Statements made in this Quarterly Report on Form 10-Q, including without limitation this Management's Discussion and Analysis of Financial Condition and Results of Operations, other than statements of historical information, are forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may sometimes be identified by such words as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue" or similar words. We believe that it is important to communicate our future expectations to investors. However, these forward-looking statements involve many risks and uncertainties. Our actual results could differ materially from those indicated in such forward-looking statements as a result of certain factors, including but not limited to, those set forth under Risk Factors in our Annual Report on Form 10-K previously filed with the Securities and Exchange Commission ("SEC") and elsewhere in this Quarterly Report on Form 10-Q. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results.

Overview

We are an information technology consulting firm serving Forbes Global 2000 ("Global 2000") and other large enterprise companies with a primary focus on the United States. We help our clients gain competitive advantage by using Internet-based technologies to make their businesses more responsive to market opportunities and threats, strengthen relationships with their customers, suppliers and partners, improve productivity and reduce information technology costs. We design, build and deliver business-driven technology solutions using third-party software products. Our solutions include custom applications, portals and collaboration, eCommerce, customer relationship management, enterprise content management, business intelligence, business integration, mobile technology, technology platform implementations, and service oriented architectures. Our solutions enable our clients to operate a real-time enterprise that dynamically adapts business processes and the systems that support them to meet the changing demands of an increasingly global, Internet-driven and competitive marketplace.

Services Revenues

Services revenues are derived from professional services performed developing, implementing, integrating, automating and extending business processes, technology infrastructure, and software applications. Most of our projects are performed on a time and materials basis, and a smaller amount of revenues are derived from projects performed on a fixed fee basis. Fixed fee engagements represented approximately 10% of our services revenues for the three and six months ended June 30, 2009 compared to 17% for the three and six months ended June 30, 2008. For time and material projects, revenues are recognized and billed by multiplying the number of hours our professionals expend in the performance of the project by the established billing rates. For fixed fee projects, revenues are generally recognized using the input method based on the ratio of hours expended to total estimated hours. Amounts invoiced to clients in excess of revenues recognized are classified as deferred revenues. On most projects, we are also reimbursed for out-of-pocket expenses such as airfare, lodging and meals. These reimbursements are included as a component of revenues. The aggregate amount of reimbursed expenses will fluctuate depending on the location of our customers, the total number of our projects that require travel, and whether our arrangements with our clients provide for the reimbursement of travel and other project related expenses.

Software and Hardware Revenues

Software and hardware revenues are derived from sales of third-party software and hardware. Revenues from sales of third-party software and hardware are generally recorded on a gross basis provided we act as a principal in the transaction. On rare occasions, we do not meet the requirements to be considered a principal in the transaction and act as an agent. In these cases, revenues are recorded on a net basis. Software and hardware revenues are expected to fluctuate depending on our customers' demand for these products.

If we enter into contracts for the sale of services and software or hardware, management evaluates whether the services are essential to the functionality of the software or hardware and whether objective fair value evidence exists for each deliverable in the transaction. If management concludes the services to be provided are not essential to the functionality of the software or hardware and can determine objective fair value evidence for each deliverable of the transaction, then we account for each deliverable in the transaction separately, based on the relevant revenue recognition policies. Generally, all deliverables of our multiple element arrangements meet these separation criteria.

Cost of revenues

Cost of revenues consists primarily of cash and non-cash compensation and benefits, including bonuses and non-cash compensation related to equity awards, associated with our technology professionals. Cost of revenues also includes the costs associated with subcontractors. Third-party software and hardware costs, reimbursable expenses and other unreimbursed project related expenses are also included in cost of revenues. Project related expenses will fluctuate generally depending on outside factors including the cost and frequency of travel and the location of our customers. Cost of revenues does not include depreciation of assets used in the production of revenues which are primarily personal computers, servers and other information technology related equipment.

Gross Margins

Our gross margins for services are affected by the utilization rates of our professionals, defined as the percentage of our professionals' time billed to customers divided by the total available hours in the respective period, the salaries we pay our consulting professionals and the average billing rate we receive from our customers. If a project ends earlier than scheduled or we retain professionals in advance of receiving project assignments, or if demand for our services declines, our utilization rate will decline and adversely affect our gross margins. Gross margin percentages of third-party software and hardware sales are typically lower than gross margin percentages for services, and the mix of services and software and hardware for a particular period can significantly impact our total combined gross margin percentage for such period. In addition, gross margin for software and hardware sales can fluctuate due to pricing and other competitive pressures.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ("SG&A") consist of salaries, benefits, bonuses, non-cash compensation, office costs, recruiting, professional fees, sales and marketing activities, training, and other miscellaneous expenses. Non-cash compensation includes stock compensation expenses related to restricted stock, option grants to employees and non-employee directors, and retirement savings plan contributions. We work to minimize selling costs by focusing on repeat business with existing customers and by accessing sales leads generated by our software vendors, most notably IBM, Oracle and Microsoft, whose products we use to design and implement solutions for our clients. These relationships enable us to reduce our selling costs and sales cycle times and increase win rates through leveraging our partners' marketing efforts and endorsements.

Results of Operations

Three months ended June 30, 2009 compared to three months ended June 30, 2008

Revenues. Total revenues decreased 24% to $44.9 million for the three months ended June 30, 2009 from $59.1 million for the three months ended June 30, 2008. Revenue contraction continued this quarter due to the decreased demand in the IT industry and delays in IT spending by customers, which we believe is related to the general economic slowdown.

Services revenues decreased 24% to $40.8 million for the three months ended June 30, 2009 from $53.6 million for the three months ended June 30, 2008.

Software and hardware revenues decreased 15% to $1.8 million for the three months ended June 30, 2009 from $2.1 million for the three months ended June 30, 2008. Reimbursable expenses decreased 29% to $2.4 million for the three months ended June 30, 2009 from $3.4 million for the three months ended June 30, 2008 as a result of the decline in services revenue. We do not realize any profit on reimbursable expenses.

Cost of Revenues. Cost of revenues decreased 15% to $33.2 million for the three months ended June 30, 2009 from $39.0 million for the three months ended June 30, 2008. The decrease in cost of revenues is directly related to the decrease in revenues and management's efforts in managing costs, primarily headcount. The average number of professionals performing services, including subcontractors, decreased to 998 for the three months ended June 30, 2009 from 1,150 for the three months ended June 30, 2008. Management will continue to manage the cost structure to match demand.

Gross Margin. Gross margin decreased 42% to $11.7 million for the three months ended June 30, 2009 from $20.1 million for the three months ended June 30, 2008. Gross margin as a percentage of revenues decreased to 26.0% for the three months ended June 30, 2009 from 34.1% for the three months ended June 30, 2008 due to a decrease in services and software and hardware gross margin. Services gross margin, excluding reimbursable expenses, decreased to 28.2% or $11.5 million for the three months ended June 30, 2009 from 36.9% or $19.8 million for the three months ended June 30, 2008. The decrease in services gross margin is due primarily to higher labor related costs as a result of lower utilization. The average utilization rate of our professionals, excluding subcontractors, decreased to 76% for the three months ended June 30, 2009 compared to 84% for the three months ended June 30, 2008. The Company's average bill rate decreased slightly to $105 per hour for the three months ended June 30, 2009 from $107 per hour for the three months ended June 30, 2008. Software and hardware gross margin decreased to 12.0% or $0.2 million for the three months ended June 30, 2009 from 17.6% or $0.3 million for the three months ended June 30, 2008.

Selling, General and Administrative. SG&A expenses decreased 12% to $10.1 million for the three months ended June 30, 2009 from $11.5 million for the three months ended June 30, 2008. SG&A expenses, as a percentage of revenues, increased to 22.6% for the three months ended June 30, 2009 from 19.6% for the three months ended June 30, 2008. Sales related costs, general and administrative salaries, and stock compensation expense all increased as a percentage of revenues compared to the prior year comparable period.

Depreciation. Depreciation expense decreased 29% to $0.4 million for the three months ended June 30, 2009 from $0.6 million for the three months ended June 30, 2008. The decrease in depreciation expense is mainly attributable to various assets becoming fully depreciated during 2008 and 2009. Depreciation expense as a percentage of services revenue, excluding reimbursable expenses, was 1.0% for the three months ended June 30, 2009 and 2008.

Amortization. Amortization expense decreased 9% to $1.1 million for the three months ended June 30, 2009 from $1.2 million for the three months ended June 30, 2008. The decrease in amortization expense reflects the completion of the amortization of certain acquired intangible assets.

Net Interest Income. We had interest income of $90,000, net of interest expense, for the three months ended June 30, 2009, compared to interest income of $89,000, net of interest expense, for the three months ended June 30, 2008. Interest income is earned primarily on the note receivable and the money market account. Our average interest rate for the three months ended June 30, 2009 decreased by more than 70% compared to the same prior year period, while average cash balances increased by $11.8 million.

Provision for Income Taxes. We provide for federal, state and foreign income taxes at the applicable statutory rates adjusted for non-deductible expenses. Our effective tax rate increased to 186.0% for the three months ended June 30, 2009 from 41.3% for the three months ended June 30, 2008. The increase in the effective rate is due primarily to the magnified effect of certain state taxes, which are generally based on gross receipts instead of income, permanent items such as meals and entertainment, and non-deductible executive compensation under
Section 162(m) of the Internal Revenue Code (the "Code"), relative to a smaller income base.

Six months ended June 30, 2009 compared to six months ended June 30, 2008

Revenues. Total revenues decreased 17% to $96.2 million for the six months ended June 30, 2009 from $116.4 million for the six months ended June 30, 2008. Revenue contraction has occurred during the first half of the year due to the decreased demand in the IT industry and delays in IT spending by customers, which we believe is related to the general economic slowdown.

Services revenues decreased 19% to $85.7 million for the six months ended June 30, 2009 from $105.7 million for the six months ended June 30, 2008.

Software and hardware revenues increased 51% to $5.7 million for the six months ended June 30, 2009 from $3.8 million for the six months ended June 30, 2008 due mainly to the renewal of several larger software licenses and an overall increase in software sales during the first quarter of 2009. Reimbursable expenses decreased 31% to $4.8 million for the six months ended June 30, 2009 from $6.9 million for the six months ended June 30, 2008 as a result of the decline in services revenue. We do not realize any profit on reimbursable expenses.

Cost of Revenues. Cost of revenues decreased 10% to $71.2 million for the six months ended June 30, 2009 from $78.7 million for the six months ended June 30, 2008. The decrease in cost of revenues is directly related to the decrease in revenues and management's efforts in managing costs, primarily headcount. The average number of professionals performing services, including subcontractors, decreased to 1,038 for the six months ended June 30, 2009 from 1,167 for the six months ended June 30, 2008. Management will continue to manage the cost structure to match demand.

Gross Margin. Gross margin decreased 34% to $25.0 million for the six months ended June 30, 2009 from $37.7 million for the six months ended June 30, 2008. Gross margin as a percentage of revenues decreased to 26.0% for the six months ended June 30, 2009 from 32.4% for the six months ended June 30, 2008 due to a decrease in services and software and hardware gross margin. Services gross margin, excluding reimbursable expenses, decreased to 28.6% or $24.5 million for the six months ended June 30, 2009 from 35.1% or $37.1 million for the six months ended June 30, 2008. The decrease in services gross margin is due primarily to higher labor related costs as a result of lower utilization. The average utilization rate of our professionals, excluding subcontractors, decreased to 76% for the six months ended June 30, 2009 compared to 81% for the six months ended June 30, 2008. The Company's average bill rate decreased slightly to $106 per hour for the six months ended June 30, 2009 from $107 per hour for the six months ended June 30, 2008. Software and hardware gross margin decreased to 9.2% or $0.5 million for the six months ended June 30, 2009 from 15.5% or $0.6 million for the six months ended June 30, 2008.

Selling, General and Administrative. SG&A expenses decreased 8% to $20.7 million for the six months ended June 30, 2009 from $22.3 million for the six months ended June 30, 2008. SG&A expenses, as a percentage of revenues, increased to 21.5% for the six months ended June 30, 2009 from 19.2% for the six months ended June 30, 2008. Sales related costs, general and administrative salaries, and stock compensation expense all increased as a percentage of revenues compared to the prior year comparable period.

Depreciation. Depreciation expense decreased 21% to $0.9 million for the six months ended June 30, 2009 from $1.1 million for the six months ended June 30, 2008. The decrease in depreciation expense is mainly attributable to various assets becoming fully depreciated during 2008 and 2009. Depreciation expense as a percentage of services revenue, excluding reimbursable expenses, was 1.0% for the six months ended June 30, 2009 and 2008.

Amortization. Amortization expense decreased 9% to $2.2 million for the six months ended June 30, 2009 from $2.4 million for the six months ended June 30, 2008. The decrease in amortization expense reflects the completion of the amortization of certain acquired intangible assets and the impact of the impairment charge recorded in the fourth quarter of 2008.

Net Interest Income. We had interest income of $188,000, net of interest expense, for the six months ended June 30, 2009, compared to interest income of $192,000, net of interest expense, for the six months ended June 30, 2008. Interest income is earned primarily on the note receivable and the money market account. Our average interest rate for the six months ended June 30, 2009 decreased by almost 70% compared to the same prior year period, while average cash balances increased $12.0 million.

Other Income or Expense. We had other income of $258,000 for the six months ended June 30, 2009, net of other expense, compared to other expense of $45,000, net of other income, for the six months ended June 30, 2008. Other income for the six months ended June 30, 2009 is primarily related to government incentives received by our China operations.

Provision for Income Taxes. We provide for federal, state and foreign income taxes at the applicable statutory rates adjusted for non-deductible expenses. Our effective tax rate increased to 58.8% for the six months ended June 30, 2009 from 41.1% for the six months ended June 30, 2008. The increase in the effective rate is due primarily to the magnified effect of certain state taxes, which are generally based on gross receipts instead of income, permanent items such as meals and entertainment, and non-deductible executive compensation under Section 162(m) of the Code, relative to a smaller income base.

Liquidity and Capital Resources

Selected measures of liquidity and capital resources are as follows:
                                                                 As of            As of
                                                                June 30,       December 31,
                                                                  2009             2008
                                                                       (in millions)
Cash and cash equivalents                                      $     31.3     $         22.9
Working capital (including cash and cash equivalents)          $     57.0     $         56.2
Available borrowing capacity under credit facility (1)         $     46.1     $         49.9

(1) Available borrowing capacity under our credit facility is based on the Company's calculation of the financial covenants as of June 30, 2009. See Note 8, Line of Credit, for further discussion.

Net Cash Provided By Operating Activities

Net cash provided by operating activities for the six months ended June 30, 2009 was $15.8 million compared to $10.9 million for the six months ended June 30, 2008. For the six months ended June 30, 2009, the components of operating cash flows were net income of $0.7 million plus non-cash charges of $8.2 million and net working capital reductions of $6.9 million. The primary components of operating cash flows for the six months ended June 30, 2008 were net income of $7.1 million plus non-cash charges of $7.6 million, offset by investments in working capital of $3.8 million. The Company's days sales outstanding as of June 30, 2009 decreased to 72 days from 75 days at June 30, 2008.

During the six months ended June 30, 2009, we used $0.3 million in cash primarily to purchase equipment and develop software. During the six months ended June 30, 2008, we used $0.9 million in cash to purchase equipment and develop software and $0.3 million in cash to pay certain acquisition related costs.

Net Cash Provided By Financing Activities

During the six months ended June 30, 2009, we made no draws from our line of credit. We received proceeds of $0.3 million from exercises of stock options and sales of stock through our Employee Stock Purchase Plan and we had a reduction in tax benefits of $0.5 million due to the decline in the Company's share price of underlying stock awards. We used $7.0 million to repurchase shares of the Company's common stock through the stock repurchase program. For the six months ended June 30, 2008, we made no draws from our line of credit; however, we made payments of $0.4 million in fees to establish our new credit facility. We received proceeds of $0.7 million from exercises of stock options and sales of stock through our Employee Stock Purchase Plan, and we realized tax benefits related to stock option exercises and restricted stock vesting of $0.2 million.

Availability of Funds from Bank Line of Credit Facility

In May 2008, the Company entered into a Credit Agreement (the "Credit Agreement") with Silicon Valley Bank ("SVB") and KeyBank National Association ("KeyBank"). The Credit Agreement provides for revolving credit borrowings up to a maximum principal amount of $50 million, subject to a commitment increase of $25 million. The Credit Agreement also allows for the issuance of letters of credit in the aggregate amount of up to $500,000 at any one time; outstanding letters of credit reduce the credit available for revolving credit borrowings. The credit facility will be used for ongoing, general corporate purposes. Substantially all of our assets are pledged to secure the credit facility. In July 2009, U.S. Bank National Association ("U.S. Bank") assumed $10 million of KeyBank's commitment.

All outstanding amounts owed under the Credit Agreement become due and payable no later than the final maturity date of May 30, 2012. Borrowings under the credit facility bear interest at the Company's option at SVB's prime rate (4.00% on June 30, 2009) plus a margin ranging from 0.00% to 0.50% or one-month LIBOR (0.41% on June 30, 2009) plus a margin ranging from 2.50% to 3.00%. The additional margin amount is dependent on the amount of outstanding borrowings.
As of June 30, 2009, the Company had $49.9 million of maximum borrowing capacity. The Company will incur an annual commitment fee of 0.30% on the unused portion of the line of credit.

As of June 30, 2009, we were in compliance with all covenants under our credit facility and we expect to be in compliance during the next twelve months. Based on the financial covenants described above as of June 30, 2009, the amount of the Company's available borrowing capacity is approximately $46.1 million. The Company's ongoing available borrowing capacity under the Credit Agreement is dependent on operating performance and its impact on the financial covenant calculations.

Stock Repurchase Program

In 2008, the Company's Board of Directors authorized the repurchase of up to $20.0 million of the Company's common stock. In 2009, the Company's Board of Directors authorized the repurchase of up to an additional $10.0 million of the Company's common stock for a total repurchase program of $30.0 million. The program expires on June 30, 2011.

The Company has established a written trading plan in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934 (the "Exchange Act"), under which it will make a portion of its Company stock repurchases. Additional repurchases will be at times and in amounts as the Company deems appropriate and will be made through open market transactions in compliance with Rule 10b-18 of the Exchange Act, subject to market conditions, applicable legal requirements and other factors.

Since the program's inception in 2008, the Company has repurchased approximately $16.2 million of its outstanding common stock through June 30, 2009.

Lease Obligations

There were no material changes outside the ordinary course of business in lease obligations or other contractual obligations in the first six months of 2009.

Shelf Registration Statement

In July 2008, we filed a shelf registration statement with the SEC to allow for offers and sales of our common stock from time to time. Approximately four million shares of common stock may be sold under this registration statement if we choose to do so. We currently have no intent to use the shelf registration to complete an offering.

Conclusion

We expect to fund our operations from cash on hand, cash generated from operations and short-term borrowings as necessary from our credit facility. We believe that the currently available funds, access to capital from our credit facility and cash flows generated from operations will be sufficient to meet our working capital requirements and other capital needs for the next twelve months.

Critical Accounting Policies

Our accounting policies are fully described in Note 2, Summary of Significant Accounting Policies, to our Consolidated Financial Statements in our 2008 Annual Report on Form 10-K. The Company believes its most critical accounting policies include revenue recognition, accounting for goodwill and intangible assets, purchase accounting, accounting for stock-based compensation, and income taxes.