 6. These notes were repaid prior to the filing of the Company’s Registration Statement on Form S-1 for its initial public offering.

47

SUCCESSFACTORS, INC.

Notes to Consolidated Financial Statements — (Continued)

12.   Selected Quarterly Financial Data (unaudited) (in thousands, expect per share data)

	Quarter Ended
	Mar. 31,			June 30,			Sept. 30,			Dec. 31,
	2007			2007			2007			2007
Revenue	$	12,391		$	15,004		$	16,744		$	19,211
Gross profit		7,340			9,318			10,268			10,083
Loss from operations		(12,490	)		(14,685	)		(19,802	)		(22,793	)
Net loss	$	(12,619	)	$	(16,363	)	$	(20,181	)	$	(26,291	)
Net loss per common share, basic and diluted	$	(4.40	)	$	(5.00	)	$	(3.30	)	$	(1.11	)

	Quarter Ended
	Mar. 31,			June 30,			Sept. 30,			Dec. 31,
	2006			2006			2006			2006
Revenue	$	6,304		$	6,601		$	8,336		$	11,329
Gross profit		3,023			3,415			4,570			7,161
Loss from operations		(7,519	)		(7,604	)		(7,968	)		(9,162	)
Net loss	$	(7,553	)	$	(7,626	)	$	(7,758	)	$	(9,109	)
Net loss per common share, basic and diluted	$	(3.99	)	$	(3.25	)	$	(3.02	)	$	(3.32	)

(a)(2) Financial Statement Schedules

All financial statement schedules are omitted because they are not applicable or the information is included in Registrant’s consolidated financial statements or related notes.

(a)(3) Exhibits

The exhibit list in the Index to Exhibits is incorporated herein by reference as the list of exhibits required as part of this report.

48

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant has duly caused this amendment to be signed on its behalf by the undersigned thereunto duly authorized.

SUCCESSFACTORS, INC.

By:  /s/  LARS DALGAARD

Name:     Lars Dalgaard

Title:  President and Chief Executive Officer

Date: June 2, 2008

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this amendment has been signed below by the following persons in behalf of the Registrant in the capacities and on the dates indicated.

Signature		Title	Date
/s/  Lars Dalgaard Lars Dalgaard		President, Chief Executive Officer and Director (Principal Executive Officer)	June 2, 2008
/s/  Bruce Felt Bruce Felt		Chief Financial Officer (Principal Financial and Accounting Officer)	June 2, 2008
/s/  * David N. Strohm		Chairperson of the Board of Directors	June 2, 2008
/s/  * Douglas J. Burgum		Director	June 2, 2008
/s/  * Eric C. W. Dunn		Director	June 2, 2008
/s/  * William E. McGlashan, Jr.		Director	June 2, 2008
/s/  * Elizabeth A. Nelson		Director	June 2, 2008
/s/  * David G. Whorton		Director	June 2, 2008
*By:	/s/  Bruce Felt Bruce Felt	Attorney-in-Fact	June 2, 2008

49

EXHIBIT INDEX

Exhibit No.			Document
	3	.1	Restated Certificate of Incorporation of Registrant.
	3	.2	Amended and Restated Bylaws of Registrant.
	4	.1	Form of Registrant’s common stock certificate.(1)
	4	.2	Fourth Amended and Restated Investor Rights Agreement, dated as of May 19, 2006, between Registrant and certain Stockholders of Registrant.(2)
	10	.1	Form of Indemnity Agreement entered into between Registrant and its directors and executive officers.(2)
	10	.2*	2001 Stock Option Plan.(2)
	10	.3*	Form of Stock Option Agreement and Exercise Notice and Restricted Stock Purchase Agreement under the 2001 Stock Option Plan.(2)
	10	.4*	2007 Equity Incentive Plan.(3)
	10	.5*	Form of Notice of Stock Option Grant, Stock Option Agreement and Stock Option Exercise Agreement, Notice of Restricted Stock Award Grant and Restricted Stock Purchase Agreement, Notice of Restricted Stock Unit Grant and Restricted Stock Unit Agreement, Notice of Stock Bonus Award Grant and Stock Bonus Agreement and Notice of Stock Appreciation Right Grant and Stock Appreciation Right Agreement under the 2007 Equity Incentive Plan.(4)
	10	.6*	Offer Letter, dated October 10, 2006, between Registrant and Bruce C. Felt, Jr.(2)
	10	.7*	Offer Letter, dated April 3, 2001, between Registrant and Luen Au.(2)
	10	.8	Office Lease Agreement, dated August 24, 2006, between Registrant and CLPF-BridgePointe, L.P.(2)
	10	.9	e-business Hosting Agreement, dated June 30, 2003, between Registrant and International Business Machines Corporation.(2)
	10	.10	Series E Preferred Stock Purchase Agreement, dated May 19, 2006, between Registrant and certain Stockholders of Registrant.(2)
	10	.11	Series D Preferred Stock Purchase Agreement, dated February 11, 2005, between Registrant and certain Stockholders of Registrant.(2)
	10	.12	Series C Preferred Stock Purchase Agreement, dated May 7, 2004, between Registrant and certain Stockholders of Registrant.(2)
	10	.13	Loan and Security Agreement, dated June 7, 2006, between Registrant and Lighthouse Capital Partners V, L.P.(2)
	10	.14	Warrant to Purchase Preferred Stock of Registrant issued to KarrScheffel, LLC, dated April 19, 2007.(2)
	10	.15	Preferred Stock Purchase Warrant of Registrant issued to Lighthouse Capital Partners V, L.P., dated June 7, 2006.(2)
	10	.16*	Employment Letter Agreement, dated July 19, 2007, between Registrant and Lars Dalgaard.(2)
	10	.17*	Offer Letter, dated July 16, 2007, between Registrant and Paul Albright.
	10	.18*	Offer Letter, dated August 28, 2007, between Registrant and Jay Larson.
	10	.19*	Offer Letter, dated June 27, 2006, between Registrant and Julian Ong.
	23	.1†	Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
	24	.1	Power of Attorney (included on the signature page hereto).
	31	.1†	Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31	.2†	Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	.1†	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32	.2†	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	99	.1	Registrant Employee Welcome Letter.(5)

(1) Incorporated by reference to the Exhibits filed with Amendment No. 4 to the Company’s Registration Statement on Form S-1, filed on October 31, 2007 (File No. 333-144758).

(2)	Incorporated by reference to the Exhibits filed with the Company’s Registration Statement on Form S-1, filed on July 20, 2007 (File No. 333-144758).
(3)	Incorporated by reference to the Exhibits filed with Amendment No. 8 to the Company’s Registration Statement on Form S-1, filed on November 13, 2007 (File No. 333-144758).
(4)	Incorporated by reference to the Exhibits filed with Amendment No. 7 to the Company’s Registration Statement on Form S-1, filed on November 9, 2007 (File No. 333-144758).
(5)	Incorporated by reference to the Exhibit filed with Amendment No. 1 Company’s Registration Statement on Form S-1, filed on August 31, 2007 (File No. 333-144758).
*	Indicates management contract or compensatory plan or arrangement.
†	Filed herewith.