most important factors in the success of their business. Optimizing pay is a priority as compensation remains one of the largest expense categories for most companies. Also, it is widely believed that compensation is one of the most important factors influencing employee performance. The best managed companies typically are analytical and deliberate in establishing and monitoring their compensation programs and seek to understand compensation practices and levels at the organizations that compete with them for talent.

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

The predominant approach used by companies to determine appropriate compensation is “market pricing.” Market pricing is the process of comparing positions and pay in a company against aggregated, statistically significant compensation data from companies of comparable size, industry and location. Through the use of market pricing, the development of salary structures, and execution of pay programs, organizations can effectively manage their compensation costs and link pay to performance.

Although most organizations are in agreement regarding the importance of market pricing in compensation management, there is wide variation regarding the processes and tools employed to make compensation decisions. Some organizations employ in-house compensation professionals who purchase surveys and use them to price the positions themselves, whereas others hire compensation consultants to market price their positions and recommend appropriate salary ranges.

Along with its application suites, the Company provides its customers with implementation and data configuration services as well as assistance with the application of its compensation and performance management solutions to their organization. In addition to its enterprise offerings, the Company also provides a series of consumer and e-commerce solutions through its website to provide compensation information and tools designed for the consumer.

CompAnalyst is a suite of on-demand compensation management solutions for use by the compensation professional in an enterprise. CompAnalyst is built around a core data set of market pricing information and includes access to several analytics applications, including Job Analyzer, Survey Center, Salary Structures, Reporting & Analysis, CompAnalyst Executive, CompAnalyst Professional Edition, Salary Wizard Pro, Job Valuation Reports, Compensation Market Studies, and Surveys:

TalentManager is a suite of on-demand solutions that provides the essential workflow to link pay to performance across the enterprise. TalentManager enables an organization to manage goal setting, performance reviews and incentive programs, and to link those elements to relevant compensation programs within a single integrated application. The Company’s TalentManager suite includes Performance Manager, CompPlanner, IncentivesManager, and StockManager

The Company’s consumer and e-commerce family of products consists of free-to-user applications that are ad-sponsored, as well as certain premium products that are sold directly to individuals visiting the website.

The Company’s consumer and e-commerce products include www.salary.com, the Wizard, the Center, and Personal Report Subscription

Cost of revenues for the three months ended June 30, 2006 was $1.0 million, an increase of $0.3 million, or an increase of 51% over cost of revenues of $0.7 million for the three months ended June 30, 2005.

Research and development expenses for the three months ended June 30, 2006 were $0.7 million, or an increase of 72% over research and development expenses of $0.4 million for the three months ended June 30, 2005.

Sales and marketing expenses for the three months ended June 30, 2006 were $2.7 million, or an increase of 59% over sales and marketing expenses of $1.7 million for the three months ended June 30, 2005.

Other income (expense) for the three months ended June 30, 2006 was an expense of $22,000, or a decrease of 58% from other expenses of $53,000 for the three months ended June 30, 2005.