**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-K**





(Mark
      one)


x
            Annual
                report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934 for the fiscal year ended December 31,
                2006





o
            Transition
                report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934


Commission
      file number 001-15169





**PERFICIENT,
      INC.**


(Exact
      Name of Registrant as Specified in Its Charter)




**Delaware**
              (State
                or other jurisdiction of
              incorporation
                or organization)
            **No.
                74-2853258**
              (I.R.S.
                Employer Identification No.)





**1120
      South Capital of Texas Highway, Building 3, Suite 220**


**Austin,
      Texas 78746**


(Address
      of principal executive offices)




**(512)
      531-6000**


(Registrant's
      telephone number, including area code)




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


**Common
      Stock, $0.001 par value**


(Title
      of
      Class)




Securities
      registered pursuant to Section 12(g) of the 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 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 Securities Exchange Act of 1934 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 (Sec.229.405 of this chapter) 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.  ̈





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.


Large
                  accelerated filer o
              Accelerated
                  filer þ
              Non-accelerated
                  filer o





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




The
      aggregate market value of the voting stock held by non-affiliates of the Company
      was approximately $275.5 million on June 30, 2006 based on the last
      reported sale price of the Company's common stock on the NASDAQ National Market
      on June 30, 2006.





As
      of
      February 26, 2007, there were 27,288,210 shares of Common Stock
      outstanding.





Portions
      of the definitive proxy statement in connection with the 2007 Annual Meeting
      of
      Stockholders, which will be filed with the Securities and Exchange Commission
      no
      later than April 30, 2007, are incorporated by reference in Part III of this
      Form 10-K.










**TABLE
      OF CONTENTS**






PART
                IItem
                1.
            Business.
            1Item
                1A.
            Risk
                Factors.
            9Item
                1B.
            Unresolved
                Staff Comments.
            14Item
                2.
            Properties.
            15Item
                3.
            Legal
                Proceedings.
            15Item
                4.
            Submission
                of Matters to a Vote of Security Holders.
            15PART
                IIItem
                5.
            Market
                for Registrant's Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities.
            16Item
                6.
            Selected
                Financial Data.
            17Item
                7.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations.
            18Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market Risk.
            27Item
                8.
            Financial
                Statements and Supplementary Data.
            28Item
                9.
            Changes
                In and Disagreements With Accountants on Accounting and Financial
                Disclosure.
            52Item
                9A.
            Controls
                and Procedures.
            52Item
                9B.
            Other
                Information.
            53PART
                IIIItem
                10.
            Directors,
                Executive Officers and Corporate Governance.
            55Item
                11.
            Executive
                Compensation.
            57Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters.
            57Item
                13.
            Certain
                Relationships and Related Transactions, and Director
                Independence.
            57Item
                14.
            Principal
                Accounting Fees and Services.
            57PART
                IVItem
                15.
            Exhibits
                and Financial Statement Schedules.
            58




i





**PART
      I**





**Item
      1.  Business.**




**Overview**




We
      are an
      information technology consulting firm serving Global 2000 and other large
      enterprise companies throughout 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 eBusiness
      solutions using third party and custom software products developed by our
      partners. Our solutions include custom applications, portals and collaboration,
      eCommerce, online customer 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 the changing demands of an
      increasingly global, Internet-driven and competitive marketplace.




Through
      our experience in developing and delivering eBusiness solutions for a large
      number of Global 2000 clients, we have acquired significant domain expertise
      that we believe differentiates our firm. We use expert project teams that we
      believe deliver high-value, measurable results by working collaboratively with
      clients and their partners through a user-centered, technology-based and
      business-driven solutions methodology. We believe this approach enhances
      return-on-investment for our clients by significantly reducing the time and
      risk
      associated with designing and implementing eBusiness integration
      solutions.





We
      are
      expanding through a combination of organic growth and acquisitions. We believe
      that information technology consulting is a fragmented industry and that there
      are a substantial number of privately held information technology consulting
      firms in our target markets that can be acquired on strategically beneficial
      and
      financially accretive terms. We have a track record of successfully identifying,
      executing and integrating acquisitions that add strategic value to our business.
      Over the past three years, we have acquired and integrated eight information
      technology consulting firms, three of which were acquired in 2006. We also
      completed an acquisition in February 2007. We believe that we can achieve
      significantly faster growth in revenues and profitability through a combination
      of organic growth and acquisitions than we could through organic growth
      alone.




We
      believe we have built one of the leading independent information technology
      consulting firms in the United States. We serve our customers from our network
      of fifteen offices throughout the United States and Canada. In addition, we
      have
      over 350 colleagues who are part of “national” business units, who travel
      extensively to serve clients throughout the United States. Our future growth
      plan includes expanding our business throughout the United States, both through
      expansion of our national travel practices and through opening new offices,
      both
      organically and through acquisitions. In 2006, 2005 and 2004, 99%, 99%, and
      98%
      of our revenues, respectively, was derived from clients in the United States
      while 1%, 1% and 2% of our revenues, respectively, was derived from clients
      in
      Canada. Over 99% of our total assets were located in the United States in 2006
      and 2005, with the remainder located in Canada.




We
      place
      strong emphasis on building lasting relationships with clients. Over the past
      three years ending December 31, 2006, an average of 81% of revenues, excluding
      from the calculation for any single period revenues from acquisitions completed
      in that single period, was derived from clients who continued to utilize our
      services from the prior year. We have also built meaningful partnerships with
      software providers, most notably IBM, whose products we use to design and
      implement solutions for our clients. These partnerships enable us to reduce
      our
      cost of sales and sales cycle times and increase success rates through
      leveraging our partners' marketing efforts and endorsements.




**Industry
      Background**




A
      number
      of factors are shaping the information technology industry and, in particular,
      the market for our information technology consulting services:





*United
      States Economic Recovery* .
      The
      years 2001 and 2002 saw a protracted downturn in information technology spending
      as a result of an economic recession in the United States and the collapse
      of
      the Internet “bubble.” The information technology consulting industry began to
      experience a recovery in the second half of 2003 which continued through 2006.
      The industry is benefiting from the overall improvement in the United States
      economy as well as a need by businesses to continue the transformation that
      they
      began in the 1990s with the commercialization of the Internet. It is expected
      that information technology services spending will continue to increase in
      the
      foreseeable future. According to independent market research firm Gartner
      Dataquest, total information technology services spending in North America
      is
      expected to achieve a 6.3% compound annual growth rate through 2010, resulting
      in a $365 billion market.




1




*Need
      to Rationalize Complex, Heterogeneous Enterprise Technology
      Environments* .
      Over
      the past 15 years, the information systems of many Global 2000 and large
      enterprise companies have evolved from traditional mainframe-based systems
      to
      include distributed computing environments. This evolution has been driven
      by
      the benefits offered by distributed computing, including lower incremental
      technology costs, faster application development and deployment, increased
      flexibility and improved access to business information. Organizations have
      also
      widely installed enterprise resource planning (ERP), supply chain management
      (SCM), and customer relationship management (CRM), applications in order to
      streamline internal processes and enable communication and
      collaboration.




As
      a
      result of investment in these different technologies, organizations now have
      complex enterprise technology environments with incompatible technologies and
      high costs of integration. These increases in complexity, cost and risk,
      combined with the business and technology transformation caused by the
      commercialization of the Internet, have created demand for information
      technology consultants with experience in enabling the integration of disparate
      platforms and leveraging Internet-based technologies to support business and
      technology goals.




*Increased
      Competitive Pressures* .
      The
      marketplace continues to become increasingly global, Internet-driven and
      competitive. To gain and maintain a competitive advantage in this environment,
      Global 2000 and large enterprise companies seek real-time access to critical
      business applications and information that enables quality business decisions
      based on the latest possible information, flexible business processes and
      systems that respond quickly to market opportunities, improved quality and
      lower
      cost customer care through online customer self-service and provisioning,
      reduced supply chain costs and improved logistics through processes and systems
      integrated online to suppliers, partners and distributors and increased employee
      productivity through better information flow and collaboration.




Enabling
      these business goals requires integrating, automating and extending business
      processes, technology infrastructure and software applications end-to-end within
      an organization and with key partners, suppliers and customers. This requires
      the ability not only to integrate the disparate information resource types,
      databases, legacy mainframe applications, packaged application software, custom
      applications, trading partners, people and Web services, but also to manage
      the
      business processes that govern the interactions between these resources so
      that
      organizations can engage in “real-time business.” Real-time business refers to
      the use of current information in business to execute critical business
      processes.




These
      factors are driving increased spending on software and related consulting
      services in the areas of application integration, middleware and portals (AIMP),
      as these segments play critical roles in the integration between new and
      existing systems and the extension of those systems to customers, suppliers
      and
      partners via the Internet. Companies are expected to increase software spending
      on integration broker suites, enterprise portal services, application platform
      suites and message-oriented middleware. As companies increase spending on
      software, their overall spending on services will also increase, often by a
      multiplier of each dollar spent on software.





*Quarterly
      Fluctuations.* Our
      quarterly operating results are subject to seasonal fluctuations. The first
      and
      fourth quarters are impacted by professional staff vacation and holidays, as
      well as the timing of buying decisions by clients. Our results will also
      fluctuate, in part, based on whether we succeed in counterbalancing periodic
      declines in services revenues when a project or engagement is completed or
      cancelled by entering into arrangements to provide additional services to the
      same or other clients. Software sales are seasonal as well, with generally
      higher software demand during the third and fourth quarter. These and other
      seasonal factors may contribute to fluctuations in our operating results from
      quarter-to-quarter.




**Competitive
      Strengths**




We
      believe our competitive strengths include:




§
            *Domain
                Expertise*.
                We have acquired significant domain expertise in a core set of eBusiness
                solutions and software platforms. These solutions include custom
                applications, portals and collaboration, eCommerce, customer relationship
                management, enterprise content management, business intelligence,
                business
                integration, mobile technology solutions, technology platform
                implementations and service oriented architectures and enterprise
                service
                bus. The platforms in which we have significant domain expertise
                and on
                which these solutions are built include IBM WebSphere, TIBCO
                BusinessWorks, Microsoft.NET, Oracle-Seibel, Cognos and Documentum,
                among
                others.




2




§
            *Delivery
                Model and Methodology*.
                We believe our significant domain expertise enables us to provide
                high-value solutions through expert project teams that deliver measurable
                results by working collaboratively with clients through a user-centered,
                technology-based and business-driven solutions methodology. Our eNable
                Methodology, a unique and proven execution process map we developed,
                allows for repeatable, high quality services delivery. The eNable
                Methodology leverages the thought leadership of our senior strategists
                and
                practitioners to support the client project team and focuses on
                transforming our clients' business processes to provide enhanced
                customer
                value and operating efficiency, enabled by Web technology. As a result,
                we
                believe we are able to offer our clients the dedicated attention
                that
                small firms usually provide and the delivery and project management
                that
                larger firms usually offer.




§
            *Client
                Relationships*.
                We have built a track record of quality solutions and client satisfaction
                through the timely, efficient and successful completion of numerous
                projects for our clients. As a result, we have established long-term
                relationships with many of our clients who continue to engage us
                for
                additional projects and serve as references for us. In the year ending
                December 31, 2006, an average of 81% of revenues, excluding from
                the
                calculation for any single period revenues from acquisitions completed
                in
                that single period, was derived from clients who continued to utilize
                our
                services from the prior year.




§
            *Vendor
                Partnerships and Endorsements*.
                We have built meaningful partnerships with software providers, including
                IBM, whose products we use to design and implement solutions for
                our
                clients. These partnerships enable us to reduce our cost of sales
                and
                sales cycle times and increase win rates by leveraging our partners'
                marketing efforts and endorsements. We also serve as a sales channel
                for
                our partners, helping them market and sell their software products.
                We are
                a Premier IBM business partner, a TeamTIBCO partner, a Microsoft
                Gold
                Certified Partner, a Certified Oracle Partner, and a Documentum Select
                Services Team Partner.




§
            *Geographic
                Focus*.
                We believe we have built one of the leading independent information
                technology consulting firms in the United States. We serve our clients
                from our network of fifteen offices throughout the United States
                and
                Canada. In addition, we have over 350 colleagues who are part of
                “national” business units, who travel extensively to serve clients
                throughout the United States. Our future growth plan includes expanding
                our business throughout the United States through expansion of our
                national travel practices, both organically and through acquisition.
                We
                believe our network provides a competitive platform from which to
                expand
                nationally.




§
            *Emerging
                Offshore Capability*.
                We have an exclusive supplier relationship with a small offshore
                development facility in Bitoli, Macedonia. Through this facility
                we
                contract with a team of professionals with expertise in IBM, TIBCO
                and
                Microsoft technologies and with specializations that include application
                development, adapter and interface development, quality assurance
                and
                testing, monitoring and support, product development, platform migration,
                and portal development. This expertise, as well as our partnerships
                with
                offshore services providers based in India, will enhance our ability
                to
                deliver solutions.




**Our
      Solutions**




We
      help
      clients gain competitive advantage by using Internet-based technologies to
      make
      their businesses more responsive to market opportunities and threats, strengthen
      relationships with customers, suppliers and partners, improve productivity
      and
      reduce information technology costs. Our eBusiness solutions enable these
      benefits by developing, integrating, automating and extending business
      processes, technology infrastructure and software applications end-to-end within
      an organization and with key partners, suppliers and customers. This provides
      real-time access to critical business applications and information and a
      scalable, reliable, secure and cost-effective technology infrastructure that
      enables clients to:




§
            give
                managers and executives the information they need to make quality
                business
                decisions and dynamically adapt their business processes and systems
                to
                respond to client demands, market opportunities or business
                problems;




§
            improve
                the quality and lower the cost of customer acquisition and care through
                Web-based customer self-service and
                provisioning;




§
            reduce
                supply chain costs and improve logistics by flexibly and quickly
                integrating processes and systems and making relevant real-time
                information and applications available online to suppliers, partners
                and
                distributors;




§
            increase
                the effectiveness and value of legacy enterprise technology infrastructure
                investments by enabling faster application development and deployment,
                increased flexibility and lower management costs;
                and




§
            increase
                employee productivity through better information flow and collaboration
                capabilities and by automating routine processes to enable focus
                on unique
                problems and opportunities.




3





Our
      eBusiness integration solutions include the following:




§
            *Custom
                applications*.
                We design, develop, implement and integrate custom application solutions
                that deliver enterprise-specific functionality to meet the unique
                requirements and needs of our clients. Perficient's substantial experience
                with platforms including J2EE, .Net and open-source - plus our flexible
                delivery structure - enables enterprises of all types to leverage
                cutting-edge technologies to meet business-driven
                needs.




§
            *Enterprise
                portals and collaboration*.
                We design, develop, implement and integrate secure and scalable enterprise
                portals for our clients and their customers, suppliers and partners
                that
                include searchable data systems, collaborative systems for process
                improvement, transaction processing, unified and extended reporting
                and
                content management and personalization.§
            *eCommerce*.
                We design, develop and implement secure and reliable ecommerce
                infrastructures that dynamically integrate with back-end systems
                and
                complementary applications that provide for transaction volume scalability
                and sophisticated content
                management.




§
            *Online
                customer relationship management (eCRM)*.
                We design, develop and implement advanced eCRM solutions that facilitate
                customer acquisition, service and support, sales, and marketing by
                understanding our customers' needs through interviews, facilitated
                requirements gathering sessions and call center analysis, developing
                an
                iterative, prototype driven solution and integrating the solution
                to
                legacy processes and applications.




§
            *Enterprise
                content management*.
                We design, develop and implement Enterprise Content Management (ECM)
                solutions that enable the management of all unstructured information
                regardless of file type or format. Our ECM solutions can facilitate
                the
                creation of new content and/or provide easy access and retrieval
                of
                existing digital assets from other enterprise tools such as enterprise
                resource planning (ERP), customer relationship management or legacy
                applications. Perficient's ECM solutions include Enterprise Imaging
                and
                Document Management, Web Content Management, Digital Asset Management,
                Enterprise Records Management, Compliance and Control, Business Process
                Management and Collaboration and Enterprise
                Search.




§
            *Business
                intelligence*.
                We design, develop and implement business intelligence solutions
                that
                allow companies to interpret and act upon accurate, timely and integrated
                information. By classifying, aggregating and correlating data into
                meaningful business information, business intelligence solutions
                help our
                clients make more informed business decisions. Our business intelligence
                solutions allow our clients to transform data into knowledge for
                quick and
                effective decision making and can include information strategy, data
                warehousing and business analytics and
                reporting.




§
            *Business
                integration*.
                We design, develop and implement business integration solutions that
                allow
                our clients to integrate all of their business processes end-to-end
                and
                across the enterprise. Truly innovative companies are extending those
                processes, and eliminating functional friction, between the enterprise
                and
                core customers and partners. Our business integration solutions can
                extend
                and extract core applications, reduce infrastructure strains and
                cost,
                Web-enable legacy applications, provide real-time insight into business
                metrics and introduce efficiencies for customers, suppliers and
                partners.§
            *Mobile
                technology solutions*.
                We design, develop and implement mobile technology solutions that
                deliver
                wireless capabilities to carriers, Mobile Virtual Network Operators
                (MVNO), Mobile Virtual Network Enablers (MVNE), and the enterprise.
                Perficient's expertise with wireless technologies such as SIP, MMS,
                WAP,
                and GPRS are coupled with our deep expertise in mobile content delivery.
                Our secure and scalable solutions can include mobile content delivery
                systems; wireless value-added services including SIP, IMS, SMS, MMS
                and
                Push-to-Talk; custom developed applications to pervasive devices
                including
                Symbian, WML, J2ME, MIDP, Linux; and customer care solutions including
                provisioning, mediation, rating and billing.§
            *Technology
                platform implementations*.
                We design, develop and implement technology platform implementations
                that
                allow our clients to establish a robust, reliable Internet-based
                infrastructure for integrated business applications which extend
                enterprise technology assets to employees, customers, suppliers and
                partners. Our Platform Services include application server selection,
                architecture planning, installation and configuration, clustering
                for
                availability, performance assessment and issue remediation, security
                services and technology migrations.




§
            *Service
                oriented architectures and enterprise service bus*.
                We design, develop and implement service oriented architecture and
                enterprise service bus solutions that allow our clients to quickly
                adapt
                their business processes to respond to new market opportunities or
                competitive threats by taking advantage of business strategies supported
                by flexible business applications and IT
                infrastructures.




4





We
      conceive, build and implement these solutions through a comprehensive set of
      services including business strategy, user-centered design, systems
      architecture, custom application development, technology integration, package
      implementation and managed services.




In
      addition to our eBusiness solution services, we offer education and mentoring
      services to our clients. We operate an IBM-certified advanced training facility
      in Chicago, Illinois, where we provide our clients both customized and
      established curriculum of courses and other education services in areas
      including object-oriented analysis and design immersion, J2EE, user experience,
      and an IBM Course Suite with over 20 distinct courses covering the IBM WebSphere
      product suite. We also leverage our education practice and training facility
      to
      provide continuing education and professional development opportunities for
      our
      colleagues.




**Our
      Solutions Methodology**




Our
      approach to solutions design and delivery is user-centered, technology-based
      and
      business-driven and is:




§
            iterative
                and results oriented;




§
            centered
                around a flexible and repeatable
                framework;




§
            collaborative
                and customer-centered in that we work with not only our clients but
                with
                our clients' customers in developing our
                solutions;




§
            focused
                on delivering high value, measurable results;
                and




§
            grounded
                by industry leading project
                management.




The
      eNable Methodology allows for repeatable, high quality services delivery through
      a unique and proven execution process map. Our methodology is grounded in a
      thorough understanding of our clients' overall business strategy and competitive
      environment. The eNable Methodology leverages the thought leadership of our
      senior strategists and practitioners and focuses on transforming our clients'
      business processes, applications and technology infrastructure. The eNable
      Methodology focuses on business value or return-on-investment, with specific
      objectives and benchmarks established at the outset.




**Our
      Strategy**




Our
      goal
      is to be the premier technology management consulting firm in the United States.
      To achieve our goal, our strategy is:




§
              *Grow
                  Relationships with Existing and New Clients*.
                  We intend to continue to solidify and expand enduring relationships
                  with
                  our existing clients and to develop long-term relationships with
                  new
                  clients by providing them with solutions that generate a demonstrable,
                  positive return-on-investment. Our incentive plan rewards our project
                  managers to work in conjunction with our sales people to expand
                  the nature
                  and scope of our engagements with existing clients.


§
              *Continue
                  Making Disciplined Acquisitions*.
                  The information technology consulting market is a fragmented industry
                  and
                  we believe there are a substantial number of smaller privately
                  held
                  information technology consulting firms that can be acquired and
                  be
                  immediately accretive to our financial results. We have a track
                  record of
                  successfully identifying, executing and integrating acquisitions
                  that add
                  strategic value to our business. Our established culture and
                  infrastructure positions us to successfully integrate each acquired
                  company, while continuing to offer effective solutions to our clients.
                  Over the past three years, we have acquired and successfully integrated
                  eight privately held information technology consulting firms including
                  three in 2006. We continue to actively look for attractive acquisitions
                  that leverage our core expertise and look to expand our capabilities
                  and
                  geographic presence.


§
              *Expand
                  Nationally.*We
                  believe we have built one of the leading independent information
                  technology consulting firms in the United States. We serve our
                  customers
                  from our network of fifteen offices throughout the central United
                  States
                  and Canada. In addition, we have over 350 colleagues who are part
                  of
                  “national” business units, who travel extensively to serve clients
                  throughout the United States. Our future growth plan includes expanding
                  our business, both through expansion of our national travel practices and
                  through opening new offices, both organically and through acquisition.
                  We
                  believe our network provides a competitive platform.


§
            *Enhance
                Brand Visibility.*Our focus on a core set of eBusiness solutions, applications and
                software
                platforms and a targeted customer and geographic market has given
                us
                significant market visibility. In addition, we believe we have achieved
                critical mass in size, which has significantly enhanced our visibility
                among prospective clients, employees and software vendors. As we
                continue
                to grow our business, we intend to highlight to customers and prospective
                customers our thought leadership in eBusiness solutions and infrastructure
                software technology platforms.**




5





§
            *Invest
                in Our People and Culture*.
                We have developed a culture built on teamwork, a passion for technology
                and client service, and a focus on cost control and the bottom line.
                As a
                people-based business, we continue to invest in the development of
                our
                professionals and to provide them with entrepreneurial opportunities
                and
                career development and advancement. Our technology, business consulting
                and project management ensure that client team best practices are
                being
                developed across the company and our recognition program rewards
                teams for
                implementing those practices. We believe this results in a team of
                motivated professionals with the ability to deliver high-quality
                and
                high-value services for our
                clients.




§
            *Leverage
                Existing and Pursue New Strategic Alliances*.
                We intend to continue to develop alliances that complement our core
                competencies. Our alliance strategy is targeted at leading business
                advisory companies and technology providers and allows us to take
                advantage of compelling technologies in a mutually beneficial and
                cost-competitive manner. Many of these relationships, and in particular
                IBM, result in our partners, or their clients, utilizing us as the
                services firm of choice.




§
            *Use
                Offshore Services When Appropriate*.
                Our solutions and services are typically delivered at the customer
                site
                and require a significant degree of customer participation, interaction
                and specialized technology expertise which tends to offset the potential
                savings from utilizing offshore resources. However, there are projects
                in
                which we can use lower cost offshore technology professionals to
                perform
                less specialized roles on our solution engagements, enabling us to
                fully
                leverage our United States colleagues while offering our clients
                a highly
                competitive blended average rate. We have established partnerships
                with a
                number of offshore staffing firms from whom we source offshore technology
                professionals on an as-needed basis. Additionally, we maintain an
                exclusive arrangement with an offshore development and delivery firm
                in
                Macedonia.




**Sales
      and Marketing**




As
      of
      December 31, 2006, we had a 36 person direct solutions-oriented sales force.
      Our
      sales team is experienced and connected through a common services portfolio,
      sales process and performance management system. Our sales process utilizes
      project pursuit teams that include those of our information technology
      professionals best suited to address a particular prospective client's needs.
      We
      reward our sales force for developing and maintaining relationships with our
      clients and seeking out follow-on engagements as well as leveraging those
      relationships to forge new ones in different areas of the business and with
      our
      clients' business partners. More than 85% of our sales are executed by our
      direct sales force.




Our
      target client base includes companies in the United States with annual revenues
      in excess of $1 billion. We believe this market segment can generate the repeat
      business that is a fundamental part of our growth plan. We pursue only solutions
      opportunities where our domain expertise and delivery track record give us
      a
      competitive advantage. We also typically target engagements of up to $3 million
      in fees, which we believe to be below the target project range of most large
      systems integrators and beyond the delivery capabilities of most local
      boutiques.




We
      have
      sales and marketing partnerships with software vendors including IBM
      Corporation, TIBCO Software, Inc., Microsoft Corporation, Oracle-Siebel, Cognos,
      Inc., Art Technology Group, Inc., or ATG, Wily Technology, Inc., Bowstreet,
      Adobe Systems Inc., and Stellent, Inc. These companies are key vendors of open
      standards based software commonly referred to as middleware application servers,
      enterprise application integration platforms, business process management,
      business activity monitoring and business intelligence applications and
      enterprise portal server software. Our direct sales force works in tandem with
      the sales and marketing groups of our partners to identify potential new clients
      and projects. Our partnerships with these companies enable us to reduce our
      cost
      of sales and sales cycle times and increase win rates by leveraging our
      partners' marketing efforts and endorsements. In particular, the IBM software
      sales channel provides us with significant sales lead flow and joint selling
      opportunities.




As
      we
      continue to grow our business, we intend to highlight our thought leadership
      in
      eBusiness solutions and infrastructure software technology platforms. Our
      efforts will include technology white papers, by-lined articles by our
      colleagues in technology and trade publications, media and industry analyst
      events, sponsorship of and participation in targeted industry conferences and
      trade shows.




**Clients**




During
      the year ended December 31, 2006, we provided services to more
      than 385 customers. No one customer provided more than 10% of our total
      revenues in 2006 or 2005. For the year ended December 31, 2004, IBM supplied
      17%
      of our total revenues. No other customer provided more than 10% of our total
      revenues in 2004.




6





**Competition**




The
      market for the information technology consulting services we provide is
      competitive and has low barriers to entry. We believe that our competitors
      fall
      into several categories, including:




§
              small
                  local consulting firms that operate in no more than one or two
                  geographic
                  regions;


§
            regional
                consulting firms such as Software Architects, Inc., Haverstick Consulting,
                Inc. and Quilogy, Inc.;




§
            national
                consulting firms, such as Answerthink, Inc., Accenture, BearingPoint,
                Inc., Ciber, Inc., Electronic Data Systems Corporation and Sapient
                Corporation;




§
            in-house
                professional services organizations of software companies;
                and




§
            to
                a limited extent, offshore providers such as Cognizant Technology
                Solutions Corporation, Infosys Technologies Limited, Satyam Computer
                Services Limited and Wipro Limited.




We
      believe that the principal competitive factors affecting our market include
      domain expertise, track record and customer references, quality of proposed
      solutions, service quality and performance, reliability, scalability and
      features of the software platforms upon which the solutions are based, and
      the
      ability to implement solutions quickly and respond on a timely basis to customer
      needs. In addition, because of the relatively low barriers to entry into this
      market, we expect to face additional competition from new entrants. We expect
      competition from offshore outsourcing and development companies to increase
      in
      the future.




Some
      of
      our competitors have longer operating histories, larger client bases and greater
      name recognition and possess significantly greater financial, technical and
      marketing resources than we do. As a result, these competitors may be better
      able to attract customers to which we market our services and adapt more quickly
      to new technologies or evolving customer or industry requirements.




**Employees**




As
      of
      December 31, 2006, we had 972 employees, 853 of which were billable
      professionals, including 198 subcontractors, and 119 of which were involved
      in
      sales, general administration and marketing. Our employees are not represented
      by a collective bargaining agreement and we have never experienced a strike
      or
      similar work stoppage. We consider our relations with our employees to be
      good.




*Recruiting* .
      We are
      dedicated to hiring, developing and retaining experienced, motivated technology
      professionals who combine a depth of understanding of current Internet and
      legacy technologies with the ability to implement complex and cutting-edge
      solutions.




Our
      recruiting efforts are an important element of our continuing operations and
      future growth. We generally target technology professionals with extensive
      experience and demonstrated expertise. To attract technology professionals,
      we
      use a broad range of sources including on-staff recruiters, outside recruiting
      firms, internal referrals, other technology companies and technical
      associations, the Internet and advertising in technical periodicals. After
      initially identifying qualified candidates, we conduct an extensive screening
      and interview process.




*Retention* .
      We
      believe that our rapid growth, focus on a core set of eBusiness solutions,
      applications and software platforms and our commitment to career development
      through continued training and advancement opportunities make us an attractive
      career choice for experienced professionals. Because our strategic partners
      are
      established and emerging market leaders, our technology professionals have
      an
      opportunity to work with cutting-edge information technology. We foster
      professional development by training our technology professionals in the skills
      critical to successful consulting engagements such as implementation methodology
      and project management. We believe in promoting from within whenever possible.
      In addition to an annual review process that identifies near-term and
      longer-term career goals, we make a professional development plan available
      to
      assist our professionals with assessing their skills and developing a detailed
      action plan for guiding their career development. For the year ended December
      31, 2006, our voluntary attrition rate was approximately 19%, which we believe
      is well below the industry average.




*Training* .
      To
      ensure continued development of our technical staff, we place a high priority
      on
      training. We offer extensive training for our professionals around
      industry-leading technologies. We utilize our education practice and
      IBM-certified advanced training facility in Chicago, Illinois to provide
      continuing education and professional development opportunities for our
      colleagues.




*Compensation* .
      Our
      employees have a compensation model that includes a base salary and an incentive
      compensation component. Our tiered incentive compensation plans help us reach
      our overall goals by rewarding individuals for their influence on key
      performance factors. Key performance metrics include client satisfaction,
      revenues generated, utilization, profit and personal skills growth.




7





*Leadership
      Councils* .
      Our
      technology leadership council performs a critical role in maintaining our
      technology leadership. Consisting of key employees from each of our practice
      areas, the council frames our new strategic partner strategies and conducts
      regular Internet webcasts with our technology professionals on specific partner
      and general technology issues and trends. The council also coordinates thought
      leadership activities, including white paper authorship and publication and
      speaking engagements by our professionals. Finally, the council identifies
      services opportunities between and among our strategic partners' products,
      oversees our quality assurance programs and assists in acquisition-related
      technology due diligence.




**Culture**




*The
      Perficient Promise* .
      We have
      developed the “Perficient Promise,” which consists of the following six simple
      commitments our colleagues make to each other:




§
            we
                believe in long-term client and partner relationships built on investment
                in innovative solutions, delivering more value than the competition
                and a
                commitment to excellence;




§
            we
                believe in growth and profitability and building meaningful
                scale;




§
            we
                believe each of us is ultimately responsible for our own career
                development and has a commitment to mentor
                others;




§
            we
                believe that Perficient has an obligation to invest in our consultants'
                training and education;




§
            we
                believe the best career development comes on the job;
                and




§
            we
                love challenging new work
                opportunities.




We
      take
      these commitments extremely seriously because we believe that we can succeed
      only if the Perficient Promise is kept.





**Knowledge
      Management**




*MyPerficient.com--The
      Corporate Portal* .
      To
      ensure easy access to a wide range of information and tools, we have created
      a
      corporate portal, MyPerficient.com. It is a secure, centralized communications
      tool. It allows each of our colleagues unlimited access to information,
      productivity tools, time and expense entry, benefits administration, corporate
      policies and forms and quality management information directories and
      documentation.




*Professional
      Services Automation Technology* .
      We
      recently completed the implementation of a Professional Services application
      as
      the enabling technology for many of our business processes, including knowledge
      management. We possess and continue to aggregate significant knowledge including
      marketing collateral, solution proposals, work product and client deliverables.
      Primavera's technology allows us to store this knowledge in a logical manner
      and
      provides full-text search capability allowing our colleagues to deliver
      solutions more efficiently and competitively.





**General
      Information**




Our
      stock
      is traded on the NASDAQ Global Select Market under the symbol “PRFT.” Our
      website can be visited at www.perficient.com. We make available free of charge
      through our website our annual reports on Form 10-K, quarterly reports on Form
      10-Q, current reports on Form 8-K, and amendments to those reports filed or
      furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
      reasonably practicable after we electronically file such material, or furnish
      it
      to, the Securities and Exchange Commission. The information contained or
      incorporated in our website is not part of this document.




8





**Item
      1A.  Risk Factors.**




*You
      should carefully consider the following risk factors together with the other
      information contained in or incorporated by reference into this annual report
      before you decide to buy our common stock. If any of these risks actually occur,
      our business, financial condition, operating results or cash flows could be
      materially and adversely affected. This could cause the trading price of our
      common stock to decline and you may lose part or all of your
      investment.*




***Risks
      Related to Our Business***




**Prolonged
      economic weakness in the Internet software and services market could adversely
      affect our business, financial condition and results of
      operations.**




The
      market for middleware and Internet software and services has changed rapidly
      over the last eight years. The market for middleware and Internet software
      and
      services expanded dramatically during 1999 and most of 2000, but declined
      significantly in 2001 and 2002. Market demand for Internet software and services
      began to stabilize and improve from 2003 to 2006, but this trend may not
      continue. Our future growth is dependent upon the demand for Internet software
      and services, and, in particular, the information technology consulting services
      we provide. Demand and market acceptance for middleware and Internet services
      are subject to a high level of uncertainty. Prolonged weakness in the middleware
      and Internet software and services industry has caused in the past, and may
      cause in the future, business enterprises to delay or cancel information
      technology projects, reduce their overall budgets and/or reduce or cancel orders
      for our services. This, in turn, may lead to longer sales cycles, delays in
      purchase decisions, payment and collection, and may also result in price
      pressures, causing us to realize lower revenues and operating margins. If
      companies cancel or delay their business and technology initiatives or choose
      to
      move these initiatives in-house, our business, financial condition and results
      of operations could be materially and adversely affected.




**Pursuing
      and completing potential acquisitions could divert management's attention and
      financial resources and may not produce the desired business
      results.**




If
      we pursue any acquisition, our management could spend a significant amount
      of
      time and financial resources to pursue and integrate the acquired business
      with
      our existing business. To pay for an acquisition, we might use capital stock,
      cash or a combination of both. Alternatively, we may borrow money from a bank
      or
      other lender. If we use capital stock, our stockholders will experience
      dilution. If we use cash or debt financing, our financial liquidity may be
      reduced and the interest on any debt financing could adversely affect our
      results of operations. From an accounting perspective, an acquisition may
      involve amortization or the write-off of significant amounts of intangible
      assets that could adversely affect our results of operations.




Despite
      the investment of these management and financial resources, and completion
      of
      due diligence with respect to these efforts, an acquisition may not produce
      the
      anticipated revenues, earnings or business synergies for a variety of reasons,
      including:




**·**
            difficulties
                in the integration of services and personnel of the acquired
                business;




**·**
            the
                failure of management and acquired services personnel to perform
                as
                expected;




**·**
            the
                risks of entering markets in which we have no, or limited, prior
                experience;




**·**
            the
                failure to identify or adequately assess any undisclosed or potential
                liabilities or problems of the acquired business including legal
                liabilities;




**·**
            the
                failure of the acquired business to achieve the forecasts we used
                to
                determine the purchase price; or




**·**
            the
                potential loss of key personnel of the acquired
                business.




These
      difficulties could disrupt our ongoing business, distract our management and
      colleagues, increase our expenses and materially and adversely affect our
      results of operations.





**If
      we do not effectively manage our growth, our results of operations and cash
      flows could be adversely affected.**




Our
      ability to operate profitably with positive cash flows depends partially on
      how
      effectively we manage our growth. In order to create the additional capacity
      necessary to accommodate the demand for our services, we may need to implement
      a
      variety of new and upgraded operational and financial systems, procedures and
      controls, open new offices and hire additional colleagues. Implementation of
      these new systems, procedures and controls may require substantial management
      efforts and our efforts to do so may not be successful. The opening of new
      offices or the hiring of additional colleagues may result in idle or
      underutilized capacity. We periodically assess the expected long-term capacity
      utilization of our offices and professionals. We may not be able to achieve
      or
      maintain optimal utilization of our offices and professionals. If demand for
      our
      services does not meet our expectations, our revenues and cash flows will not
      be
      sufficient to offset these expenses and our results of operations and cash
      flows
      could be adversely affected.




9





**We
      may not be able to attract and retain information technology consulting
      professionals, which could affect our ability to compete
      effectively.**




Our
      business is labor intensive. Accordingly, our success depends in large part
      upon
      our ability to attract, train, retain, motivate, manage and effectively utilize
      highly skilled information technology consulting professionals. Additionally,
      our technology professionals are primarily at-will employees. We also use
      independent subcontractors where appropriate. Failure to retain highly skilled
      technology professionals would impair our ability to adequately manage staff
      and
      implement our existing projects and to bid for or obtain new projects, which
      in
      turn would adversely affect our operating results.




**Our
      success will depend on attracting and retaining senior management and key
      personnel.**




Our
      industry is highly specialized and the competition for qualified management
      and
      key personnel is intense. We expect this to remain so for the foreseeable
      future. We believe that our success will depend on retaining our senior
      management team and key technical and business consulting personnel. Retention
      is particularly important in our business as personal relationships are a
      critical element of obtaining and maintaining strong relationships with our
      clients. In addition, as we rapidly grow our business, our need for senior
      experienced management and delivery personnel increases substantially. If a
      significant number of these individuals stop working for us, or if we are unable
      to attract top talent, our level of management, technical, marketing and sales
      expertise could diminish or otherwise be insufficient for our growth. We may
      be
      unable to achieve our revenues and operating performance objectives unless
      we
      can attract and retain technically qualified and highly skilled sales,
      technical, business consulting, marketing and management personnel. These
      individuals would be difficult to replace, and losing them could seriously
      harm
      our business.




**We
      may have difficulty in identifying and competing for strategic acquisition
      and
      partnership opportunities.**




Our
      business strategy includes the pursuit of strategic acquisitions. We may acquire
      or make strategic investments in complementary businesses, technologies,
      services or products, or enter into strategic partnerships or alliances with
      third parties in the future in order to expand our business. We may be unable
      to
      identify suitable acquisition, strategic investment or strategic partnership
      candidates, or if we do identify suitable candidates, we may not complete those
      transactions on terms commercially favorable to us, or at all. If we fail to
      identify and successfully complete these transactions, our competitive position
      and our growth prospects could be adversely affected. In addition, we may face
      competition from other companies with significantly greater resources for
      acquisition candidates, making it more difficult for us to acquire suitable
      companies on favorable terms.




**The
      market for the information technology consulting services we provide is
      competitive, has low barriers to entry and is becoming increasingly
      consolidated, which may adversely affect our market
      position.**




The
      market for the information technology consulting services we provide is
      competitive, rapidly evolving and subject to rapid technological change. In
      addition, there are relatively low barriers to entry into this market and
      therefore new entrants may compete with us in the future. For example, due
      to
      the rapid changes and volatility in our market, many well-capitalized companies,
      including some of our partners, that have focused on sectors of the Internet
      software and services industry that are not competitive with our business may
      refocus their activities and deploy their resources to be competitive with
      us.




An
      increasing amount of information technology services are being provided by
      lower-cost non-domestic resources. The increased utilization of these resources
      for US-based projects could result in lower revenues and margins for US-based
      information technology companies. Our ability to compete utilizing higher-cost
      domestic resources and/or our ability to procure comparably priced off-shore
      resources could adversely impact our results of operations and financial
      condition.





Our
      future financial performance will depend, in large part, on our ability to
      establish and maintain an advantageous market position. We currently compete
      with regional and national information technology consulting firms, and, to
      a
      limited extent, offshore service providers and in-house information technology
      departments. Many of the larger regional and national information technology
      consulting firms have substantially longer operating histories, more established
      reputations and potential partner relationships, greater financial resources,
      sales and marketing organizations, market penetration and research and
      development capabilities, as well as broader product offerings and greater
      market presence and name recognition. We may face increasing competitive
      pressures from these competitors as the market for Internet software and
      services continues to grow. This may place us at a disadvantage to our
      competitors, which may harm our ability to grow, maintain revenues or generate
      net income.




In
      recent
      years, there has been substantial consolidation in our industry, and we expect
      that there will be significant additional consolidation in the future. As a
      result of this increasing consolidation, we expect that we will increasingly
      compete with larger firms that have broader product offerings and greater
      financial resources than we have. We believe that this competition could have
      a
      significant negative effect on our marketing, distribution and reselling
      relationships, pricing of services and products and our product development
      budget and capabilities. One or more of our competitors may develop and
      implement methodologies that result in superior productivity and price
      reductions without adversely affecting their profit margins. In addition,
      competitors may win client engagements by significantly discounting their
      services in exchange for a client’s promise to purchase other goods and services
      from the competitor, either concurrently or in the future. These activities
      may
      potentially force us to lower our prices and suffer reduced operating margins.
      Any of these negative effects could significantly impair our results of
      operations and financial condition. We may not be able to compete successfully
      against new or existing competitors.




10





**Our
      business will suffer if we do not keep up with rapid technological change,
      evolving industry standards or changing customer
      requirements.**




Rapidly
      changing technology, evolving industry standards and changing customer needs
      are
      common in the Internet software and services market. We expect technological
      developments to continue at a rapid pace in our industry. Technological
      developments, evolving industry standards and changing customer needs could
      cause our business to be rendered obsolete or non-competitive, especially if
      the
      market for the core set of eBusiness solutions and software platforms in which
      we have expertise does not grow or if such growth is delayed due to market
      acceptance, economic uncertainty or other conditions. Accordingly, our success
      will depend, in part, on our ability to:




**·**
            continue
                to develop our technology
                expertise;




**·**
            enhance
                our current services;




**·**
            develop
                new services that meet changing customer
                needs;




**·**
            advertise
                and market our services; and




**·**
            influence
                and respond to emerging industry standards and other technological
                changes.




We
      must
      accomplish all of these tasks in a timely and cost-effective manner. We might
      not succeed in effectively doing any of these tasks, and our failure to succeed
      could have a material and adverse effect on our business, financial condition
      or
      results of operations, including materially reducing our revenues and operating
      results.




We
      may
      also incur substantial costs to keep up with changes surrounding the Internet.
      Unresolved critical issues concerning the commercial use and government
      regulation of the Internet include the following:




**·**
            security;




**·**
            intellectual
                property ownership;




**·**
            privacy;




**·**
            taxation;
                and




**·**
            liability
                issues.




Any
      costs
      we incur because of these factors could materially and adversely affect our
      business, financial condition and results of operations, including reduced
      net
      income.




**A
      significant portion of our revenue is dependent upon building long-term
      relationships with our clients and our operating results could suffer if we
      fail
      to maintain these relationships.**




Our
      professional services agreements with clients are in most cases terminable
      on 10
      to 30 days' notice. A client may choose at any time to use another consulting
      firm or choose to perform services we provide through their own internal
      resources. Accordingly, we rely on our clients' interests in maintaining the
      continuity of our services rather than on contractual requirements. Termination
      of a relationship with a significant client or with a group of clients that
      account for a significant portion of our revenues could adversely affect our
      revenues and results of operations.




**If
      we fail to meet our clients' performance expectations, our reputation may be
      harmed.**





As
      a
      services provider, our ability to attract and retain clients depends to a large
      extent on our relationships with our clients and our reputation for high quality
      services and integrity. We also believe that the importance of reputation and
      name recognition is increasing and will continue to increase due to the number
      of providers of information technology services. As a result, if a client is
      not
      satisfied with our services or does not perceive our solutions to be effective
      or of high quality, our reputation may be damaged and we may be unable to
      attract new, or retain existing, clients and colleagues.




11





**We
      may face potential liability to customers if our customers' systems
      fail.**




Our
      eBusiness integration solutions are often critical to the operation of our
      customers' businesses and provide benefits that may be difficult to quantify.
      If
      one of our customers' systems fails, the customer could make a claim for
      substantial damages against us, regardless of our responsibility for that
      failure. The limitations of liability set forth in our contracts may not be
      enforceable in all instances and may not otherwise protect us from liability
      for
      damages. Our insurance coverage may not continue to be available on reasonable
      terms or in sufficient amounts to cover one or more large claims. In addition,
      a
      given insurer might disclaim coverage as to any future claims. If we experience
      one or more large claims against us that exceed available insurance coverage
      or
      result in changes in our insurance policies, including premium increases or
      the
      imposition of large deductible or co-insurance requirements, our business and
      financial results could suffer.




**The
      loss of one or more of our significant software business partners would have
      a
      material and adverse effect on our business and results of
      operations.**




Our
      business relationships with software vendors enable us to reduce our cost of
      sales and increase win rates through leveraging our partners’ marketing efforts
      and strong vendor endorsements. The loss of one or more of these relationships
      and endorsements could increase our sales and marketing costs, lead to longer
      sales cycles, harm our reputation and brand recognition, reduce our revenues
      and
      adversely affect our results of operations.




In
      particular, a substantial portion of our solutions are built on IBM WebSphere
      platforms and a significant number of our clients are identified through joint
      selling opportunities conducted with IBM and through sales leads obtained from
      our relationship with IBM. Revenues from IBM were approximately 8%, 9%, and
      17%
      of total revenues for the years ended December 31, 2006, 2005 and 2004,
      respectively. The loss of our relationship with, or a significant reduction
      in
      the services we perform for IBM, would have a material adverse effect on our
      business and results of operations.




**Our
      quarterly operating results may be volatile and may cause our stock price to
      fluctuate.**




Our
      quarterly revenues, expenses and operating results have varied in the past
      and
      may vary significantly in the future. In addition, many factors affecting our
      operating results are outside of our control, such as:




§
            demand
                for Internet software and services;




§
            customer
                budget cycles;




§
            changes
                in our customers' desire for our partners' products and our
                services;




§
            pricing
                changes in our industry; and




§
            government
                regulation and legal developments regarding the use of the
                Internet.




As
      a
      result, if we experience unanticipated changes in the number or nature of our
      projects or in our employee utilization rates, we could experience large
      variations in quarterly operating results in any particular
      quarter.




**Our
      services revenues may fluctuate quarterly due to seasonality or timing of
      completion of projects.**




We
      may
      experience seasonal fluctuations in our services revenues. We expect that
      services revenues in the fourth quarter of a given year may typically be lower
      than in other quarters in that year as there are fewer billable days in this
      quarter as a result of vacations and holidays. In addition, we generally perform
      services on a project basis. While we seek wherever possible to counterbalance
      periodic declines in revenues on completion of large projects with new
      arrangements to provide services to the same client or others, we may not be
      able to avoid declines in revenues when large projects are completed. Our
      inability to obtain sufficient new projects to counterbalance any decreases
      in
      work upon completion of large projects could adversely affect our revenues
      and
      results of operations.




**Our
      software revenues may fluctuate quarterly, leading to volatility in our results
      of operations.**




Our
      software revenues may fluctuate quarterly and be higher in the fourth quarter
      of
      a given year as procurement policies of our clients may result in higher
      technology spending towards the end of budget cycles. This seasonal trend may
      materially affect our quarter-to-quarter revenues, margins and operating
      results.




12





**Our
      overall gross margin fluctuates quarterly based on our services and software
      revenues mix, impacting our results of operations.**




The
      gross
      margin on our services revenues is, in most instances, greater than the gross
      margin on our software revenues. As a result, our gross margin will be higher
      in
      quarters where our services revenues, as a percentage of total revenues, has
      increased, and will be lower in quarters where our software revenues, as a
      percentage of total revenues, has increased. In addition, gross margin on
      software revenues may fluctuate as a result of variances in gross margin on
      individual software products. Our stock price may be negatively affected in
      quarters in which our gross margin decreases.




**Our
      services gross margins are subject to fluctuations as a result of variances
      in
      utilization rates and billing rates.**




Our
      services gross margins are affected by trends in the utilization rate of our
      professionals, defined as the percentage of our professionals' time billed
      to
      customers divided by the total available hours in a period, and in the billing
      rates we charge our clients. Our operating expenses, including employee
      salaries, rent and administrative expenses, are relatively fixed and cannot
      be
      reduced on short notice to compensate for unanticipated variations in the number
      or size of projects in process. If a project ends earlier than scheduled, we
      may
      need to redeploy our project personnel. Any resulting non-billable time may
      adversely affect our gross margins.




The
      average billing rates for our services may decline due to rate pressures from
      significant customers and other market factors, including innovations and
      average billing rates charged by our competitors. Also, our average billing
      rates will decline if we acquire companies with lower average billing rates
      than
      ours. To sell our products and services at higher prices, we must continue
      to
      develop and introduce new services and products that incorporate new
      technologies or high-performance features. If we experience pricing pressures
      or
      fail to develop new services, our revenues and gross margins could decline,
      which could harm our business, financial condition and results of
      operations.




**If
      we fail to complete fixed-fee contracts within budget and on time, our results
      of operations could be adversely affected.**




We
      perform a limited number of projects on a fixed-fee, turnkey basis, rather
      than
      on a time-and-materials basis. Under these contractual arrangements, we bear
      the
      risk of cost overruns, completion delays, wage inflation and other cost
      increases. If we fail to estimate accurately the resources and time required
      to
      complete a project or fail to complete our contractual obligations within the
      scheduled timeframe, our results of operations could be adversely affected.
      We
      cannot guarantee that in the future we will not price these contracts
      inappropriately, which may result in losses.




**We
      may not be able to maintain our level of profitability.**




Although
      we have been profitable for the past three years, we may not be able to sustain
      or increase profitability on a quarterly or annual basis in the future. We
      cannot guarantee future operating results. In future quarters, our operating
      results may not meet public market analysts' and investors' expectations. If
      this occurs, the price of our common stock will likely fall.




**We
      have recorded deferred offering costs in connection with a shelf registration
      statement, and our inability to offset these costs against the proceeds of
      future offerings from our shelf registration statement could result in a
      non-cash expense in our Statement of Income in a future
      period.**




We
      initially filed a registration statement with the Securities and Exchange
      Commission on March 7, 2005 to register the offer and sale by the Company
      and certain selling stockholders of shares of our common stock. Due to overall
      market conditions during the second quarter 2006, we converted our registration
      statement into a shelf registration statement to allow for offers and sales
      of
      common stock from time to time as market conditions permit. As of December
      31,
      2006, we have recorded approximately $943,000 of deferred offering costs
      (approximately $579,000 after tax, if ever expensed) in connection with the
      offering and have classified these costs as prepaid expenses in other
      non-current assets on our balance sheet.




If
      we
      sell shares of common stock from our shelf registration statement, we will
      offset these accumulated deferred offering costs against the proceeds of the
      offering. If we do not raise funds through an equity offering from the shelf
      registration statement or fail to maintain the effectiveness of the shelf
      registration statement, the currently capitalized deferred offering costs will
      be expensed. Such expense would be a non-cash accounting charge as all of these
      expenses have already been paid.





***Risks
      Related to Ownership of Our Common Stock***




**Our
      stock price has been volatile and may continue to fluctuate
      widely.**




Our
      common stock is traded on the Nasdaq Global Select Market under the symbol
      “PRFT.” Our common stock price has been volatile. Our stock price may continue
      to fluctuate widely as a result of the limited trading volume, announcements
      of
      new services and products by us or our competitors, quarterly variations in
      operating results, the gain or loss of significant customers, changes in public
      market analysts' estimates and market conditions for information technology
      consulting firms and other technology stocks in general.




13





We
      periodically review and consider possible acquisitions of companies that we
      believe will contribute to our long-term objectives. In addition, depending
      on
      market conditions, liquidity requirements and other factors, from time to time
      we consider accessing the capital markets. These events may also affect the
      market price of our common stock.





**Our
      officers, directors, and 5% and greater stockholders own a large percentage
      of
      our voting securities and their interests may differ from other
      stockholders.**




Our
      executive officers, directors and existing 5% and greater stockholders
      beneficially own or control approximately **** 13%
      of
      the voting power of our common stock. This concentration of voting power of
      our
      common stock may make it difficult for our other stockholders to successfully
      approve or defeat matters that may be submitted for action by our stockholders.
      It may also have the effect of delaying, deterring or preventing a change in
      control of our company.




**We
      may need additional capital in the future, which may not be available to us.
      The
      raising of any additional capital may dilute your ownership percentage in our
      stock.**




We
      intend
      to continue to make investments to support our business growth and may require
      additional funds to pursue business opportunities and respond to business
      challenges. Accordingly, we may need to engage in equity or debt financings
      to
      secure additional funds. If we raise additional funds through further issuances
      of equity or convertible debt securities, our existing stockholders could suffer
      dilution, and any new equity securities we issue could have rights, preferences
      and privileges superior to those of holders of our common stock. Any debt
      financing secured by us in the future could involve restrictive covenants
      relating to our capital raising activities and other financial and operational
      matters, which may make it more difficult for us to obtain additional capital
      and to pursue business opportunities, including potential acquisitions. In
      addition, we may not be able to obtain additional financing on terms favorable
      to us, if at all. If we are unable to obtain adequate financing or financing
      on
      terms satisfactory to us, when we require it, our ability to continue to support
      our business growth and to respond to business challenges could be significantly
      limited.





**It
      may be difficult for another company to acquire us, and this could depress
      our
      stock price.**




In
      addition to the large percentage of our voting securities held by our officers,
      directors and 5% and greater stockholders, provisions contained in our
      certificate of incorporation, bylaws and Delaware law could make it difficult
      for a third party to acquire us, even if doing so would be beneficial to our
      stockholders. Our certificate of incorporation and bylaws may discourage, delay
      or prevent a merger or acquisition that a stockholder may consider favorable
      by
      authorizing the issuance of “blank check” preferred stock. In addition,
      provisions of the Delaware General Corporation Law also restrict some business
      combinations with interested stockholders. These provisions are intended to
      encourage potential acquirers to negotiate with us and allow the board of
      directors the opportunity to consider alternative proposals in the interest
      of
      maximizing stockholder value. However, these provisions may also discourage
      acquisition proposals or delay or prevent a change in control, which could
      harm
      our stock price.




**Item
      1B. Unresolved Staff Comments.**





None.





**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**




Some
      of
      the statements contained in this annual report that are not purely historical
      statements discuss future expectations, contain projections of results of
      operations or financial condition or state other forward-looking information.
      Those statements are subject to known and unknown risks, uncertainties and
      other
      factors that could cause the actual results to differ materially from those
      contemplated by the statements. The “forward-looking” information is based on
      various factors and was derived using numerous assumptions. In some cases,
      you
      can identify these so-called forward-looking statements by words like “may,”
“will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential” or “continue” or the negative of those words and other
      comparable words. You should be aware that those statements only reflect our
      predictions. Actual events or results may differ substantially. Important
      factors that could cause our actual results to be materially different from
      the
      forward-looking statements are disclosed under the heading “Risk Factors” in
      this annual report.




Although
      we believe that the expectations reflected in the forward-looking statements
      are
      reasonable, we cannot guarantee future results, levels of activity, performance
      or achievements. We are under no duty to update any of the forward-looking
      statements after the date of this annual report to conform such statements
      to
      actual results.




14





**Item 2.**
            **Properties.**




Our
      principal executive, administrative, finance and marketing operations are
      located in St. Louis, Missouri, where we have leased approximately 15,450 square
      feet of office space, and Austin, TX, where we have leased approximately 2,700
      square feet of office space. We also lease offices in major cities and in total,
      we have fifteen offices across the United States and Canada. We do not own
      any
      real property. We believe our facilities are adequate to meet our needs in
      the
      near future.





**Item 3.**
            **Legal
                Proceedings.**




Although
      we may become a party to litigation and claims arising in the course of our
      business, management currently does not believe the results of these actions
      will have a material adverse effect on our business or financial
      condition.





**Item 4.**
            **Submission
                of Matters to a Vote of Security
                Holders.**




The
      following matters were voted upon at the Annual Meeting of Stockholders held
      on
      October 12, 2006:




1.
      Each
      of persons listed below were nominated for election to the board of directors
      and were elected to serve as directors as indicated below:





For
            
            Withheld
            
            AbstentionsJohn
                T. McDonald
            
            
            19,025,109
            
            
            255,767
            
            
            --David
                S. Lundeen
            
            
            18,409,291
            
            
            871,585
            
            
            --Max
                D. Hopper
            
            
            18,420,491
            
            
            860,385
            
            
            --Kenneth
                R. Johnsen
            
            
            19,215,652
            
            
            65,224
            
            
            --Ralph
                C. Derrickson
            
            
            18,429,736
            
            
            851,140
            
            
            --




15





**PART
      II**





**Item 5.**
            **Market
                for Registrant's Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity
                Securities.**




Our
      common stock is quoted on the NASDAQ Global Select Market under the symbol
      “PRFT.” The following table sets forth, for the periods indicated, the high and
      low sale prices per share of our common stock as reported on the NASDAQ Global
      Select Market since February 2, 2005 and the NASDAQ SmallCap Market prior to
      February 2, 2005.




**High**
            
            **Low****Year
                Ending December 31, 2006:**First
                Quarter
            
            $
            12.01
            
            $
            8.76Second
                Quarter
            
            
            14.29
            
            
            11.52Third
                Quarter
            
            
            15.68
            
            
            11.55Fourth
                Quarter
            
            
            19.16
            
            
            15.31**Year
                Ending December 31, 2005:**First
                Quarter
            
            $
            9.44
            
            $
            6.80Second
                Quarter
            
            
            7.99
            
            
            5.30Third
                Quarter
            
            
            8.35
            
            
            6.74Fourth
                Quarter
            
            
            9.55
            
            
            7.20




On
      February 26, 2007, the last reported sale price of our common stock on the
      NASDAQ Global Select Market was $20.01 per share. There were approximately
      149
      stockholders of record of our common stock as of February 26, 2007.




We
      have
      never declared or paid any cash dividends on our common stock and do not
      anticipate paying cash dividends in the foreseeable future. Our credit facility
      currently prohibits the payment of cash dividends without the prior written
      consent of the lenders.





Information
      on our Equity Compensation Plan has been included at Item 12, Part III of the
      consolidated financial statements.




16




**Item 6.**
            **Selected
                Financial Data.**




The
      selected financial data presented for, and as of the end of, each of the years
      in the five-year period ended December 31, 2006, has been prepared in accordance
      with United States generally accepted accounting principles. All amounts shown
      are in thousands. The financial data presented is not directly comparable
      between periods as a result of the adoption of Statement of Financial Accounting
      Standards No. 123R (As Amended), *Share
      Based Payment* (“SFAS
      123R”) in 2006 and three acquisitions in 2006, two acquisitions in 2005, three
      acquisitions in 2004, and two acquisitions in 2002.





The
      following data should be read in conjunction with the Consolidated Financial
      Statements and the Notes to Consolidated Financial Statements appearing in
      Part
      II Item 8 and Management's Discussion and Analysis of Financial Condition and
      Results of Operations appearing in Part II Item 7.




**Year
                Ended December 31,****2006**
            
            
            **2005**
            
            
            **2004**
            
            
            **2003**
            
            
            **2002**(In
                thousands)Revenues
            
            $
            160,926
            
            $
            96,997
            
            $
            58,848
            
            $
            30,192
            
            $
            22,450Gross
                margin
            
            
            53,756
            
            
            32,418
            
            
            18,820
            
            
            11,375
            
            
            8,911Selling,
                general and administrative
            
            
            32,268
            
            
            17,917
            
            
            11,068
            
            
            7,993
            
            
            8,568Depreciation and
                intangibles amortization
            
            
            4,406
            
            
            2,226
            
            
            1,209
            
            
            1,281
            
            
            1,973Restructuring,
                severance, and other
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            579Income
                (loss) from operations
            
            
            17,082
            
            
            12,275
            
            
            6,543
            
            
            2,102
            
            
            (2,209
            )Interest
                expense (net of income)
            
            
            (407
            )
            
            (643
            )
            
            (134
            )
            
            (283
            )
            
            (186
            )Other
                income (expense)
            
            
            174
            
            
            43
            
            
            32
            
            
            (13
            )
            
            --Income
                (loss) before income taxes
            
            
            16,849
            
            
            11,675
            
            
            6,441
            
            
            1,805
            
            
            (2,395
            )Net
                income (loss)
            
            $
            9,567
            
            $
            7,177
            
            $
            3,913
            
            $
            1,050
            
            $
            (2,395
            )







**As
                of December 31,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****Balance
                Sheet Data:**
            
            (In
                thousands)Cash
                and cash equivalents
            
            $
            4,549
            
            $
            5,096
            
            $
            3,905
            
            $
            1,989
            
            $
            1,525Working
                capital
            
            $
            24,859
            
            $
            17,078
            
            $
            9,234
            
            $
            4,013
            
            $
            1,854Property
                and equipment, net
            
            $
            1,806
            
            $
            960
            
            $
            806
            
            $
            699
            
            $
            1,211Goodwill
                and intangible assets, net
            
            $
            81,056
            
            $
            52,031
            
            $
            37,340
            
            $
            11,694
            
            $
            12,380Total
                assets
            
            $
            131,000
            
            $
            84,935
            
            $
            62,582
            
            $
            20,260
            
            $
            19,593Current
                portion of long term debt and line of credit
            
            $
            1,201
            
            $
            1,581
            
            $
            1,379
            
            $
            367
            
            $
            1,025Long-term
                debt and line of credit, less current portion
            
            $
            137
            
            $
            5,338
            
            $
            2,902
            
            $
            436
            
            $
            745Total
                stockholders' equity
            
            $
            107,352
            
            $
            65,911
            
            $
            44,622
            
            $
            16,016
            
            $
            14,521





17





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




*You
      should read the following summary together with the more detailed business
      information and consolidated financial statements and related notes that appear
      elsewhere in this annual report and in the documents that we incorporate by
      reference into this annual report. This annual report may contain certain
“forward-looking” information within the meaning of the Private Securities
      Litigation Reform Act of 1995. This information involves risks and
      uncertainties. Our actual results may differ materially from the results
      discussed in the forward-looking statements. Factors that might cause such
      a
      difference include, but are not limited to, those discussed in “Risk
      Factors.”*




**Overview**




We
      are an
      information technology consulting firm serving Global 2000 and large enterprise
      companies throughout the United States and Canada. We help clients gain
      competitive advantage by using Internet-based technologies to make their
      businesses more responsive to market opportunities and threats, strengthen
      relationships with customers, suppliers and partners, improve productivity
      and
      reduce information technology costs. Our solutions enable these benefits by
      integrating, automating and extending business processes, technology
      infrastructure and software applications end-to-end within an organization
      and
      with key partners, suppliers and customers. This provides real-time access
      to
      critical business applications and information and a scalable, reliable, secure
      and cost-effective technology infrastructure.




*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 is
      derived from projects performed on a fixed fee basis. Fixed fee engagements
      represented approximately 9% of our services revenues for the year ended
      December 31, 2006. For time and material projects, revenues is 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 proportionate performance
      method. Revenues on uncompleted projects are recognized on a
      contract-by-contract basis in the period in which the portion of the fixed
      fee
      is complete. Amounts invoiced to clients in excess of revenues recognized are
      classified as deferred revenues. The Company’s average bill rates increased
      slightly in 2006. The Company is anticipating modest additional increases in
      2007. 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
      Revenues*




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




*Cost
      of revenues*




Cost
      of
      revenues consists primarily of cash and non-cash compensation and benefits
      associated with our technology professionals and subcontractors. Non-cash
      compensation includes stock compensation expenses arising from restricted stock
      and option grants to employees. Cost of revenues also includes third-party
      software costs, reimbursable expenses and other unreimbursed project related
      expenses. 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.




*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. Subject to fluctuations resulting from our acquisitions, we expect
      these key metrics of our services business to remain relatively constant for
      the
      foreseeable future assuming there are no further declines in the demand for
      information technology software and services. Gross margin percentages of third
      party software sales are typically lower than gross margin percentages for
      services and the mix of services and software for a particular period can
      significantly impact total combined gross margin percentage for such period.
      In
      addition, gross margin for software sales can fluctuate due to pricing and
      other
      competitive pressures. ****




18




*Selling,
      General and Administrative Expenses*




Selling,
      general and administrative expenses (“SG&A”) consist of salaries, 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
      and option grants to employees and non-employee directors. We work to minimize
      selling costs by focusing on repeat business with existing customers and by
      accessing sales leads generated by our software business partners, most notably
      IBM, whose products we use to design and implement solutions for our clients.
      These partnerships enable us to reduce our selling costs and sales cycle times
      and increase win rates through leveraging our partners' marketing efforts and
      endorsements. A substantial portion of our SG&A costs are relatively fixed.
      As a result, we expect SG&A costs as a percentage of revenue to decline as
      we continue to increase revenues in 2007.




*Plans
      for Growth and Acquisitions*




Our
      goal
      is to continue to build one of the leading independent information technology
      consulting firms in North America by expanding our relationships with existing
      and new clients, leveraging our operations to expand nationally and continuing
      to make disciplined acquisitions. We believe the United States represents an
      attractive market for growth, primarily through acquisitions. As demand for
      our
      services grows, we believe we will attempt to increase the number of
      professionals in our 15 North American offices and to add new offices throughout
      the United States, both organically and through acquisitions. In addition,
      we
      believe our track record for identifying acquisitions and our ability to
      integrate acquired businesses helps us complete acquisitions efficiently and
      productively, while continuing to offer quality services to our clients,
      including new clients resulting from the acquisitions.




Consistent
      with our strategy of growth through disciplined acquisitions, we consummated
      six
      acquisitions since January 1, 2005, including one in February 2007.




**Results
      of Operations**




The
      following table summarizes our results of operations as a percentage of total
      revenues:




Revenues:
            
            
            **2006**
            
            
            **2005**
            
            
            **2004**Services
                revenues
            
            
            85.6
            %
            
            86.3
            %
            
            73.6
            %Software
                revenues
            
            
            9.0
            
            
            9.7
            
            
            22.4Reimbursed
                expenses
            
            
            5.4
            
            
            4.0
            
            
            4.0Total
                revenues
            
            
            100.0
            
            
            100.0
            
            
            100.0Cost
                of revenues (exclusive of depreciation and amortization, shown separately
                below):Project
                personnel costs
            
            
            52.3
            
            
            52.7
            
            
            44.3Software
                costs
            
            
            7.5
            
            
            8.0
            
            
            19.3Reimbursable
                expenses
            
            
            5.4
            
            
            4.0
            
            
            4.0Other
                project related expenses
            
            
            1.3
            
            
            1.9
            
            
            0.5Total
                cost of revenues
            
            
            66.5
            
            
            66.6
            
            
            68.1Services
                gross margin
            
            
            37.4
            
            
            36.7
            
            
            39.2Software
                gross margin
            
            
            16.1
            
            
            17.8
            
            
            13.9Total
                gross margin
            
            
            35.3
            
            
            34.8
            
            
            33.3Selling,
                general and administrative
            
            
            20.1
            
            
            18.5
            
            
            18.8Depreciation
                and amortization
            
            
            2.7
            
            
            2.3
            
            
            2.1Income
                from operations
            
            
            10.7
            
            
            12.6
            
            
            11.0Interest
                expense, net
            
            
            (0.2
            )
            
            (0.7
            )
            
            (0.2
            )Income
                before income taxes
            
            
            10.5
            
            
            11.9
            
            
            10.8Provision
                for income taxes
            
            
            4.5
            
            
            4.6
            
            
            4.3Net
                income
            
            
            6.0
            %
            
            7.3
            %
            
            6.5
            %




19





**Year
      Ended December 31, 2006 Compared to Year Ended December 31,
      2005**




*Revenues* .
      Total
      revenues increased 66% to $160.9 million for the year ended December 31, 2006
      from $97.0 million for the year ended December 31, 2005. Services revenues
      increased 65% to $137.7 million in 2006 from $83.7 million in 2005. These
      increases were attributable to increased demand for the Company's services
      and
      to the acquisitions of Bay Street Solutions Inc. (“Bay Street”), Insolexen Corp.
      (“Insolexen”), and the Energy, Government and General Business (“EGG”) division
      of Digital Consulting & Software Services, Inc. in 2006 and the full year
      impact of the acquisitions of iPath and Vivare in 2005. Services revenue
      increased 23% due to organic services revenue growth for the year ended December
      31, 2006 compared to 14% for the year ended December 31, 2005. The Company
      calculates organic services revenue growth by measuring the trailing four
      quarters sequential quarterly services revenue growth for businesses that have
      been owned for at least two quarters.





Additionally,
      the increase in services revenues resulted from increases in the number of
      projects. The average utilization rate of our professionals, excluding
      subcontractors, remained consistent at 83% for the years ended December 31,
      2006
      and 2005. The Company believes utilization rates will be similar in 2007.
      Software revenues increased 54% to $14.4 million in 2006 from $9.4 million
      in
      2004 mainly due to acquisitions and corresponding services revenue growth.
      Reimbursable expenses increased 127% to $8.8 million in 2006 from $3.9 million
      in 2005 due to acquisitions and an increased number of projects requiring
      consultant travel. We do not realize any profit on reimbursable
      expenses.




*Cost
      of revenues* .
      Cost of
      revenues increased 66% to $107.2 million for the year ended December 31, 2006
      from $64.6 million for the year ended December 31, 2005. The increase in cost
      of
      revenues is attributable to an increase in the number of professionals as a
      result of organic growth in addition to the acquisitions of Bay Street,
      Insolexen, and EGG, an increase in bonus costs associated with strong operating
      performance, and stock compensation expense. The average number of professionals
      performing services, including subcontractors, increased to 686 for the year
      ended December 31, 2006 from 431 for the year ended December 31, 2005. Stock
      compensation expense included in cost of revenues for the year ended December
      31, 2006 was nearly $1 million. No stock compensation expense was recognized
      in
      cost of revenues prior to January 1, 2006. The increase in stock compensation
      expense is the result of our adoption of Statement of Financial Accounting
      Standards No. 123 (revised) (“SFAS 123R”), *Share
      Based Payment,* on
      January 1, 2006. Costs associated with software sales increased 57% to $12.1
      million in 2006 from $7.7 million in 2005 in connection with the increased
      software revenues in 2006 compared to 2005.




*Gross
      Margin* .
      Gross
      margin increased 66% to $53.8 million for the year ended December 31, 2006
      from
      $32.4 million for the year ended December 31, 2005. Gross margin as a percentage
      of revenues remained consistent at 33.4% for the years ended December 31, 2006
      and 2005. Services gross margin increased to 37.4% in 2006 from 36.7% in 2005
      primarily due to **** an
      increase in average billing rates and improved project pricing .
      This
      increase was partially offset by $1 million of non-cash stock compensation
      expense recognized in cost of revenues during the year ended December 31, 2006,
      as discussed above. Excluding stock compensation expense, gross margin increased
      to 34% for the year ended December 31, 2006 from 33% for the year ended December
      31, 2005. Software gross margin decreased to 16.1% in 2006 from 17.7% in 2005
      primarily as a result of fluctuations in selling prices to customers due to
      fluctuations in vendor pricing based on market conditions at the time of the
      sales.




*Selling,
      General and Administrative* .
      Selling, general and administrative expenses increased 80% to $32.3 million
      for
      the year ended December 31, 2006 from $17.9 million for the year ended December
      31, 2005 due primarily to an increase in bonus costs associated with strong
      operating performance of $3.5 million. We also experienced increases in sales
      related costs of $3.2 million, management personnel, support personnel and
      facilities related to our investment in our infrastructure, including
      improvements related to Sarbanes-Oxley of $2.3 million. The acquisitions of
      Bay
      Street, Insolexen, and EGG during 2006 also contributed to the increase. Stock
      compensation expense included in selling, general and administrative expenses
      for the year ended December 31, 2006 was $2.1 million compared to $264,000
      for
      the year ended December 31, 2005. The increase in stock compensation expense
      is
      the result of our adoption of SFAS 123R on January 1, 2006. Selling, general
      and
      administrative expenses as a percentage of revenues, excluding stock
      compensation, increased to 19% for the year ended December 31, 2006 from 18%
      for
      the year ended December 31, 2005 due primarily to higher bonus and recruiting,
      partially offset by lower office costs, salaries, and professional fees. Stock
      compensation expense, as a percentage of services revenues, increased to 1.6%
      for the year ended December 31, 2006 compared to 0.3% for the year ended
      December 31, 2005.




20





*Depreciation* .
      Depreciation expense increased 54% to $948,000 during 2006 from approximately
      $615,000 during 2005. The increase in depreciation expense is due to the
      addition of software programs, servers, and other computer equipment to enhance
      our technology infrastructure and support our growth, both organic and
      acquisition-related. Depreciation expense as a percentage of total revenues
      was
      0.6% for the years ended December 31, 2006 and 2005.




*Intangibles
      Amortization* .
      Intangibles amortization expenses increased 115% to $3.5 million for the year
      ended December 31, 2006 from approximately $1.6 million for the year ended
      December 31, 2005. The increase in amortization expense reflects the acquisition
      of intangibles acquired from Bay Street, Insolexen, and EGG and full year
      amortization of intangible assets acquired for iPath and Vivare.




*Interest
      Expense* .
      Interest expense decreased 23% to $509,000 for the year ended December 31,
      2006
      compared to approximately $658,000 during the year ended December 31, 2005.
      This
      decrease is primarily due to a lower average amount of debt outstanding during
      2006 compared to 2005. As of December 31, 2006, there was approximately $1.3
      million outstanding on the acquisition line of credit and no amounts outstanding
      on the accounts receivable line of credit. Our outstanding borrowings on the
      acquisition line of credit had an average interest rate of 7.0% for the year
      ended December 31, 2006 while the average interest rate on our accounts
      receivable line of credit borrowings for the year ended December 31, 2006 was
      7.96%. During 2006, we drew down $34.9 million on the accounts receivable line
      of credit and repaid $38.9 million.




*Provision
      for Income Taxes* .
      We
      accrue a provision for federal, state and foreign income tax at the applicable
      statutory rates adjusted for non-deductible expenses. Our effective tax rate
      increased to 43.2% for the year ended December 31, 2006 from 38.5% for the
      year
      ended December 31, 2005 as a result of non-deductible stock compensation related
      to incentive stock options included in our statement of operations in 2006
      as a
      result of the adoption of SFAS 123R on January 1, 2006 and certain
      non-deductible compensation required by Section 162(m) of the Internal Revenue
      Code, which imposes a limitation on the deductibility of certain compensation
      in
      excess of $1 million paid to covered employees .




21




**Year
      Ended December 31, 2005 Compared to Year Ended December 31,
      2004**




*Revenues* .
      Total
      revenues increased 65% to $97.0 million for the year ended December 31, 2005
      from $58.8 million for the year ended December 31, 2004. Services revenues
      increased 93% to $83.7 million in 2005 from $43.3 million in 2004. These
      increases were attributable to increased demand for the Company's services
      and
      to the acquisitions of iPath Solutions, Ltd. (“iPath”) and Vivare, LP (“Vivare”)
      in 2005 and the full year impact of the acquisitions of Genisys Consulting,
      Inc.
      (“Genisys”), Meritage Technologies, Inc. (“Meritage”) and ZettaWorks LLC
      (“Zettaworks”) in 2004.




Additionally,
      the increase in services revenues resulted from increases in average project
      size and quantity of projects. The average utilization rate of our
      professionals, excluding subcontractors, remained relatively stable at 83%
      for
      the year ended December 31, 2005. For the years ended December 31, 2005 and
      2004, 9% and 17%, respectively, of our revenues was derived from sales to IBM.
      While the dollar amount of revenues from IBM has remained relatively constant
      over the past two years, the percentage of total revenues from IBM has decreased
      as a result of the Company's growth and corresponding customer diversification.
      Software revenues decreased 29% to $9.4 million in 2005 from $13.2 million
      in
      2004 due to lower client demand in the fourth quarter of 2005 compared to 2004.
      Software revenues are generated from the sale of third party software except
      for
      approximately $282,000 from the sale of internally developed software recognized
      in 2005. Reimbursable expenses increased 65% to $3.9 million in 2005 from $2.3
      million in 2004.




*Cost
      of revenues* .
      Cost of
      revenues increased 61% to $64.6 million for the year ended December 31, 2005
      from $40.0 million for the year ended December 31, 2004. The increase in cost
      of
      revenues is attributable to an increase in the number of professionals due
      to
      hiring and the acquisitions of ZettaWorks, iPath, and Vivare. The average number
      of professionals performing services, including subcontractors, increased to
      431
      for the year ended December 31, 2005 from 220 for the year ended December 31,
      2004. In addition, the Company changed its internal policy for the carry-over
      of
      billable employee's accrued vacation hours which we had allowed as of December
      31, 2004, but discontinued this policy and allowed no more vacation hour
      carry-overs as of December 31, 2005. As a result, the Company had approximately
      $237,000 of billable employee's accrued vacation expense as of December 31,
      2004
      which was forfeited during 2005. Costs associated with software sales decreased
      32% to $7.7 million in 2005 from $11.3 million in 2004 in connection with the
      decreased software revenues in 2005 compared to 2004.





*Gross
      Margin* .
      Gross
      margin increased 72% to $32.4 million for the year ended December 31, 2005
      from
      $18.8 million for the year ended December 31, 2004. Gross margin as a percentage
      of total revenues increased to 33.4% in 2005 from 32.0% in 2004. The increase
      in
      gross margin as a percentage of total revenues is due to a mix of improved
      software margins off-set by lower services margins. Services gross margin
      decreased slightly to 36.7% in 2005 from 39.2% in 2004 primarily due to lower
      gross margins on consulting services contracts acquired in the acquisitions
      of
      ZettaWorks and iPath. These businesses are national practices rather than local
      practices and, as a result, they incur a greater amount of unreimbursed travel
      expenses for delivery of services outside of their local geographic market.
      Unreimbursed expenses negatively impact our services gross margins. Services
      gross margins have also been impacted by the acquisition of Vivare which has
      slightly lower services gross margins than our historical average. Software
      gross margin increased to 17.7% in 2005 from 13.9% in 2004 primarily as a result
      of fluctuations in selling prices to customers based on fluctuations in vendor
      pricing based on market conditions at the time of the sales and from the sale
      of
      internally developed software representing software revenues of approximately
      $282,000 for which there was no associated cost of revenues.




*Selling,
      General and Administrative* .
      Selling, general and administrative expenses increased 62% to $17.9 million
      for
      the year ended December 31, 2005 from $11.1 million for the year ended December
      31, 2004 due primarily to increases in the cost of compliance with the
      Sarbanes-Oxley Act of 2002, professional service fees associated with external
      audits, and additions of sales personnel, management personnel, support
      personnel and facilities related to the acquisitions of iPath and Vivare in
      2005
      and the full year impact of the acquisitions of Genisys, Meritage and Zettaworks
      in 2004. However, selling, general and administrative expenses as a percentage
      of total revenues decreased to 18.5% for the year ended December 31, 2005 from
      18.8% for the year ended December 31, 2004. The decrease in selling, general
      and
      administrative expenses as a percentage of services revenues is the result
      of
      operational efficiencies and economies of scale as the Company has grown.
      However, these cost efficiencies have been off-set by the cost of compliance
      with the Sarbanes-Oxley Act of 2002 and regular external audit costs which
      resulted in total costs to the Company during 2005 of approximately $837,000
      compared to approximately $145,000 in 2004. In addition, the Company changed
      its
      internal policy for the carry-over of selling, general and administrative
      employee's accrued vacation hours which we had allowed as of December 31, 2004,
      but discontinued this policy and allowed no more vacation hour carry-overs
      as of
      December 31, 2005. As a result, the Company had approximately $48,000 of
      selling, general and administrative employee's accrued vacation expense as
      of
      December 31, 2004 which was forfeited during 2005. Also, during 2005, the
      Company reduced its allowance for doubtful accounts by approximately $104,000
      as
      a result of improved collections on accounts receivable. Finally, during 2005,
      the Company realized approximately $300,000 in reduced organizational meeting
      expenses as compared to 2004.




*Depreciation* .
      Depreciation expense increased 20% to approximately $615,000 during 2005 from
      approximately $512,000 during 2004. The increase is due to a general increase
      in
      purchases of fixed assets to accommodate growth.





*Intangibles
      Amortization* .
      Intangibles amortization expenses, arising from acquisitions, increased 131%
      to
      approximately $1.6 million for the year ended December 31, 2005 from
      approximately $0.7 million for the year ended December 31, 2004. The increase
      in
      amortization expense is the result of increased acquisition
      activity.




22


*Interest
      Expense* .
      Interest expense increased 380% to approximately $659,000 for the year ended
      December 31, 2005 compared to approximately $137,000 during the year ended
      December 31, 2004. This increase in interest expense is due to the interest
      expense related to the acquisition line of credit which was drawn down in
      connection with the acquisitions of Meritage in June 2004 and ZettaWorks in
      December 2004, and on draws on the accounts receivable line of credit in
      connection with the acquisitions of iPath and Vivare. As of December 31, 2005,
      there was approximately $2.7 million outstanding on the acquisition line of
      credit and approximately $4.0 million outstanding on the accounts receivable
      line of credit. During 2005, we drew down $12 million on the accounts receivable
      line of credit and repaid $8 million.




*Provision
      for Income Taxes* .
      We
      accrue a provision for federal, state and foreign income tax at the applicable
      statutory rates adjusted for non-deductible expenses. Our effective tax rate
      decreased slightly to 38.5% for the year ended December 31, 2005 from 39.2%
      for
      the year ended December 31, 2004 as a result of a decrease in certain
      non-deductible expenses. We had deferred tax assets resulting from net operating
      and capital losses of acquired companies amounting to approximately $2.8 million
      for which we had a valuation allowance of approximately $2.3 million. We had
      additional deferred tax assets of approximately $0.4 million from temporary
      differences between book and tax valuations. These combined deferred tax assets
      of $0.9 million were off-set by deferred tax liabilities of $0.7 million related
      to identifiable intangibles, goodwill, and cash to accrual adjustments. Any
      reversal of the valuation allowance on the deferred tax assets will be adjusted
      against goodwill and will not have an impact on our statement of operations.
      All
      of the net operating and capital losses relate to acquired entities, and as
      such
      are subject to annual limitations on usage under the “change in control”
provisions of the Internal Revenues Code.





**Liquidity
      and Capital Resources**




Selected
      measures of liquidity and capital resources are as follows (in
      millions):




**As
                of December 31,****2006**
            
            **2005**Cash
                and cash equivalents
            
            $
            4.5
            
            $
            5.1Working
                capital
            
            $
            24.9
            
            $
            17.1




***Net
      Cash Provided By Operating Activities***




We
      expect
      to fund our operations from cash generated from operations and short-term
      borrowings as necessary from our credit facility. We believe that these capital
      resources will be sufficient to meet our needs for at least the next twelve
      months. Net cash generated by operations for the year ended December 31, 2006
      was $9.6 million compared to $7.7 million for the year ended December 31, 2005.
      The primary components of operating cash flows for the year ended December
      31,
      2006 were net
      income after adding back non-cash expenses of $17.1 million offset by increases
      to accounts receivable of $5.8 million and decreases to other liabilities of
      $2.8 million. The increase in operating cash flow is due primarily to an
      increase in non-cash stock compensation of $2.9 million and intangibles
      amortization of $1.8 million. The increase in accounts receivable is primarily
      related to acquisitions. No significant changes occurred in the average
      days sales outstanding.





***Net
      Cash Used in Investing Activities***




For
      the
      year ended December 31, 2006, we used approximately $13.7 million in cash,
      net
      of cash acquired, to acquire Bay Street, Insolexen, and EGG. In addition, we
      used approximately $1.5 million during 2006 to purchase equipment fixed assets
      and used approximately $136,000 for software capitalized for internal use to
      expand our information management systems. For the year ended December 31,
      2005,
      we used approximately $9.7 million in cash, net of cash acquired, to acquire
      iPath and Vivare. In addition, during 2005 we used approximately $691,000 to
      purchase equipment fixed assets and used approximately $599,000 for software
      capitalized for internal use to expand our information management
      systems.





***Net
      Cash From Financing Activities***




Our
      financing activities consisted primarily of net payments totaling $4.0 million
      on our accounts receivable line of credit and $1.3 million of payments on long
      term debt. During 2006, we received $4.2 million from exercises of stock options
      and warrants and sales of stock through the Company’s Employee Stock Purchase
      Program. In addition, we realized tax benefits on stock option exercises of
      $6.6
      million during 2006. Prior
      to
      the adoption of Statement of Financial Accounting Standards No. 123R (As
      Amended), *Share Based Payment* (“SFAS 123R”) in 2006, the tax benefit on
      stock option exercises was classified as an activity in operating cash
      flows.




23





***Availability
      of Funds from Bank Line of Credit Facilities***




We
      have a
      $51.3 million credit facility with Silicon Valley Bank and Key Bank
      National Association (“Key Bank”) comprising a $25 million accounts
      receivable line of credit and a $26.3 million acquisition line of credit.
      Borrowings under the accounts receivable line of credit bear interest at the
      bank's prime rate, or 8.25%, as of December 31, 2006. As of
      December 31, 2006, there were no amounts outstanding under the accounts
      receivable line of credit and $25 million of available borrowing capacity,
      excluding $450,000 reserved for two outstanding letters of credit to secure
      facility leases. In January 2007, the letters of credit decreased $50,000.
      This accounts receivable line of credit matures in June 2008.





Our
      $26.3 million term acquisition line of credit with Silicon Valley Bank and
      Key Bank provides an additional source of financing for certain qualified
      acquisitions. As of December 31, 2006 the balance outstanding under this
      acquisition line of credit was $1.3 million. Borrowings under this
      acquisition line of credit bear interest equal to the four year U.S. Treasury
      note yield plus 3% based on the spot rate on the day the draw is processed
      (7.69% at December 31, 2006). Borrowings under this acquisition line are
      repayable in thirty-six equal monthly installments, after the initial interest
      only period which continues through June 29, 2007. Draws under this acquisition
      line may be made through June 29, 2008. We currently have $25 million of
      available borrowing capacity under this acquisition line of credit.




As
      of
      December 31, 2006, we were in compliance with all covenants under our credit
      facility and we expect to be in compliance during the next twelve months.
      Substantially all of our assets are pledged to secure the credit
      facility.




There
      were no material changes outside the ordinary course of our business in lease
      obligations or other contractual obligations in 2006. We believe that the
      current available funds, access to capital from our credit facilities, possible
      capital from registered placements of equity through the shelf registration,
      and
      cash flows generated from operations will be sufficient to meet our working
      capital requirements and meet our capital needs to finance acquisitions for
      the
      next twelve months.





We
      have
      filed a shelf registration statement with the Securities and Exchange Commission
      to allow for offers and sales of our common stock from time to time.
      Approximately 5 million shares of common stock may be sold under this
      registration statement if we choose to do so.




***Contractual
      Obligations***




In
      connection with certain of our acquisitions, we were required to
      establish various letters of credit totaling $450,000 to serve as
      collateral to secure facility leases. The letters of credit reduce the
      borrowings available under our accounts receivable line of credit. In January
      2007, the letters of credit decreased $50,000.




In
      connection with the acquisition of Javelin, we issued $1.5 million in notes,
      which have been fully repaid since April 2006.




We
      have
      incurred commitments to make future payments under contracts such as leases
      and
      certain long-term liabilities. Maturities, including estimated interest, under
      these contracts are set forth in the following table as of December 31, 2006
      (in
      thousands):




**Payments Due by Period****Contractual
                Obligations**
            
            **Total**
            
            **Less
                Than**
              **1
                Year**
            
            **1-3**
              **Years**
            
            **3-5**
              **Years**
            
            **More**
              **Than
                5**
              **Years**Long-term
                debt obligations, including estimated interest
            
            $
            1,390
            
            $
            1,251
            
            $
            139
            
            $
            --
            
            $
            --Operating
                lease obligations
            
            
            4,683
            
            
            1,355
            
            
            2,148
            
            
            1,119
            
            
            61Total
            
            $
            6,073
            
            $
            2,606
            
            $
            2,287
            
            $
            1,119
            
            $
            61





See
      Note
      9 - "Income Taxes" in Notes to Consolidated Financial Statements for information
      related to the Company's obligations for taxes.





If
      our
      capital is insufficient to fund our activities in either the short or long
      term,
      we may need to raise additional funds. In the ordinary course of business,
      we
      may engage in discussions with various persons in connection with additional
      financing. If we raise additional funds through the issuance of equity
      securities, our existing stockholders' percentage ownership will be diluted.
      These equity securities may also have rights superior to our common stock.
      Additional debt or equity financing may not be available when needed or on
      satisfactory terms. If adequate funds are not available on acceptable terms,
      we
      may be unable to expand our services, respond to competition, pursue acquisition
      opportunities or continue our operations.




24





**Subsequent
      Event**





On
      February 20, 2007, the Company consummated the acquisition of E-Tech
      Solutions.  The Company paid approximately $12.2 million consisting of
      approximately $6.1 million in cash and $6.1 million worth of the Company's
      common stock, subject to certain post-closing adjustments.  As required, we
      will use the closing price of the Company's common stock at or near the close
      date in reporting the value of the stock consideration paid in the acquisition,
      which was $20.34. The Company issued 306,248 shares of its common stock in
      connection with the acquisition.





**Critical
      Accounting Policies**




The
      Company's accounting policies are described in Note 2 to the Consolidated
      Financial Statements. The Company believes its most critical accounting policies
      include revenue recognition, estimating the allowance for doubtful accounts,
      accounting for goodwill and intangible assets, purchase accounting allocation,
      accounting for stock-based compensation, deferred income taxes and estimating
      the related valuation allowances.





*Revenue
      Recognition and Allowance for Doubtful Accounts*




Consulting
      revenues are comprised of revenues from professional services fees recognized
      primarily on a time and materials basis as performed. For fixed fee engagements,
      revenues is recognized using the proportionate performance method based on
      the
      ratio of hours expended to total estimated hours. Revenues on uncompleted
      projects are recognized on a contract-by-contract basis in the period in which
      the portion of the fixed fee is complete. Billings in excess of costs plus
      earnings are classified as deferred revenues. Our normal payment terms are
      net
      30 days. Reimbursements for out-of-pocket expenses are included in gross
      revenues. Revenues from the sale of third-party software are recorded on a
      gross
      basis provided that we act as the principal in the transaction. In the event
      we
      do not meet the requirements to be considered the principal in the software
      sale
      transaction, we record the revenues on a net basis. There is no effect on net
      income between recording the software sales on a gross basis versus a net
      basis.




Revenues
      are recognized when the following criteria are met: (1) persuasive evidence
      of the customer arrangement exists, (2) fees are fixed and determinable,
      (3) delivery and acceptance has occurred, and (4) collectibility is
      deemed probable. We
      consider a non-cancelable fully executed agreement or client purchase order
      to
      be persuasive evidence of an arrangement. We consider delivery to have occurred
      upon the rendering of services or delivery of software to the client. We
      consider the fee to be fixed or determinable if the fee is not subject to
      adjustment, or if we have not granted extended payment terms to the client.
      We
      consider collection to be probable if our internal credit analysis indicates
      that the client will be able to pay amounts as they become due under the
      arrangement.




For
      our
      sales arrangements that contain multiple revenue elements, such as software
      licenses, professional services and software maintenance, we first determine
      whether the arrangement is within the scope of Emerging Issues Task Force
      ("EITF") EITF No. 00-21 ("EITF 00-21"), "Revenue Arrangements with Multiple
      Deliverables" or Statement of Position ("SOP") 97-2 ("SOP 97-2"), "Software
      Revenue Recognition". Under EITF 00-21, separate contracts to provide services
      or for the sale of software to the same client must be evaluated as a multiple
      element arrangement if they are entered into in the same time frame. We
      recognize revenue on arrangements with multiple deliverables as separate units
      of accounting only if certain criteria are met. In general, a deliverable meets
      the separation criteria if the deliverable has standalone value to the client
      and if there is objective and reliable evidence of the fair value of all
      remaining undelivered elements in the arrangement. We allocate the total
      arrangement consideration to each separate unit of accounting based on the
      relative fair value of each separate unit of accounting. The amount of
      arrangement consideration that is allocated to a delivered unit of accounting
      is
      limited to the amount that is not contingent upon the delivery of another
      separate unit of accounting. All deliverables of the Company’s multiple element
      arrangements meet these criteria.





We
      follow
      very specific and detailed guidelines, discussed above, in determining revenues;
      however, certain judgments and estimates are made and used to determine revenues
      recognized in any accounting period. Material differences may result in the
      amount and timing of revenues recognized for any period if different conditions
      were to prevail.




Revenues
      from internally developed software are allocated to maintenance and support
      and
      are recognized ratably over the maintenance term (typically one
      year).




Revenues
      allocated to training and consulting service elements is recognized as the
      services are performed. Our consulting services are not essential to the
      functionality of our products as such services are available from other
      vendors.




Our
      allowance for doubtful accounts is based upon specific identification of likely
      and probable losses. Each accounting period, we evaluate accounts receivable
      for
      risk associated with a client's inability to make contractual payments or
      unresolved issues with the adequacy of our services. Billed and unbilled
      receivables that are specifically identified as being at risk are provided
      for
      with a charge to revenue in the period the risk is identified. We use
      considerable judgment in assessing the ultimate realization of these
      receivables, including reviewing the financial stability of the client,
      evaluating the successful mitigation of service delivery disputes, and gauging
      current market conditions. If our evaluation of service delivery issues or
      a
      client's ability to pay is incorrect, we may incur future reductions to
      revenue.




25


*Goodwill,
      Other Intangible Assets and Impairment of Long-Lived Assets*





Business
      acquisitions typically result in goodwill and other intangible assets, and
      the
      recorded values of those assets may become impaired in the future. The
      determination of the value of such intangible assets requires us to make
      estimates and assumptions that affect our consolidated financial statements.
      The
      Company follows Statement of Financial Accounting Standards (“SFAS”) No.
      142, *Goodwill and Other Intangible Assets.* In
      accordance with SFAS No. 142, we assess our goodwill on October 1 of each year
      or more frequently if events or changes in circumstances indicate that goodwill
      might be impaired. Our judgments regarding the existence of impairment
      indicators and future cash flows related to intangible assets are based on
      operational performance of the businesses, market conditions and other factors.
      Future events could cause us to conclude that impairment indicators exist and
      that goodwill is impaired. Any resulting impairment loss could have an adverse
      impact on our results of operations by decreasing net income. Management
      assessed goodwill for impairment at October 1, 2006. This analysis indicated
      that there was no impairment of the carrying values of goodwill.





We
      evaluate long-lived tangible assets and intangible assets other than goodwill
      in
      accordance with SFAS No. 144, *Accounting for the Impairment of Long-Lived Assets* .
      Long-lived assets held and used are reviewed for impairment whenever events
      or
      changes in circumstances indicate that their net book value may not be entirely
      recoverable. When such factors and circumstances exist, we compare the projected
      undiscounted future cash flows associated with the related asset or group of
      assets over their estimated useful lives against their respective carrying
      amounts. Impairment, if any, is based on the excess of the carrying amount
      over
      the fair value of those assets and is recorded in the period in which the
      determination was made.





*Purchase
      Price Allocation*





We
      allocate the purchase price of our acquisitions to the assets and liabilities
      acquired, including identifiable intangible assets, based on their respective
      fair values at the date of acquisition. Some of
      the
      items, including accounts receivable, property and equipment, other intangible
      assets, certain accrued liabilities, and other reserves require a high degree
      of
      management judgment. Certain estimates may change as additional information
      becomes available. Goodwill
      is assigned at the enterprise level and is deductible for tax purposes for
      certain types of acquisitions. The purchase price is allocated to intangibles
      based on management's estimate and an independent valuation. Management
      finalizes the purchase price allocation within twelve months of the acquisition
      date as certain initial accounting estimates are resolved.





*Accounting
      for Stock-Based Compensation*




We
      adopted SFAS No. 123R, *Share-Based
      Payment* ,
      on
      January 1, 2006, using the modified prospective application transition method.
      SFAS No. 123R requires that the costs of employee share-based payments be
      measured at fair value on the awards' grant date and recognized in the financial
      statements over the requisite service period.




The
      Company estimates the fair value of stock option awards on the date of grant
      utilizing a modified Black-Scholes option pricing model. The Black-Scholes
      option valuation model was developed for use in estimating the fair value of
      short-term traded options that have no vesting restrictions and are fully
      transferable. However, certain assumptions used in the Black-Scholes model,
      such
      as expected term, can be adjusted to incorporate the unique characteristics
      of
      the Company’s stock option awards. Option valuation models require the input of
      somewhat subjective assumptions including expected stock price volatility and
      expected term. The Company believes it is unlikely that materially different
      estimates for the assumptions used in estimating the fair value of stock options
      granted would be made based on the conditions suggested by actual historical
      experience and other data available at the time estimates were made. Restricted
      stock awards are valued at the price of our common stock on the date of the
      grant.




Prior
      to
      January 1, 2006, the Company accounted for share-based compensation using
      the intrinsic value method prescribed by Accounting Principles Board Opinion
      No. 25, *Accounting for Stock Issued to Employees* ,
      and
      related interpretations and elected the disclosure option of SFAS No. 123 as
      amended by SFAS No. 148, *Accounting for Stock-Based Compensation - Transition and
      Disclosure* .
      SFAS
      No. 123 required that companies either recognize compensation expense for grants
      of stock, stock options and other equity instruments based on fair value, or
      provide pro forma disclosure of net income and earnings per share in the notes
      to the financial statements. Accordingly, the Company measured compensation
      expense for stock options as the excess, if any, of the estimated fair market
      value of the Company's stock at the date of grant over the exercise price.
      The
      Company provided pro forma effects of this measurement in a footnote to its
      financial statements.




*Income
      Taxes*




To
      record
      income tax expense, we are required to estimate our income taxes in each of
      the
      jurisdictions in which we operate. In addition, income tax expense at interim
      reporting dates requires us to estimate our expected effective tax rate for
      the
      entire year. This involves estimating our actual current tax liability together
      with assessing temporary differences that result in deferred tax assets and
      liabilities and expected future tax rates.




26





Management
      believes that our net deferred tax asset should continue to be reduced by a
      valuation allowance to an amount we believe is more likely than not to be
      realized. Future operating results and projections could alter this conclusion,
      potentially resulting in an increase or decrease in the valuation allowance.
      Since the valuation allowance relates solely to net operating and capital losses
      from acquired companies which are subject to usage limitations, any decrease
      in
      the valuation allowance will be applied first to reduce goodwill and then to
      reduce other acquisition related non-current intangible assets to zero. Any
      remaining decrease in the valuation allowance would be recognized as a reduction
      of income tax expense.




**Recent
      Accounting Pronouncements**




In
      September 2006, the SEC issued Staff Accounting Bulletin 108 (“SAB 108”), which
      expresses the Staff’s views regarding the process of quantifying financial
      statement misstatements. The bulletin was effective at fiscal year end 2006.
      The
      implementation of this bulletin had no impact on the Company’s results of
      operations, cash flows or financial position.





In
      September 2006, the FASB issued Statement No. 157, *Fair
      Value Measurements* ("SFAS
      157"). SFAS 157 defines fair value, establishes a framework for measuring fair
      value in GAAP, and expands disclosures about fair value measurements. SFAS
      157
      will be applied prospectively and will be effective for periods beginning after
      November 15, 2007. The Company is currently evaluating the effect, if any,
      of
      SFAS 157 on the Company's consolidated financial statements.





In
      June
      2006, the FASB issued FASB Interpretation ("FIN") No. 48, *Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement
      No. 109* ("FIN
      48"). FIN 48 prescribes a recognition threshold and measurement attribute for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. FIN 48 also provides guidance on
      derecognition, classification, treatment of interest and penalties, and
      disclosure of such positions. FIN 48 will be applied prospectively and will
      be
      effective for fiscal years beginning after December 31, 2006. The Company will
      adopt the provisions of FIN 48 in the first quarter of 2007 as required. The
      adoption of FIN 48 is not expected to have a material effect on the Company’s
      consolidated financial statements.





In
      June
      2006, the EITF ratified EITF Issue 06-3, *How
      Taxes Collected From Customers and Remitted to Governmental Authorities Should
      Be Presented in the Income Statement (That Is, Gross versus Net
      Presentation)* .
      A
      consensus was reached that entities may adopt a policy of presenting taxes
      in
      the income statement on either a gross or net basis. An entity should disclose
      its policy of presenting taxes and the amount of any taxes presented on a gross
      basis should be disclosed, if significant. The guidance is effective for periods
      beginning after December 15, 2006. We present revenues net of taxes. EITF 06-3
      will not impact the method for recording these sales taxes in our consolidated
      financial statements.





**Off-Balance
      Sheet Arrangements**




The
      Company currently has no off-balance sheet arrangements, except operating lease
      commitments as disclosed in Footnote 10 to the consolidated financial
      statements.





**Item
      7A.**  **Quantitative
      and Qualitative Disclosures About Market Risk.**




We
      are
      exposed to market risks related to changes in foreign currency exchange rates
      and interest rates.  We believe our exposure to market risks is
      immaterial.





*Exchange
      Rate Sensitivity*




During
      2006, $1.6 million of our total revenues was attributable to our Canadian
      operations.  Our exposure to changes in foreign currency rates primarily
      arises from short-term intercompany transactions with our Canadian subsidiary
      and from client receivables in the Canadian dollar.  Our Canadian
      subsidiary incurs a significant portion of its expenses in Canadian dollars
      as
      well, which helps minimize our risk of exchange rate fluctuations. Based on
      the
      amount of revenues attributed to Canada during 2006, this exchange rate risk
      will not have a material impact on our financial position or results of
      operations.





*Interest
      Rate Sensitivity*




As
      of
      December 31, 2006, there were no amounts outstanding under the accounts
      receivable line of credit and $25 million of available borrowing capacity,
      excluding $450,000 reserved for two outstanding letters of credit to secure
      facility leases. Our interest expense will fluctuate as the interest rate for
      this accounts receivable line of credit floats based on the bank's prime rate.
      The interest rate on the acquisition line of credit is fixed. Since there were
      no amounts outstanding under the accounts receivable line of credit as of
      December 31, 2006, an increase in the interest rate of 100 basis points would
      add no interest expense per year.




We
      had
      unrestricted cash and cash equivalents totaling $4.5 million and
      $5.1 million at December 31, 2006 and 2005, respectively. These
      amounts were invested primarily in money market funds. The unrestricted cash
      and
      cash equivalents are held for working capital purposes. We do not enter into
      investments for trading or speculative purposes. Due to the short-term nature
      of
      these investments, we believe that we do not have any material exposure to
      changes in the fair value of our investment portfolio as a result of changes
      in
      interest rates. Declines in interest rates, however, will reduce future
      investment income.




27





**Item
      8.**  **Financial
      Statements and Supplementary Data.**




**PERFICIENT,
      INC.**




**CONSOLIDATED
      BALANCE SHEETS**


**AS
      OF DECEMBER 31, 2006 AND 2005**





**December
                31,****2006**
            
            **2005****ASSETS**
            
            (In
                thousands, except share data)Current
                assets:Cash
                and cash equivalents
            
            $
            4,549
            
            $
            5,096Accounts
                receivable, net of allowance for doubtful accounts of $707 in 2006
                and$367
                in 2005
            
            
            38,600
            
            
            23,251Prepaid
                expenses
            
            
            1,171
            
            
            887Other
                current assets
            
            
            2,799
            
            
            1,530Total
                current assets
            
            
            47,119
            
            
            30,764Property
                and equipment, net
            
            
            1,806
            
            
            960Goodwill
            
            
            69,170
            
            
            46,263Intangible
                assets, net
            
            
            11,886
            
            
            5,768Other
                non-current assets
            
            
            1,019
            
            
            1,180Total
                assets
            
            $
            131,000
            
            $
            84,935**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            5,025
            
            $
            3,774Current
                portion of long-term debt
            
            
            1,201
            
            
            1,337Other
                current liabilities
            
            
            16,034
            
            
            8,331Note
                payable to related parties
            
            
            --
            
            
            244Total
                current liabilities
            
            
            22,260
            
            
            13,686Long-term
                debt, less current portion
            
            
            137
            
            
            5,338Deferred
                income taxes
            
            
            1,251
            
            
            --Total
                liabilities
            
            
            23,648
            
            
            19,024Commitments
                and contingencies (see Note 5 and 10)Stockholders'
                equity:Common
                stock ($0.001 par value per share; 50,000,000 shares authorized and
                26,699,974 shares issued and outstanding as of December 31, 2006;
                23,294,509 shares issued and outstanding as of December 31, 2005)
            
            
            27
            
            
            23Additional
                paid-in capital
            
            
            147,028
            
            
            115,120Accumulated
                other comprehensive loss
            
            
            (125
            )
            
            (87
            )Accumulated
                deficit
            
            
            (39,578
            )
            
            (49,145
            )Total
                stockholders' equity
            
            
            107,352
            
            
            65,911Total
                liabilities and stockholders' equity
            
            $
            131,000
            
            $
            84,935




*See
      accompanying notes to consolidated financial statements.*




28





**PERFICIENT, INC.**




**CONSOLIDATED
      STATEMENTS OF INCOME**


**FOR
      THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**





**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Revenues
            
            (In
                thousands, except share data)Services
            
            $
            137,722
            
            $
            83,740
            
            $
            43,331Software
            
            
            14,435
            
            
            9,387
            
            
            13,170Reimbursable
                expenses
            
            
            8,769
            
            
            3,870
            
            
            2,347Total
                revenues
            
            
            160,926
            
            
            96,997
            
            
            58,848Cost
                of revenues (exclusive of depreciation and amortization, shown separately
                below):Project
                personnel costs
            
            
            84,161
            
            
            51,140
            
            
            26,073Software
                costs
            
            
            12,118
            
            
            7,723
            
            
            11,341Reimbursable
                expenses
            
            
            8,769
            
            
            3,870
            
            
            2,347Other
                project related expenses
            
            
            2,122
            
            
            1,846
            
            
            267Total
                cost of revenues
            
            
            107,170
            
            
            64,579
            
            
            40,028Gross
                margin
            
            
            53,756
            
            
            32,418
            
            
            18,820Selling,
                general and administrative
            
            
            32,268
            
            
            17,917
            
            
            11,068Depreciation
            
            
            948
            
            
            615
            
            
            512Amortization
                of intangible assets
            
            
            3,458
            
            
            1,611
            
            
            697Income
                from operations
            
            
            17,082
            
            
            12,275
            
            
            6,543Interest
                income
            
            
            102
            
            
            15
            
            
            3Interest
                expense
            
            
            (509
            )
            
            (658
            )
            
            (137
            )Other
                income
            
            
            174
            
            
            43
            
            
            32Income
                before income taxes
            
            
            16,849
            
            
            11,675
            
            
            6,441Provision
                for income taxes
            
            
            7,282
            
            
            4,498
            
            
            2,528Net
                income
            
            $
            9,567
            
            $
            7,177
            
            $
            3,913Basic
                net income per share
            
            $
            0.38
            
            $
            0.33
            
            $
            0.22Diluted
                net income per share
            
            $
            0.35
            
            $
            0.28
            
            $
            0.19Shares
                used in computing basic net income per share
            
            
            25,033,337
            
            
            22,005,154
            
            
            17,648,575Shares
                used in computing diluted net income per share
            
            
            27,587,449
            
            
            25,242,496
            
            
            20,680,507





*See
      accompanying notes to consolidated financial statements.*




29





**PERFICIENT, INC.**


**CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY**


**FOR
      THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**


(In
      thousands)




**CommonStockShares**
            
            
            **CommonStockAmount**
            
            
            **AdditionalPaid-inCapital**
            
            
            **AccumulatedOtherComprehensiveLoss**
            
            
            **AccumulatedDeficit**
            
            
            **TotalStockholders'Equity**Balance
                at January 1, 2004
            
            
            14,039
            
            $
            14
            
            $
            76,289
            
            $
            (52
            )
            $
            (60,235
            )
            $
            16,016Warrants
                exercised
            
            
            1,277
            
            
            1
            
            
            2,539
            
            
            --
            
            
            --
            
            
            2,540Stock
                options exercised
            
            
            492
            
            
            1
            
            
            656
            
            
            --
            
            
            --
            
            
            657Issuance
                of stock for Genisys, Meritage, and ZettaWorks
                acquisitions
            
            
            4,049
            
            
            4
            
            
            18,770
            
            
            --
            
            
            --
            
            
            18,774Issuance
                of stock for private placement
            
            
            800
            
            
            1
            
            
            2,359
            
            
            --
            
            
            --
            
            
            2,360Tax
                benefit of stock option exercises
            
            
            --
            
            
            --
            
            
            342
            
            
            --
            
            
            --
            
            
            342Stock
                compensation
            
            
            --
            
            
            --
            
            
            27
            
            
            --
            
            
            --
            
            
            27Foreign
                currency translation adjustment
            
            
            --
            
            
            --
            
            
            --
            
            
            (6
            )
            
            --
            
            
            (6
            )Net
                income
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            3,913
            
            
            3,913Total
                comprehensive income
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            3,907Balance
                at December 31, 2004
            
            
            20,657
            
            
            21
            
            
            100,982
            
            
            (58
            )
            
            (56,322
            )
            
            44,623Warrants
                exercised
            
            
            88
            
            
            --
            
            
            157
            
            
            --
            
            
            --
            
            
            157Stock
                options exercised
            
            
            1,354
            
            
            1
            
            
            2,703
            
            
            --
            
            
            --
            
            
            2,704Issuance
                of stock for iPath and Vivare acquisitions
            
            
            1,196
            
            
            1
            
            
            8,708
            
            
            --
            
            
            --
            
            
            8,709Tax
                benefit of stock option exercises
            
            
            --
            
            
            --
            
            
            2,306
            
            
            --
            
            
            --
            
            
            2,306Stock
                compensation
            
            
            --
            
            
            --
            
            
            264
            
            
            --
            
            
            --
            
            
            264Foreign
                currency translation adjustment
            
            
            --
            
            
            --
            
            
            --
            
            
            (29
            )
            
            --
            
            
            (29
            )Net
                income
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            7,177
            
            
            7,177Total
                comprehensive income
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            7,148Balance
                at December 31, 2005
            
            
            23,295
            
            
            23
            
            
            115,120
            
            
            (87
            )
            
            (49,145
            )
            
            65,911Issuance
                of stock for Bay Street, Insolexen, and EGG
                acquisitions
            
            
            1,499
            
            
            2
            
            
            17,989
            
            
            --
            
            
            --
            
            
            17,991Warrants
                exercised
            
            
            145
            
            
            --
            
            
            146
            
            
            --
            
            
            --
            
            
            146Stock
                options exercised
            
            
            1,672
            
            
            2
            
            
            4,001
            
            
            --
            
            
            --
            
            
            4,003Purchases
                of stock from Employee Stock
              Purchase
                Plan
            
            
            6
            
            
            --
            
            
            86
            
            
            --
            
            
            --
            
            
            86Tax
                benefit of stock option exercises
            
            
            --
            
            
            --
            
            
            6,554
            
            
            --
            
            
            --
            
            
            6,554Stock
                compensation
            
            
            --
            
            
            --
            
            
            3,132
            
            
            --
            
            
            --
            
            
            3,132Vested
                stock compensation
            
            
            83
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Foreign
                currency translation adjustment
            
            
            --
            
            
            --
            
            
            --
            
            
            (38
            )
            
            --
            
            
            (38
            )Net
                income
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            9,567
            
            
            9,567Total
                comprehensive income
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            9,529**Balance
                at December 31, 2006**
            
            
            **26,700**
            
            **$**
            **27**
            
            **$**
            **147,028**
            
            $
            **(125**
            **)**
            **$**
            **(39,578**
            **)**
            **$**
            **107,352**





*See
      accompanying notes to consolidated financial statements.* ****




30





**PERFICIENT, INC.**




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**





**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004****OPERATING
                ACTIVITIES**
            
            
            
            (In
                thousands)Net
                income
            
            $
            9,567
            
            $
            7,177
            
            $
            3,913Adjustments
                to reconcile net income to net cash provided by
                operations:Depreciation
            
            
            948
            
            
            615
            
            
            512Amortization
                of intangibles
            
            
            3,458
            
            
            1,611
            
            
            697Non-cash
                stock compensation
            
            
            3,132
            
            
            264
            
            
            27Non-cash
                interest expense
            
            
            6
            
            
            24
            
            
            --Tax
                benefit on stock option exercises
            
            
            --
            
            
            2,306
            
            
            342Changes
                in operating assets and liabilities, net of acquisitions:Accounts
                receivable
            
            
            (5,771
            )
            
            148
            
            
            (8,120
            )Other
                assets
            
            
            (152
            )
            
            (1,866
            )
            
            76Accounts
                payable
            
            
            1,251
            
            
            (3,155
            )
            
            5,297Other
                liabilities
            
            
            (2,824
            )
            
            563
            
            
            1,294Net
                cash provided by operating activities
            
            
            9,615
            
            
            7,687
            
            
            4,038**INVESTING
                ACTIVITIES**Purchase
                of property and equipment
            
            
            (1,518
            )
            
            (691
            )
            
            (430
            )Capitalization
                of software developed for internal use
            
            
            (136
            )
            
            (599
            )
            
            --Purchase
                of businesses, net of cash acquired
            
            
            (13,678
            )
            
            (9,704
            )
            
            (10,734
            )Payments
                on Javelin notes
            
            
            (250
            )
            
            (250
            )
            
            --Net
                cash used in investing activities
            
            
            (15,582
            )
            
            (11,244
            )
            
            (11,164
            )**FINANCING
                ACTIVITIES**Proceeds
                from revolving line of credit
            
            
            34,900
            
            
            12,000
            
            
            4,000Payments
                on revolving line of credit
            
            
            (38,900
            )
            
            (8,000
            )
            
            --Payments
                on long-term debt
            
            
            (1,338
            )
            
            (1,135
            )
            
            (522
            )Deferred
                offering costs
            
            
            --
            
            
            (942
            )
            
            --Tax
                benefit on stock option exercises
            
            
            6,554
            
            
            --
            
            
            --Proceeds
                from the exercise of stock options and Employee Stock Purchase
                Plan
            
            
            4,089
            
            
            2,704
            
            
            657Proceeds
                from the exercise of warrants
            
            
            146
            
            
            157
            
            
            2,540Proceeds
                from stock issuances, net
            
            
            --
            
            
            --
            
            
            2,373Net
                cash provided by financing activities
            
            
            5,451
            
            
            4,784
            
            
            9,048Effect
                of exchange rate on cash and cash equivalents
            
            
            (31
            )
            
            (37
            )
            
            (6
            )Change
                in cash and cash equivalents
            
            
            (547
            )
            
            1,190
            
            
            1,916Cash
                and cash equivalents at beginning of period
            
            
            5,096
            
            
            3,906
            
            
            1,990Cash
                and cash equivalents at end of period
            
            $
            4,549
            
            $
            5,096
            
            $
            3,906**Supplemental
                disclosures:**Interest
                paid
            
            $
            540
            
            $
            594
            
            $
            141Cash
                paid for income taxes
            
            $
            3,156
            
            $
            3,684
            
            $
            2,256**Non-cash
                activities:**Common
                stock and options issued in purchase of businesses
            
            $
            17,991
            
            $
            8,709
            
            $
            18,774Change
                in goodwill
            
            $
            318
            
            $
            670
            
            $
            644





*See
      accompanying notes to consolidated financial statements.*




31





**PERFICIENT,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**1. 
      Description of Business and Principles of Consolidation**




Perficient, Inc.
      (the “Company”) is an information technology consulting firm. The Company helps
      its clients use Internet-based technologies to make their businesses more
      responsive to market opportunities and threats, strengthen relationships with
      customers, suppliers and partners, improve productivity and reduce information
      technology costs. The Company designs, builds and delivers solutions using
      a
      core set of middleware software products developed by third party vendors.
      The
      Company's solutions enable its clients to operate a real-time enterprise that
      adapts business processes and the systems that support them to the changing
      demands of an increasingly global, Internet-driven and competitive
      marketplace.




The
      Company is incorporated in Delaware. The consolidated financial statements
      include the accounts of the Company and its wholly owned subsidiaries. All
      material intercompany accounts and transactions have been eliminated in
      consolidation.




**2. 
      Summary of Significant Accounting Policies**




**Use
      of Estimates**




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting periods. Actual results could differ from those estimates, and such
      differences could be material to the financial statements.





**Reclassification**





The
      Company has reclassified the presentation of certain prior period information
      to
      conform to the 2006 presentation.




**Revenue
      Recognition**




Revenues
      are primarily derived from professional services provided on a time and
      materials basis. For time and material contracts, revenues is recognized and
      billed by multiplying the number of hours expended in the performance of the
      contract by the established billing rates. For fixed fee projects, revenues
      is
      generally recognized using the proportionate performance method based on the
      ratio of hours expended to total estimated hours. Revenues on uncompleted
      projects are recognized on a contract-by-contract basis in the period in which
      the portion of the fixed fee is complete. Billings in excess of costs plus
      earnings are classified as deferred revenues. On many projects the Company
      is
      also reimbursed for out-of-pocket expenses such as airfare, lodging and meals.
      These reimbursements are included as a component of revenues. Revenues from
      software sales are recorded on a gross basis based on the Company's role as
      principal in the transaction. The Company is considered a “principal” if the
      Company is the primary obligator and bears the associated credit risk in the
      transaction. In the event the Company does not meet the requirements to be
      considered a principal in the software sale transaction and acts as an agent,
      the revenues would be recorded on a net basis.




Revenues
      are recognized when the following criteria are met: (1) persuasive evidence
      of the customer arrangement exists, (2) fees are fixed and determinable,
      (3) delivery and acceptance has occurred, and (4) collectibility is
      deemed probable. The Company’s policy for revenue recognition in instances where
      multiple deliverables are sold contemporaneously to the same counterparty is
      in
      accordance with Emerging Issues Task Force ("EITF") Issue No. 00-21, Revenue
      Arrangements with Multiple Deliverables, and SEC Staff Accounting Bulletin
      No.
      104, Revenue Recognition. Specifically, if the Company enters into contracts
      for
      the sale of services and software, then the Company evaluates whether it has
      objective fair value evidence for each deliverable in the transaction. If the
      Company has objective fair value evidence for each deliverable of the
      transaction, then it accounts for each deliverable in the transaction
      separately, based on the relevant revenue recognition policies. All
      deliverables of the Company’s multiple element arrangements meet these criteria. We
      follow
      very specific and detailed guidelines, discussed above, in determining revenues;
      however, certain judgments and estimates are made and used to determine revenues
      recognized in any accounting period. Material differences may result in the
      amount and timing of revenues recognized for any period if different conditions
      were to prevail.





Revenues
      from internally developed software are allocated to maintenance and support
      and
      are recognized ratably over the maintenance term (typically one
      year).




Revenues
      allocated to training and consulting service elements is recognized as the
      services are performed. Our consulting services are not essential to the
      functionality of our products as such services are available from other
      vendors.




**Cash
      and Cash Equivalents**




Cash
      equivalents consist primarily of cash deposits and investments with original
      maturities of ninety days or less when purchased.




32





**PERFICIENT,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





**Accounts
      Receivable and Allowance for Doubtful Accounts**




Accounts
      receivable are recorded at the invoiced amount. The allowance for doubtful
      accounts is the Company’s best estimate of the amount of uncollectible amounts
      in its existing accounts receivable. Management analyzes historical collection trends and changes in its customer
      payment patterns, customer concentration, and credit worthiness when evaluating
      the adequacy of its allowance for doubtful accounts. The Company includes any
      receivables balances that are determined to be uncollectible in its overall
      allowance for doubtful accounts. The
      Company reviews its allowance for doubtful accounts monthly. Account balances
      are charged off against the allowance when the Company believes that it is
      probable the receivable will not be recovered.





**Property
      and Equipment**




Property
      and equipment are recorded at cost. Depreciation of property and equipment
      is
      computed using the straight-line method over the useful lives of the assets
      (generally one to five years). Leasehold improvements are amortized over
      the shorter of the life of the lease or the estimated useful life of the assets.




**Intangible
      Assets**




Goodwill
      represents the excess purchase price over the fair value of net assets acquired,
      or net liabilities assumed, in a business combination. In accordance with
      Statement of Financial Accounting Standards (“SFAS”) No. 142, *Goodwill
      and Other Intangible Assets* ,
      the
      Company performs an annual impairment test of goodwill. The Company evaluates
      goodwill at the enterprise level as of October 1 each year or more frequently
      if
      events or changes in circumstances indicate that goodwill might be impaired.
      As
      required by SFAS No.142, the impairment test is accomplished using a two-stepped
      approach. The first step screens for impairment and, when impairment is
      indicated, a second step is employed to measure the impairment. The Company
      also
      reviewed other factors to determine the likelihood of impairment. No impairment
      was indicated using data as of October 1, 2006.




Other
      intangible assets include customer relationships, customer backlog, non-compete
      arrangements and internally developed software, and are being amortized over
      the
      assets' estimated useful lives using the straight-line method. Estimated useful
      lives range from nine months to eight years. Amortization of customer
      relationships, customer backlog, non-compete arrangements and internally
      developed software are considered operating expenses and are included in
“Amortization of intangible assets” in the accompanying consolidated Statements
      of Income. The Company periodically reviews the estimated useful lives of its
      identifiable intangible assets, taking into consideration any events or
      circumstances that might result in a lack of recoverability or revised useful
      life.




**Impairment
      of Long-Lived Assets**




Long-lived
      assets held and used by the Company are reviewed for impairment whenever events
      or changes in circumstances indicate that their net book value may not be
      entirely recoverable. When such factors and circumstances exist, the Company
      compares the projected undiscounted future cash flows associated with the
      related asset or group of assets over their estimated useful lives against
      their
      respective carrying amounts. Impairment, if any, is based on the excess of
      the
      carrying amount over the fair value of those assets and is recorded in the
      period in which the determination was made.





**Deferred
      Offering Costs**





Costs
      incurred related to equity offerings under effective registration statements
      are
      deferred until the offering occurs or management does not intend to complete
      the
      offering. At the time that the issuance of new equity occurs, these costs are
      netted against the proceeds received. These costs are expensed if the offering
      does not occur. Approximately $943,000 of these costs were recorded as part
      of
      Other Non-Current Assets on the Balance Sheet as of December 31,
      2006.




**Income
      Taxes**




The
      Company accounts for income taxes in accordance with SFAS
      No. 109, *Accounting for Income Taxes* .
      This
      Statement prescribes the use of the liability method whereby deferred tax asset
      and liability account balances are determined based on differences between
      financial reporting and tax bases of assets and liabilities and are measured
      using the enacted tax rates and laws that will be in effect when the differences
      are expected to reverse. Deferred tax assets are subject to tests of
      recoverability. A valuation allowance is provided for such deferred tax assets
      to the extent realization is not judged to be more likely than not.




33





**PERFICIENT,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





**Earnings
      Per Share**




Basic
      earnings per share is computed by dividing net income available to common
      stockholders by the weighted-average number of common shares outstanding during
      the period. Diluted earnings per share includes the weighted average number
      of
      common shares outstanding and the number of equivalent shares which would be
      issued related to the stock options and warrants using the treasury method,
      contingently issuance shares, and convertible preferred stock using the
      if-converted method, unless such additional equivalent shares are
      anti-dilutive.




**Stock-Based
      Compensation**




Effective
      January 1, 2006, the Company adopted the provisions of Statement of
      Financial Accounting Standards No. 123R (As Amended), *Share
      Based Payment* (“SFAS
      123R”), using the modified prospective application transition method. Under this
      method, compensation cost for the portion of awards for which the requisite
      service has not yet been rendered that are outstanding as of the adoption date
      is recognized over the remaining service period. The compensation cost for
      that
      portion of awards is based on the grant-date fair value of those awards as
      calculated for pro forma disclosures under SFAS No. 123. All new awards and
      awards that are modified, repurchased, or cancelled after the adoption date
      are
      accounted for under the provisions of SFAS No. 123R. Prior periods are not
      restated under this transition method. The Company recognizes share-based
      compensation ratably using the straight-line attribution method over the
      requisite service period. In addition, pursuant to SFAS No. 123R, the
      Company is required to estimate the amount of expected forfeitures when
      calculating share-based compensation, instead of accounting for forfeitures
      as
      they occur, which was the Company's practice prior to the adoption of SFAS
      No. 123R.





**Fair
      Value of Financial Instruments**




Cash
      equivalents, accounts receivable, accounts payable, other accrued liabilities,
      and debt are stated at amounts which approximate fair value due to the near
      term
      maturities of these instruments and the variable interest rates on the Company's
      accounts receivable line of credit.





**Recently
      Issued Accounting Standards**




In
      September 2006, the SEC issued Staff Accounting Bulletin 108 (“SAB 108”), which
      expresses the Staff’s views regarding the process of quantifying financial
      statement misstatements. The bulletin was effective at fiscal year end 2006.
      The
      implementation of this bulletin had no impact on the Company’s results of
      operations, cash flows or financial position.





In
      September 2006, the FASB issued Statement No. 157, *Fair
      Value Measurements* ("SFAS
      157"). SFAS 157 defines fair value, establishes a framework for measuring fair
      value in generally accepted accounting principles (GAAP), and expands
      disclosures about fair value measurements. SFAS 157 will be applied
      prospectively and will be effective for periods beginning after November 15,
      2007. The Company is currently evaluating the effect, if any, of SFAS 157 on
      the
      Company's consolidated financial statements.





In
      June
      2006, the FASB issued FASB Interpretation ("FIN") No. 48, *Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement
      No. 109* ("FIN
      48"). FIN 48 prescribes a recognition threshold and measurement attribute for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. FIN 48 also provides guidance on
      derecognition, classification, treatment of interest and penalties, and
      disclosure of such positions. FIN 48 will be applied prospectively and will
      be
      effective for fiscal years beginning after December 31, 2006. The Company will
      adopt the provisions of FIN 48 in the first quarter of 2007 as required. The
      Company is still evaluating the effect of adopting FIN 48 and does not expect
      it
      to have a material effect on the Company’s consolidated financial
      statements.




34





**PERFICIENT,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





In
      June
      2006, the Emerging Issues Task Force ("EITF") ratified EITF Issue
      06-3, *How
      Taxes Collected From Customers and Remitted to Governmental Authorities Should
      Be Presented in the Income Statement (That Is, Gross versus Net
      Presentation)* .
      A
      consensus was reached that entities may adopt a policy of presenting taxes
      in
      the income statement on either a gross or net basis. An entity should disclose
      its policy of presenting taxes and the amount of any taxes presented on a gross
      basis should be disclosed, if significant. The guidance is effective for periods
      beginning after December 15, 2006. We present revenues net of taxes. EITF 06-3
      will not impact the method for recording these sales taxes in our consolidated
      financial statements.





**3.
      Net Income Per Share**




The
      following table presents the calculation of basic and diluted net income per
      share (in thousands, except per share information):




**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Net
                income
            
            $
            9,567
            
            $
            7,177
            
            $
            3,913Basic:Weighted-average
                shares of common stock outstanding
            
            
            23,783
            
            
            20,868
            
            
            16,964Weighted-average
                shares of common stock subject to contingency (i.e. restricted
                stock)
            
            
            1,250
            
            
            1,137
            
            
            685Shares
                used in computing basic net income per share
            
            
            25,033
            
            
            22,005
            
            
            17,649Effect
                of dilutive securities:Stock
                options
            
            
            2,281
            
            
            3,088
            
            
            2,836Warrants
            
            
            74
            
            
            149
            
            
            196Restricted
                stock subject to vesting
            
            
            199
            
            
            --
            
            
            --Shares
                used in computing diluted net income per share
            
            
            27,587
            
            
            25,242
            
            
            20,681Basic
                net income per share
            
            $
            0.38
            
            $
            0.33
            
            $
            0.22Diluted
                net income per share
            
            $
            0.35
            
            $
            0.28
            
            $
            0.19





**4.  
      Concentration of Credit Risk and Significant Customers**




Cash
      and
      accounts receivable potentially expose the Company to concentrations of credit
      risk. Cash is placed with highly rated financial institutions. The Company
      provides credit, in the normal course of business, to its customers. The Company
      generally does not require collateral or up-front payments. The Company performs
      periodic credit evaluations of its customers and maintains allowances for
      potential credit losses. Customers can be denied access to services in the
      event
      of non-payment. A substantial portion of the services the Company provides
      are
      built on IBM WebSphere (R) platforms and a significant number of its clients are identified through joint
      selling opportunities conducted with IBM and through sales leads obtained from
      the relationship with IBM. Revenues from IBM accounted for approximately 8%,
      9%,
      and 17% of total revenues for 2006, 2005 and 2004, respectively, and accounts
      receivable from IBM accounted for approximately 9% of total accounts receivable
      as of December 31, 2006 and 2005. While the dollar amount of revenues from
      IBM has remained relatively constant over the past three years, the percentage
      of total revenues from IBM has decreased as a result of the Company's growth
      and
      corresponding customer diversification. The loss of the Company's relationship
      with IBM or a significant reduction in the services the Company provides for
      IBM
      would result in significantly decreased revenues. Due to the Company's
      significant fixed operating expenses, the loss of sales to IBM or any
      significant customer could result in the Company's inability to generate net
      income or positive cash flow from operations for some time in the
      future.




**5.  
      Employee Benefit Plan**




The
      Company has a qualified 401(k) profit sharing plan available to full-time
      employees who meet the plan's eligibility requirements. This defined
      contribution plan permits employees to make contributions up to maximum limits
      allowed by the Internal Revenues Code. The Company, at its discretion, matches
      a
      portion of the employee's contribution under a predetermined formula based
      on
      the level of contribution and years of vesting services. The Company made
      matching contributions equal to 25% of the first 6% of employee contributions
      totaling approximately $0.5 million, $0.5 million, and $0.3 million during
      2006,
      2005 and 2004, respectively, which vest over a three year period of
      service.




35





**PERFICIENT,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





**6.  
      Intangible Assets**




*Intangible
      Assets with Indefinite Lives*




The
      changes in the carrying amount of goodwill for the year ended December 31,
      2006
      are as follows (in thousands):





**Goodwill**Balance
                at December 31, 2004
            
            $
            32,818Acquisitions
                consummated during 2005 (Note 13)
            
            
            14,115Utilization
                of net operating loss carryforwards, forfeiture of restricted stock
                used
                for
              acquisition
                purchase consideration and changes in estimated acquisition transaction
                costs
            
            
            (670
            )Balance
                at December 31, 2005
            
            
            46,263Acquisitions
                consummated during 2006 (Note 13)
            
            
            22,589Utilization
                of net operating loss carryforwards and adjustment to goodwill related
                to
                deferred taxes associated with acquisitions
            
            
            318Balance
                at December 31, 2006
            
            $
            69,170





*Intangible
      Assets with Definite Lives*




Following
      is a summary of the Company's intangible assets that are subject to amortization
      (in thousands):




**Year
                ended December 31,****2006**
            
            **2005****Gross
                Carrying Amount**
            
            **Accumulated
                Amortization**
            
            **Net**
              **Carrying
                Amount**
            
            **Gross
                Carrying Amount**
            
            **Accumulated
                Amortization**
            
            **Net**
              **Carrying
                Amount****Customer
                relationships**
            
            $
            12,860
            
            $
            (2,808
            )
            $
            10,052
            
            $
            4,820
            
            $
            (1,122
            )
            $
            3,698**Non-compete
                agreements**
            
            
            2,393
            
            
            (1,094
            )
            
            1,299
            
            
            2,073
            
            
            (621
            )
            
            1,452**Customer
                backlog**
            
            
            --
            
            
            --
            
            
            --
            
            
            130
            
            
            (57
            )
            
            73**Internally
                developed software**
            
            
            755
            
            
            (220
            )
            
            535
            
            
            599
            
            
            (54
            )
            
            545**Total**
            
            **$**
            16,008
            
            **$**
            (4,122
            )
            **$**
            11,886
            
            **$**
            7,622
            
            $
            (1,854
            )
            $
            5,768





The
      estimated useful lives of acquired identifiable intangible assets are as
      follows:




Customer
                relationships
            3
                - 8 yearsNon-compete
                agreements
            2
                - 5 yearsCustomer
                backlog
            4
                months to 1 yearInternally
                developed software
            5
                years




The
      weighted average amortization periods for customer relationships and non-compete
      agreements are 6 years and 5 years, respectively. Total amortization expense
      for
      the years ended December 31, 2006, 2005, and 2004 was approximately $3.5
      million, $1.6 million, and $0.7 million respectively.




Estimated
      annual amortization expense for the next five years ended December 31 is as
      follows (in thousands):




2007
            
            $
            2,8822008
            
            $
            2,6892009
            
            $
            2,3082010
            
            $
            1,7482011
            
            $
            1,619Thereafter
            
            $
            641




36




**PERFICIENT,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**




**7.  
      Equity Based Compensation**




**Stock
      Option Plans**




In
      May 1999, the Company's Board of Directors and stockholders approved the
      1999 Stock Option/Stock Issuance Plan (the “1999 Plan”). The 1999 Plan contains
      programs for (i) the discretionary granting of stock options to employees,
      non-employee board members and consultants for the purchase of shares of the
      Company's commons stock, (ii) the discretionary issuance of common stock
      directly to eligible individuals, and (iii) the automatic issuance of stock
      options to non-employee board members. The Compensation Committee of the Board
      of Directors administers the 1999 Plan, and determines the exercise price and
      vesting period for each grant. Options granted under the 1999 Plan have a
      maximum term of 10 years. In the event that the Company is acquired,
      whether by merger or asset sale or board-approved sale by the stockholders
      of
      more than 50% of the Company's voting stock, each outstanding option under
      the
      discretionary option grant program which is not to be assumed by the successor
      corporation or otherwise continued will automatically accelerate in full, and
      all unvested shares under the discretionary option grant and stock issuance
      programs will immediately vest, except to the extent the Company's repurchase
      rights with respect to those shares are to be assigned to the successor
      corporation or otherwise continued in effect. The Compensation Committee may
      grant options under the discretionary option grant program that will accelerate
      in the acquisition even if the options are assumed or that will accelerate
      if
      the optionee's service is subsequently terminated.





The
      Compensation Committee may grant options and issue shares that accelerate in
      connection with a hostile change in control effected through a successful tender
      offer for more than 50% of the Company's outstanding voting stock or by proxy
      contest for the election of board members, or the options and shares may
      accelerate upon a subsequent termination of the individual's
      service.





On
      December 15, 2004, the Company granted restricted stock awards of 262,500 shares
      of common stock under the 1999 Stock Option/Stock Issuance Plan. This equity
      grant vests over seven years, with an original vesting schedule that was
      back-loaded but was converted to pro-rata or straight-line vesting over the
      seven year period due to the achievement of certain performance targets and
      compensation committee approval. On December 28, 2005, the Company granted
      restricted stock awards of approximately 323,000 shares of common stock under
      the 1999 Stock Option/Stock Issuance Plan. This equity grant vests over six
      years, with an original vesting schedule that was back-end loaded but was
      converted to pro-rata or straight-line vesting over the six year period due
      to
      the achievement of certain performance targets and compensation committee
      approval. On December 21, 2006, the Company granted restricted stock awards
      of
      approximately 843,000 shares of common stock under the 1999 Stock Option/Stock
      Issuance Plan. This equity grant vests ratably over five years.





37





**PERFICIENT,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**




A
      summary
      of changes in common stock options during 2006, 2005 and 2004 is as follows
      (in
      thousands, except exercise price information):





**Shares**
            
            **Range
                of Exercise Prices**
            
            **Weighted-Average
                Exercise Price**
            
            **Aggregate
                Intrinsic Value**Options
                outstanding at January 1, 2004
            
            
            5,726
            
            $
            0.02
                - $26.00
            
            $
            2.42Options
                granted
            
            
            1,459
            
            $
            3.00
                - $ 6.31
            
            $
            4.67Options
                exercised
            
            
            (492
            )
            $
            0.03
                - $ 4.50
            
            $
            1.34Options
                canceled
            
            
            (254
            )
            $
            0.50
                - $13.25
            
            $
            3.37Options
                outstanding at December 31, 2004
            
            
            6,439
            
            $
            0.02
                - $26.00
            
            $
            2.97Options
                granted
            
            
            415
            
            $
            7.34
                - $ 9.19
            
            $
            7.81Options
                exercised
            
            
            (1,354
            )
            $
            0.03
                - $ 8.10
            
            $
            2.00Options
                canceled
            
            
            (232
            )
            $
            0.03
                - $16.00
            
            $
            5.37Options
                outstanding at December 31, 2005
            
            
            5,268
            
            $
            0.02
                - $16.94
            
            $
            3.53Options
                granted
            
            
            --
            
            
            --
            
            
            --Options
                exercised
            
            
            (1,672
            )
            $
            0.02
                - $12.13
            
            $
            2.40Options
                canceled
            
            
            (44
            )
            $
            1.01
                - $13.25
            
            $
            5.41Options
                outstanding at December 31, 2006
            
            
            3,552
            
            $
            0.02
                - $16.94
            
            $
            4.03
            
            
            43,975Options
                vested, December 31, 2004
            
            
            3,227
            
            $
            0.02
                - $16.94
            
            $
            2.85Options
                vested, December 31, 2005
            
            
            3,305
            
            $
            0.02
                - $16.94
            
            $
            3.00Options
                vested or expected to vest, December 31, 2006
            
            
            2,347
            
            $
            0.02
                - $16.94
            
            $
            3.62
            
            
            41,400





The
      total
      aggregate intrinsic value of options exercised during the years ended
      December 31, 2006, 2005, and 2004, was $18.6 million, $8.4 million,
      and $1.5 million, respectively. The total fair value of restricted shares
      vesting during the year ended December 31, 2006 was $1.4 million. For
      the years ended December 31, 2005 and 2004, the total fair value of restricted
      shares vesting during the year was $0.




38





**PERFICIENT,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**







Restricted
      stock activity for the year ended December 31, 2006 was as follows (in
      thousands, except fair value information):




**Shares**
            
            **Weighted-Average**
              **Grant
                Date Fair**
              **Value**Restricted
                stock awards outstanding at January 1, 2006
            
            
            614
            
            $
            7.69Awards
                granted
            
            
            911
            
            $
            15.61Awards
                released
            
            
            (83
            )
            $
            7.62Awards
                canceled
            
            
            (13
            )
            $
            8.04Restricted
                stock awards outstanding at December 31, 2006
            
            
            1,429
            
            $
            12.74





The
      following is additional information related to stock options outstanding at
      December 31, 2006 (in thousands, except exercise price
      information):




**Options
                Outstanding**
            
            **Options
                Exercisable****Range
                of Exercise**
              **Prices**
            
            **Options**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
              **Life
                (Years)**
            
            **Options**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**$0.02
                - $1.15
            
            
            468
            
            
            $0.62
            
            
            4.94
            
            
            468
            
            
            $0.62$1.21
                - $2.28
            
            
            1,101
            
            
            $2.09
            
            
            6.53
            
            
            808
            
            
            $2.02$2.77
                - $3.75
            
            
            796
            
            
            $3.42
            
            
            5.50
            
            
            578
            
            
            $3.54$4.40
                - $6.31
            
            
            733
            
            
            $6.04
            
            
            7.61
            
            
            182
            
            
            $5.51$6.97
                - $16.94
            
            
            454
            
            
            $10.10
            
            
            6.22
            
            
            311
            
            
            $11.30$0.02
                - $16.94
            
            
            3,552
            
            
            $4.03
            
            
            6.27
            
            
            2,347
            
            
            $3.62





The
      fair
      value of options was calculated at the date of grant using the Black-Scholes
      pricing model with the following weighted-average assumptions for the year
      ended
      December 31, 2005 and 2004, as follows, with a weighted-average life of
      options of 5 years used for each of the years presented:




Year
                EndDecember
                31,
            
            Risk-Free
              Interest
                Rate
            
            Dividend
              Yield
            
            Volatility
              Factor2004
            
            
            3.61%
            
            
            0%
            
            
            1.3882005
            
            
            3.72%
            
            
            0%
            
            
            1.405




No
      stock
      options were granted in 2006.





At
      December 31, 2006, 2005 and 2004, the weighted-average remaining
      contractual life of outstanding options was 6.27, 7.17, and 7.89 years,
      respectively. The weighted-average grant-date fair value per share of options
      granted during 2005 and 2004 at market prices was approximately $7.81 and $4.67,
      respectively. There were no option grants at below or above market prices during
      2005 and 2004. No option grants occurred in 2006.





The
      Company recognized $3.1 million and $0.3 million of stock compensation expense
      during 2006 and 2005, respectively. Tax benefits recognized on stock option
      exercises were $0.8 million and $0.2 million during 2006 and 2005. For the
      year
      ended December 31, 2004, stock compensation expense and the related tax benefits
      recognized on stock option exercises were immaterial. As of December 31, 2006,
      there was $19.7 million of total unrecognized compensation cost related to
      non-vested share-based awards. This cost is expected to be recognized over
      a
      weighted-average period of 2.8 years. Our
      estimated forfeiture rate for the year ended December 31, 2006 of approximately
      12% for share based awards was based on historical forfeiture experience to
      anticipate actual forfeitures in the future.




39





**PERFICIENT,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





Prior
      to
      the adoption of SFAS No. 123R, the Company accounted for employee stock-based
      compensation using the intrinsic value method prescribed by APB 25. As presented
      below, the Company applied the disclosure provisions of SFAS 123, as amended
      by
      SFAS 148, *Accounting
      for Stock-Based Compensation - Transition and Disclosure,* as if
      the fair value method had been applied. If this method had been used, the
      Company’s net income and net income per share for the years ended December 31,
      2005 and 2004 would have been adjusted to the pro forma amounts below (in
      thousands except per share data):




**Year
                ended December 31,****2005**
            
            
            **2004**Net
                income -- as reported
            
            $
            7,177
            
            $
            3,913Total
                stock-based compensation costs, net of tax, included in the determination
                of net income as reported
            
            
            162
            
            
            27The
                stock-based employee compensation cost, net of tax, that would have
                been
                included in the determination of net income if the fair value based
                method
                had been applied to all awards
            
            
            (2,609
            )
            
            (1,016
            )Pro
                forma net income
            
            $
            4,730
            
            $
            2,924Earnings
                per shareBasic
                - as reported
            
            $
            0.33
            
            $
            0.22Basic
                - pro forma
            
            $
            0.23
            
            $
            0.17Diluted
                - as reported
            
            $
            0.28
            
            $
            0.19Diluted
                -  pro forma
            
            $
            0.20
            
            $
            0.14





At
      December 31, 2006, 3.6 million shares were reserved for future issuance
      upon exercise of outstanding options and 8,575 shares were reserved for future
      issuance upon exercise of outstanding warrants. At December 31, 2006, there
      were
      1.4 million shares of restricted stock outstanding under the 1999 Plan and
      classified as equity.




The
      following table summarizes information regarding warrants outstanding and
      exercisable as of December 31, 2006 (in thousands, except exercise price
      information):




**Warrants
                Outstanding and Exercisable****Exercise
                Price**
            
            **Warrants**$1.98
            
            
            9**$1.98**
            
            
            **9**




The
      majority of the outstanding warrants expire in December 2011.





**Employee
      Stock Purchase Plan**




In
      2005,
      the Compensation Committee approved the Employee Stock Purchase Plan (the
“ESPP”) to be available to employees starting January 1, 2006. The ESPP is a
      broadly-based stock purchase plan in which any eligible employee may elect
      to
      participate by authorizing the Company to make payroll deductions in a specific
      amount or designated percentage to pay the exercise price of an option. In
      no
      event will an employee be granted an option under the ESPP that would permit
      the
      purchase of Common Stock with a fair market value in excess of $25,000 in any
      calendar year and the Compensation Committee of the Company has set the current
      annual participation limit at $12,500. For the year ended December 31, 2006,
      approximately 6,000 shares had been purchased under the ESPP.




There
      are four three-month offering periods in each calendar year beginning on January
      1, April 1, July 1, and October 1, respectively. The exercise price of options
      granted under the ESPP is an amount equal to 95% of the fair market value of
      the
      Common Stock on the date of exercise (occurring on, respectively, March 31,
      June
      30, September 30, and December 31). The ESPP is designed to comply with Section
      423 of the Code and thus is eligible for the favorable tax treatment afforded
      by
      Section 423.




40





**PERFICIENT,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





**8.  
      Line of Credit and Long Term Debt**




On
      June 29, 2006, the Company entered into an Amended and Restated Loan and
      Security Agreement with Silicon Valley Bank and KeyBank National Association.
      The amended agreement increased the total size of the Company's senior bank
      credit facilities from $28.5 million to $51.3 million by increasing the
      accounts receivable line of credit from $15 million to $25 million and
      increasing the acquisition term line of credit from $13.5 million to
      $26.3 million.





The
      accounts receivable line of credit, which expires in June 2009, provides
      for a borrowing capacity equal to all eligible accounts receivable, including
      80% of unbilled revenues, subject to certain borrowing base calculations as
      defined in the agreement, but in no event more than $25 million. Borrowings
      under this line of credit bear interest at the bank's prime rate (8.25% at
      December 31, 2006). As of December 31, 2006, there were no amounts outstanding
      under the accounts receivable line of credit and $25 million of available
      borrowing capacity, excluding $450,000 reserved for two outstanding letters
      of credit to secure facility leases. In January 2007, the letters of
      credit decreased $50,000.




The
      Company's $26.3 million term acquisition line of credit provides an additional
      source of financing for certain qualified acquisitions. As of December 31,
      2006,
      the balance outstanding under this acquisition line of credit was approximately
      $1.3 million. Borrowings under this acquisition line of credit bear interest
      equal to the four year U.S. Treasury note yield plus 3% based on the spot rate
      on the day the draw is processed (7.69% at December 31, 2006). Borrowings under
      this acquisition line are repayable in thirty-six equal monthly installments
      after the initial interest only period which continues through June 29, 2007.
      Draws under this acquisition line may be made through June 29, 2008. As of
      December 31, 2006, the balance outstanding under this acquisition line of credit
      of $1.3 million had an average interest rate of 7.00%. The
      Company currently has approximately $25.0 million of available borrowing
      capacity under this acquisition line of credit.





The
      Company is required to comply with various financial covenants under the $51.3
      million credit facility. Specifically, the Company is required to maintain
      a
      ratio of after tax earnings before interest, depreciation and amortization,
      and
      other non-cash charges, including but not limited to stock and stock option
      compensation expense on trailing three months annualized, to current maturities
      of long-term debt and capital leases plus interest of at least 1.50 to 1.00,
      a
      ratio of cash plus eligible accounts receivable including 80% of unbilled
      revenues less principal amount of all outstanding advances on accounts
      receivable line of credit to advances under the term acquisition line of credit
      of at least 0.75 to 1.00, and a maximum ratio of all outstanding advances under
      the entire credit facility to earnings before taxes, interest, depreciation,
      amortization and other non-cash charges, including but not limited to, stock
      and
      stock option compensation expense including pro forma adjustments for
      acquisitions on a trailing twelve month basis of no more than 2.50 to 1.00.
      As
      of December 31, 2006, the Company was in compliance with all covenants under
      this facility. This credit facility is secured by substantially all assets
      of
      the Company.




Notes
      payable to related party at December 31, 2005 consisted of non
      interest-bearing notes issued to the shareholders of Javelin
      Solutions, Inc. (“Javelin”) in April 2002 in connection with the
      Company's acquisition of Javelin. The note was fully repaid in
      2006.




Future
      minimum term debt repayments as of December 31, 2006 are as follows (in
      thousands):





**Debt
                Payments**2007
            
            $
            1,2012008
            
            
            137Present
                value of debt commitments
            
            
            1,338Less
                current portion
            
            
            1,201Long
                term portion
            
            $
            137





**9.  
      Income Taxes**





As
      of
      December 31, 2006, the Company had U.S. Federal tax net operating loss
      carry forwards of approximately $6.3 million that will begin to expire in
      2020 if not utilized. The Company has established a valuation allowance against
      these net operating loss carry forwards of $2.0 million.




Utilization
      of net operating losses may be subject to an annual limitation due to the
“change in ownership” provisions of the Internal Revenues Code of 1986. The
      annual limitation may result in the expiration of net operating losses before
      utilization.




41





**PERFICIENT,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





Significant
      components of the provision for income taxes attributable to continuing
      operations are as follows (in thousands):







**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Current:Federal
            
            $
            1,138
            
            $
            1,148
            
            $
            1,412Foreign
            
            
            102
            
            
            223
            
            
            255State
            
            
            260
            
            
            241
            
            
            235Total
                current
            
            
            1,500
            
            
            1,612
            
            
            1,902Tax
                benefit on acquired net operating loss carryforward
            
            
            246
            
            
            353
            
            
            312Tax
                benefit from stock options
            
            
            6,554
            
            
            2,306
            
            
            342Deferred:Federal
            
            
            (902
            )
            
            201
            
            
            (26
            )Foreign
            
            
            --
            
            
            --
            
            
            --State
            
            
            (116
            )
            
            26
            
            
            (2
            )Total
                deferred
            
            
            (1,018
            )
            
            227
            
            
            (28
            )Total
                provision for income taxes
            
            $
            7,282
            
            $
            4,498
            
            $
            2,528





The
      components of pretax income for the years ended December 31, 2006, 2005 and
      2004
      are as follows (in thousands):





**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Domestic
            
            $
            16,565
            
            $
            11,267
            
            $
            5,804Foreign
            
            
            284
            
            
            408
            
            
            637Total
            
            $
            16,849
            
            $
            11,675
            
            $
            6,441




Foreign
      operations include Canada and the United Kingdom for the years ended December
      31, 2004 and 2005. In 2006, foreign operations only included Canada. As of
      December 31, 2006, the Company’s location in the United Kingdom was dormant.




42





**PERFICIENT,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**




Deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for income tax purposes. Significant components of the
      Company's deferred taxes as of December 31, 2006 and 2005 are as
      follows:





**December
                31,****2006**
            
            **2005**Deferred
                tax assets:
            
            (In
                thousands)Current
                deferred tax assets:Accrued
                liabilities
            
            $
            298
            
            $
            140Net
                operating losses
            
            
            243
            
            
            246Bad
                debt reserve
            
            
            268
            
            
            110809
            
            
            496Valuation
                allowance
            
            
            (457
            )
            
            (361
            )Net
                current deferred tax assets
            
            $
            352
            
            $
            135Non-current
                deferred tax assets:Net
                operating losses
            
            $
            2,339
            
            $
            2,577Fixed
                assets
            
            
            53
            
            
            49Deferred
                compensation
            
            
            435
            
            
            1022,827
            
            
            2,728Valuation
                allowance
            
            
            (1,599
            )
            
            (1,984
            )Net
                non-current deferred tax assets
            
            $
            1,228
            
            $
            744Deferred
                tax liabilities:Current
                deferred tax liabilities:Deferred
                income
            
            $
            308
            
            $
            93Non-current
                deferred tax liabilities:Deferred
                income
            
            $
            431
            
            $
            94Foreign
                withholding tax on undistributed earnings
            
            
            65
            
            
            45Intangibles
            
            
            1,983
            
            
            461Total
                non-current deferred tax liabilities
            
            $
            2,479
            
            $
            600Net
                current deferred tax asset
            
            **$**
            44
            
            **$**
            42Net
                non-current deferred tax asset (liability)
            
            **$**
            (1,251
            )
            $
            144




The
      Company has established a valuation allowance to offset a portion of the
      Company's deferred tax assets due to uncertainties regarding the realization
      of
      deferred tax assets based on the Company's earnings history and limitations
      on
      the utilization of acquired net operating losses. The valuation allowance
      decreased by approximately $0.3 million during 2006 and decreased by
      approximately $0.7 million during 2005. These decreases are primarily due to
      the
      benefit of acquired net operating loss carryforwards. As of December 31, 2006,
      all of the valuation allowance relates to acquired entities, and as such, if
      realized, will reduce goodwill or other non-current assets prior to resulting
      in
      an income tax benefit.





Changes
      to the valuation allowance are summarized as follows for the years presented
      (in
      thousands):





**Year
                ended December 31,****2006**
            
            **2005**
            
            **2004**Balance,
                beginning of year
            
            $
            2,345
            
            $
            3,027
            
            $
            1,057Benefit
                realized
            
            
            (289
            )
            
            (446
            )
            
            --Additions
                resulting from purchase accounting
            
            
            --
            
            
            --
            
            
            1,970Write-offs
            
            
            --
            
            
            (236
            )
            
            --Balance,
                end of year
            
            $
            2,056
            
            $
            2,345
            
            $
            3,027




During
      2005, the Company determined that its undistributed earnings of foreign
      subsidiaries were no longer permanently reinvested. All of the undistributed
      earnings were deemed to have been repatriated during 2005 under U.S. tax law,
      and current federal and state taxes on the deemed repatriated amounts (less
      applicable foreign tax credits) are included in the respective current
      provisions. Upon actual repatriation of these earnings, in the form of dividends
      or otherwise, the Company will be subject to withholding taxes payable to the
      various foreign countries. A deferred tax liability has been recorded to reflect
      the foreign withholding tax. The foreign entities have minimal temporary items
      and thus no deferred taxes have been provided thereon.




43





**PERFICIENT,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**




The
      federal corporate statutory rate is reconciled to the Company’s effective income
      tax rate as follows:





**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Federal
                corporate statutory rate
            
            
            34.3
            %
            
            34.0
            %
            
            34.0
            %State
                taxes, net of federal benefit
            
            
            4.6
            
            
            4.3
            
            
            2.8Intangibles
                amortization
            
            
            --
            
            
            --
            
            
            0.7Effect
                of foreign operations
            
            
            --
            
            
            0.1
            
            
            0.6Stock
                compensation
            
            
            2.1
            
            
            --
            
            
            --Other
            
            
            2.2
            
            
            0.1
            
            
            1.1Effective
                income tax rate
            
            
            43.2
            %
            
            38.5
            %
            
            39.2
            %




The
      effective income tax rate increased to 43.2% for the year ended December 31,
      2006 from 38.5% for the year ended December 31, 2005 as a result of
      non-deductible stock compensation related to incentive stock options included
      in
      the Company’s statement of operations in 2006 as a result of the adoption of
      SFAS 123R on January 1, 2006 and certain non-deductible compensation required
      by
      Section 162(m) of the Internal Revenue Code, which imposes a limitation on
      the
      deductibility of certain compensation in excess of $1 million paid to covered
      employees .





**10.
      Commitments and Contingencies**




The
      Company leases its office facilities and certain equipment under various
      operating lease agreements, as amended. The Company has the option to extend
      the
      term of certain of its office facilities leases. Future minimum commitments
      under these lease agreements as of December 31, 2006 are as follows (in
      thousands):




**Operating**
              **Leases**2007
            
            $
            1,3552008
            
            
            1,1282009
            
            
            1,0202010
            
            
            7682011
            
            
            351Thereafter
            
            
            61Total
                minimum lease payments
            
            $
            4,683




Rent
      expense for the years ended December 31, 2006, 2005 and 2004 was
      approximately $1.7 million, $1.5 million and $1.4 million
      respectively.




In
      connection with certain of its acquisitions, the Company was required to
      establish various letters of credit totaling $450,000 with Silicon
      Valley Bank to serve as collateral for certain office space leases. These
      letters of credit reduce the borrowings available under the Company's line
      of
      credit with Silicon Valley Bank. In January 2007, these letters of credit
      decreased $50,000. One
      letter of credit for $200,000 will remain in effect through October 2009, and
      the other letter of credit for $250,000 will remain in effect through June
      2007.


44




**PERFICIENT,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**


**11.
      Balance Sheet Components**




**December
                31,****2006**
            
            **2005**(In
                thousands)**Accounts
                receivable:**Accounts
                receivable
            
            $
            29,461
            
            $
            17,037Unbilled
                revenues
            
            
            9,846
            
            
            6,581Allowance
                for doubtful accounts
            
            
            (707
            )
            
            (367
            )**Total**
            
            $
            38,600
            
            $
            23,251**Other
                current assets:**Income
                tax receivable
            
            $
            2,150
            
            $
            1,367Other
                current assets
            
            
            649
            
            
            163**Total**
            
            $
            2,799
            
            $
            1,530**Other
                current liabilities:**Accrued
                bonus
            
            $
            9,851
            
            $
            3,525Accrued
                subcontractor fees
            
            
            1,803
            
            
            1,842Deferred
                revenues
            
            
            1,318
            
            
            1,084Payroll
                related costs
            
            $
            1,258
            
            $
            503Sales
                and use taxes
            
            
            326
            
            
            150Accrued
                acquisition costs related to Insolexen and EGG
            
            
            563
            
            
            --Other
                accrued expenses
            
            
            915
            
            
            1,227**Total**
            
            $
            16,034
            
            $
            8,331**Property
                and
                Equipment:**


Hardware (useful
                life of 2 years)
            
            $
            3,933
            
            $
            2,708Furniture
                and fixtures (useful life of 5 years)
            
            
            980
            
            
            781Leasehold
                improvements (useful life of 3 years)
            
            
            275
            
            
            150Software (useful
                life of 1 year)
            
            
            702
            
            
            474Accumulated
                depreciation and amortization
            
            
            (4,084
            )
            
            (3,153
            )Property
                and equipment, net
            
            $
            1,806
            
            $
            960





**12.
      Allowance for Doubtful Accounts**





Activity
      in the allowance for doubtful accounts is summarized as follows for the years
      presented (in thousands):





**Year
                ended December 31,****2006**
            
            **2005**
            
            **2004**Balance,
                beginning of year
            
            $
            367
            
            $
            654
            
            $
            623Charged
                to expense
            
            
            264
            
            
            32
            
            
            33Additions
                resulting from purchase accounting
            
            
            371
            
            
            24
            
            
            --Uncollected
                balances written off, net of recoveries
            
            
            (295
            )
            
            (343
            )
            
            (2
            )Balance,
                end of year
            
            $
            707
            
            $
            367
            
            $
            654





45





**PERFICIENT,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





**13.
      Business Combinations**




Acquisition
      of iPath Solutions, Ltd.




On
      June 10, 2005, the Company acquired iPath Solutions, Ltd. (“iPath”), a
      privately held technology consulting company, for $9.9 million. The
      purchase price consists of $3.9 million in cash, $900,000 of
      liabilities repaid on behalf of iPath, transaction costs of $600,000, and
      623,803 shares of the Company's common stock valued at approximately $7.24
      per
      share (approximately $4.5 million worth of Company's common stock). The
      total purchase price has been allocated to the assets acquired, including
      identifiable intangible assets, based on their respective fair values at the
      date of acquisition. Goodwill is assigned at the enterprise level. The purchase
      price was allocated to intangibles based on management's estimate and an
      independent valuation. The results of the iPath operations have been included
      in
      the Company's consolidated financial statements since June 10,
      2005.





The
      purchase price allocation is as follows (in millions):





Intangibles:Customer
                relationships
            
            $
            0.7Customer
                backlog
            
            
            0.2Non-compete
                agreements
            
            
            0.1Goodwill
            
            
            7.3Tangible
                assets and liabilities acquired:Accounts
                receivable
            
            
            1.6Property
                and equipment
            
            
            0.1Accrued
                expenses
            
            
            (0.1
            )Net
                assets acquired
            
            $
            9.9





The
      Company estimates that the intangible assets acquired have useful lives of
      six
      months to five years.





Acquisition
      of Vivare, LP




On
      September 2, 2005, the Company acquired Vivare, LP (“Vivare”), a privately
      held technology consulting company, for $9.8 million. The purchase price
      consists of $4.9 million in cash, transaction costs of approximately
      $500,000, and 618,500 shares of the Company's common stock valued at
      approximately $7.03 per share (approximately $4.4 million worth of
      Company's common stock). The total purchase price has been allocated to the
      assets acquired, including identifiable intangible assets, based on their
      respective fair values at the date of acquisition. Goodwill is assigned at
      the
      enterprise level. The purchase price was allocated to intangibles based on
      management's estimate and an independent valuation. The results of Vivare’s
      operations have been included in the Company's consolidated financial statements
      since September 2, 2005.





The
      purchase price allocation is as follows (in millions):




Intangibles:Customer
                relationships
            
            $
            1.0Customer
                backlog
            
            
            0.1Non-compete
                agreements
            
            
            0.1Goodwill
            
            
            6.8Tangible
                assets acquired:Accounts
                receivable
            
            
            1.7Property
                and equipment
            
            
            0.1Net
                assets acquired
            
            $
            9.8





The
      Company estimates that the intangible assets acquired have useful lives of
      nine
      months to six years.




46


**PERFICIENT,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





Acquisition
      of Bay Street Solutions, Inc.




On
      April
      7, 2006, the Company acquired Bay Street Solutions, Inc. (“Bay Street”), a
      national customer relationship management consulting firm, for approximately
      $9.8 million.  The purchase price consists of approximately $4.1 million in
      cash, transaction costs of $636,000, and 464,569 shares of the Company's common
      stock valued at approximately $12.18 per share (approximately $5.7 million
      worth
      of the Company's common stock) less the value of those shares subject to a
      lapse
      acceleration right of approximately $630,000, as determined by a third party
      valuation firm.  The total purchase price has been allocated to the assets
      acquired, including identifiable intangible assets, based on their respective
      fair values at the date of acquisition. Goodwill is assigned at the enterprise
      level. The purchase price was allocated to intangibles based on management's
      estimate and an independent valuation. Management expects to finalize the
      purchase price allocation within twelve months of the acquisition date as
      certain initial accounting estimates are resolved. The results of Bay Street's
      operations have been included in the Company's consolidated financial statements
      since April 7, 2006.




The
      preliminary purchase price allocation is as follows (in millions):




Intangibles:Customer
                relationships
            
            $
            1.6Customer
                backlog
            
            
            0.2Non-compete
                agreements
            
            
            0.1Goodwill
            
            
            6.4Tangible
                assets acquired:Accounts
                receivable
            
            
            2.4Other
                assets
            
            
            0.6Property
                and equipment
            
            
            0.1Accrued
                expenses
            
            
            (1.6
            )Net
                assets acquired
            
            $
            9.8





The
      Company estimates that the intangible assets acquired have useful lives of
      four
      months to six years.





Acquisition
      of Insolexen, Corp.





On
      May
      31, 2006, the Company acquired Insolexen, Corp. (“Insolexen”), a business
      integration consulting firm, for approximately $15.1 million. The purchase
      price
      consists of approximately $7.7 million in cash, transaction costs of
      $695,000, and 522,944 shares of the Company's common stock valued at
      approximately $13.72 per share (approximately $7.2 million worth of the
      Company's common stock) less the value of those shares subject to a lapse
      acceleration right of approximately $613,000, as determined by a third party
      valuation firm. The total purchase price has been allocated to the assets
      acquired, including identifiable intangible assets, based on their respective
      fair values at the date of acquisition. Goodwill is assigned at the enterprise
      level. The purchase price was allocated to intangibles based on management's
      estimate and an independent valuation. Management expects to finalize the
      purchase price allocation within twelve months of the acquisition date as
      certain initial accounting estimates are resolved. The results of Insolexen's
      operations have been included in the Company's consolidated financial statements
      since May 31, 2006.




47





**PERFICIENT,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





The
      preliminary purchase price allocation is as follows (in millions):


Intangibles:Customer
                relationships
            
            $
            2.8Customer
                backlog
            
            
            0.4Non-compete
                agreements
            
            
            0.1Goodwill
            
            
            10.5Tangible
                assets and liabilities acquired:Accounts
                receivable
            
            
            3.9Other
                assets
            
            
            2.1Accrued
                expenses
            
            
            (4.7
            )Net
                assets acquired
            
            $
            15.1





The
      Company estimates that the intangible assets acquired have useful lives of
      seven
      months to six years.





Acquisition
      of the Energy, Government and General Business (EGG) division of Digital
      Consulting & Software Services, Inc.





On
      July
      21, 2006, the Company acquired the Energy, Government and General Business
      (“EGG”) division of Digital Consulting & Software Services, Inc., a systems
      integration consulting business, for approximately $13.1 million. The purchase
      price consists of approximately $6.4 million in cash, transaction costs of
      approximately $275,000, and 511,382 shares of the Company's common stock valued
      at approximately $12.71 per share (approximately $6.5 million worth of the
      Company's common stock) less the value of those shares subject to a lapse
      acceleration right of approximately $92,000, as determined by a third party
      valuation firm. The total purchase price has been allocated to the assets
      acquired, including identifiable intangible assets, based on their respective
      fair values at the date of acquisition. Goodwill is assigned at the enterprise
      level. The purchase price was allocated to intangibles based on management's
      estimate and an independent valuation. Management expects to finalize the
      purchase price allocation within twelve months of the acquisition date as
      certain initial accounting estimates are resolved. The results of EGG's
      operations have been included in the Company's consolidated financial statements
      since July 21, 2006.





The
      preliminary purchase price allocation is as follows (in millions):


Intangibles:Customer
                relationships
            
            $
            3.7Customer
                backlog
            
            
            0.5Non-compete
                agreements
            
            
            0.1Goodwill
            
            
            6.3Tangible
                assets and liabilities acquired:Accounts
                receivable
            
            
            3.7Other
                assets
            
            
            0.4Accrued
                expenses
            
            
            (1.6
            )Net
                assets acquired
            
            $
            13.1





The
      Company estimates that the intangible assets acquired have useful lives of
      five
      months to six years.




48


**PERFICIENT,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





Pro-forma
      Results of Operations




The
      following presents the unaudited pro forma combined results of operations of
      the
      Company with iPath, Vivare, Bay Street, Insolexen, and EGG for the years ended
      December 31, 2006 and 2005, after giving effect to certain pro forma adjustments
      related to the amortization of acquired intangible assets and assuming these
      companies were acquired as of the beginning of each period presented. These
      unaudited pro forma results are not necessarily indicative of the actual
      consolidated results of operations had the acquisitions actually occurred on
      January 1, 2005 and January 1, 2006 or of future results of operations of the
      consolidated entities. (in thousands, except per share
      information):




**December
                31,****2006**
            
            **2005**Revenues
            
            $
            181,953
            
            $
            148,833Net
                income
            
            $
            9,132
            
            $
            8,464Basic
                income per share
            
            $
            0.36
            
            $
            0.35Diluted
                income per share
            
            $
            0.32
            
            $
            0.31





**14.
      Quarterly Financial Results (Unaudited)**




The
      following tables set forth certain unaudited supplemental quarterly financial
      information for the years ended December 31, 2006 and 2005. The quarterly
      operating results are not necessarily indicative of future results of
      operations. The financial data presented is not directly comparable between
      periods as a result of the adoption of Statement of Financial Accounting
      Standards No. 123R (As Amended), *Share
      Based Payment* (“SFAS
      123R”) in the first quarter of 2006 and three acquisitions in 2006 and two
      acquisitions in 2005 (in thousands, except per share data):




**Three
                Months Ended,****March
                31,**
              **2006**
            
            **June
                30,**
              **2006**
            
            **September
                30,**
              **2006**
            
            **December
                31,**
              **2006****(Unaudited)**Revenues:Services
            
            $
            25,606
            
            $
            32,751
            
            $
            40,219
            
            $
            39,145Software
            
            
            2,682
            
            
            2,587
            
            
            1,532
            
            
            7,635Reimbursable
                expenses
            
            
            1,356
            
            
            2,172
            
            
            2,543
            
            
            2,698Total
                revenues
            
            $
            29,644
            
            $
            37,510
            
            $
            44,294
            
            $
            49,478Gross
                margin
            
            $
            9,288
            
            $
            13,178
            
            $
            15,854
            
            
            15,437Income
                from operations
            
            $
            3,057
            
            $
            4,027
            
            $
            4,840
            
            $
            5,159Income
                before income taxes
            
            $
            3,034
            
            $
            3,900
            
            $
            4,675
            
            $
            5,241Net
                income
            
            $
            1,705
            
            $
            2,255
            
            $
            2,834
            
            $
            2,774Basic
                net income per share
            
            $
            0.07
            
            $
            0.09
            
            $
            0.11
            
            $
            0.10Diluted
                net income per share
            
            $
            0.07
            
            $
            0.08
            
            $
            0.10
            
            $
            0.10





**Three
                Months Ended,****March
                31,**
              **2005**
            
            **June
                30,**
              **2005**
            
            **September
                30,**
              **2005**
            
            **December
                31,**
              **2005****(Unaudited)**Revenues:Services
            
            $
            17,657
            
            $
            19,234
            
            $
            23,157
            
            $
            23,691Software
            
            
            1,407
            
            
            1,393
            
            
            1,918
            
            
            4,669Reimbursable
                expenses
            
            
            660
            
            
            1,034
            
            
            1,048
            
            
            1,129Total
                revenues
            
            $
            19,724
            
            $
            21,661
            
            $
            26,123
            
            $
            29,489Gross
                margin
            
            $
            6,720
            
            $
            7,283
            
            $
            9,298
            
            
            9,117Income
                from operations
            
            $
            2,532
            
            $
            2,756
            
            $
            3,555
            
            $
            3,432Income
                before income taxes
            
            $
            2,420
            
            $
            2,650
            
            $
            3,359
            
            $
            3,245Net
                income
            
            $
            1,488
            
            $
            1,627
            
            $
            2,066
            
            $
            1,996Basic
                net income per share
            
            $
            0.07
            
            $
            0.08
            
            $
            0.09
            
            $
            0.09Diluted
                net income per share
            
            $
            0.06
            
            $
            0.07
            
            $
            0.08
            
            $
            0.08




49





**PERFICIENT,
      INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





**15.
      Subsequent Event**





On
      February 20, 2007, the Company consummated the acquisition of E-Tech
      Solutions.  The Company paid approximately $12.2 million consisting of
      approximately $6.1 million in cash and $6.1 million worth of the Company's
      common stock, subject to certain post-closing adjustments.  As required,
      the Company will use the closing price of the its common stock at or near the
      close date in reporting the value of the stock consideration paid in the
      acquisition, which was $20.34. The Company issued 306,248 shares of its common
      stock in connection with the acquisition.




50





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





The
      Board
      of Directors and Stockholders


Perficient,
      Inc.


Austin,
      Texas




We
      have
      audited the accompanying consolidated balance sheets of Perficient, Inc. as
      of
      December 31, 2006 and 2005 and the related consolidated statements of income,
      stockholders’ equity and comprehensive income, and cash flows for each of the
      three years in the period ended December 31, 2006. 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. An audit 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, as well as evaluating the overall financial statement
      presentation. We believe that our audits provide a reasonable basis for our
      opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Perficient, Inc. at December
      31, 2006 and 2005, and the results of its operations and its cash flows for
      each
      of the three years in the period ended December 31, 2006 **,** in
      conformity with accounting principles generally accepted in the United States
      of
      America.




As
      discussed in Note 1 to the consolidated financial statements, effective
      January 1, 2006, the Company adopted Statement of Financial Accounting
      Standards No. 123(R), *Share-Based
      Payment* .




We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of Perficient, Inc.’s
      internal control over financial reporting as of December 31, 2006, based on
      criteria established in *Internal
      Control - Integrated Framework* issued
      by
      the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
      and
      our report dated March 1, 2007 expressed an unqualified opinion
      thereon.







Houston,
      Texas


March
      1,
      2007




51





**Item
      9.**  **Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure.**




None.





**Item
      9A.**  **Controls and Procedures.**




*Evaluation
      of Disclosure Controls and Procedures*





We
      have
      established disclosure controls and procedures to ensure that material
      information relating to the Company, including its consolidated subsidiaries,
      is
      made known to the officers who certify the Company's financial reports and
      to
      other members of senior management and the Board of Directors.




We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in the Company's reports under the Exchange
      Act is recorded, processed, summarized and reported within the time periods
      specified in the SEC's rules and forms, and that such information is accumulated
      and communicated to management, including the principal executive officer and
      principal financial officer of the Company, as appropriate, to allow timely
      decisions regarding required disclosure. The Company's management, with the
      participation of the Company's principal executive officer and principal
      financial officer, has evaluated the effectiveness of the Company's disclosure
      controls and procedures as of the end of the fiscal year covered by this Annual
      Report on Form 10-K. As described below under Management's Annual Report on
      Internal Control Over Financial Reporting, the Company has determined that
      its
      disclosure controls and procedures were effective.




*Management's
      Report on Internal Control over Financial Reporting*





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting, as such term is defined in Exchange Act Rules
      13a-15(f). In fulfilling this responsibility, estimates and judgments by
      management are required to assess the expected benefits and related costs of
      control procedures. The objectives of internal control include providing
      management with reasonable, but not absolute, assurance that assets are
      safeguarded against loss from unauthorized use or disposition, and that
      transactions are executed in accordance with management's authorization and
      recorded properly to permit the preparation of consolidated financial statements
      in conformity with accounting principles generally accepted in the United States
      of America. Under the supervision and with the participation of our management,
      including our principal executive officer and principal financial officer,
      we
      conducted an evaluation of the effectiveness of our internal control over
      financial reporting based on the framework in Internal Control - Integrated
      Framework issued by the Committee of Sponsoring Organizations of the Treadway
      Commission. Based on our assessment under those criteria, management concluded
      that the Company’s internal control over financial reporting was effective as of
      December 31, 2006.





The
      Company acquired Bay Street, Insolexen, and EGG in April, May, and July of
      2006,
      respectively. As permitted by SEC guidance, management excluded these acquired
      companies from its assessment of the effectiveness of the Company’s internal
      control over financial reporting as of December 31, 2006. In total, Bay Street,
      Insolexen, and EGG represented 29% and 17% of the Company's total assets and
      total revenues, respectively, as of and for the year ended December 31, 2006.
      Excluding identifiable intangible assets and goodwill recorded in the business
      combination, Bay Street, Insolexen, and EGG represented 6% of the Company's
      total assets as of December 31, 2006.





Our
      management's assessment of the effectiveness of our internal control over
      financial reporting as of December 31, 2006 has been audited by BDO Seidman,
      LLP, an independent registered public accounting firm, as stated in their report
      which is included herein.





*Changes
      in Internal Control Over Financial Reporting*





During
      the quarter ended December 31, 2006, we continued our remediation efforts from
      the prior quarters in order to fully remediate our previously reported material
      weakness. This includes performing the following:





·
            Verified
                employee security access to our automated general ledger system is
                appropriate related to the employee’s responsibilities and further
                strengthened our controls surrounding general ledger access granted
                to our
                new accounting personnel;·
            Established
                certain spreadsheet controls including required detail review of
                key
                spreadsheets, limited access to key spreadsheets on a central server
                and
                assignment of appropriate rights, a controlled process for requesting
                changes to a spreadsheet, and a process to back up spreadsheets on
                a
                regular basis so that complete and accurate information is available
                for
                financial reporting;·
            Activated
                certain additional application and prevent controls with the assistance
                of
                our general ledger software provider and our internal technology
                personnel; and·
            Engaged
                a third party to assist with project management and strategic oversight
                of
                our remediation of the 2005 significant deficiencies and material
                weakness
                and the 2006 control review process.




52





In
      addition, during the year ended December 31, 2006, we have hired several new
      employees to further diversify accounting responsibilities, most notably the
      addition of a new Chief Financial Officer, but also including various senior
      and
      staff accountants.





The
      cumulative impact of these activities established during 2006 occurred and
      management obtained sufficient evidence of the operating effectiveness of such
      additional controls during the year ended December 31, 2006. Accordingly,
      management has concluded that our previously reported material weakness caused
      principally by inadequate staffing levels has been remediated.





**Item
      9B. Other Information.**




None.




53




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Board of Directors and Stockholders


Perficient,
      Inc.


Austin,
      Texas




We
      have
      audited management’s assessment, included in the accompanying Management’s
      Report on Internal Control over Financial Reporting, that Perficient, Inc.
      (“the
      Company”) maintained effective internal control over financial reporting as of
      December 31, 2006, based on the criteria established in Internal
      Control-Integrated Framework, issued by the Committee of Sponsoring
      Organizations, or COSO, of the Treadway Commission. The Company’s management is
      responsible for maintaining effective internal control over financial reporting
      and for its assessment of the effectiveness of internal control over financial
      reporting. Our responsibility is to express an opinion on management’s
      assessment and an opinion on the effectiveness of the Company’s internal control
      over financial reporting based on our audit.




We
      conducted our audit 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 effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, evaluating management’s assessment, testing and evaluating
      the design and operating effectiveness of internal control, and performing
      such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinion.




A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that:
      (1) pertain to the maintenance of records that, in reasonable detail,
      accurately and fairly reflect the transactions and dispositions of the assets
      of
      the Company; (2) provide reasonable assurance that transactions are
      recorded as necessary to permit preparation of financial statements in
      accordance with generally accepted accounting principles, and that receipts
      and
      expenditures of the Company are being made only in accordance with
      authorizations of management and directors of the Company; and (3) provide
      reasonable assurance regarding prevention or timely detection of unauthorized
      acquisition, use, or disposition of the Company’s assets that could have a
      material effect on the financial statements.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.




As
      indicated in the accompanying Management's Report on Internal Control Over
      Financial Reporting, the scope of management's assessment of the effectiveness
      of internal control over financial reporting includes all of the Company's
      consolidated operations, except for the acquired operations of Bay Street
      Solutions, Inc., Insolexen Corporation, and the Energy, Government and General
      Business (“EGG”) division of Digital Consulting & Software Services, Inc.
      (collectively the “Acquired Companies”), each of which the Company acquired
      during 2006. The Acquired Companies represented 29% of the Company’s total
      assets as of December 31, 2006, and 17% of the Company’s revenues for the year
      ended December 31, 2006. Our audit of internal control over financial reporting
      of the Company also excluded an evaluation of the internal control over
      financial reporting of the Acquired Companies’ operations.




In
      our
      opinion, management’s assessment that Perficient, Inc. maintained effective
      internal control over financial reporting as of December 31, 2006 is fairly
      stated in all material respects, based on the criteria established in Internal
      Control-Integrated Framework issued by COSO. Also in our opinion, the Company
      maintained, in all material respects, effective internal control over financial
      reporting as of December 31, 2006, based on the criteria established in Internal
      Control-Integrated Framework issued by COSO.




We
      have
      also audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheets of Perficient,
      Inc. as of December 31, 2006 and 2005, and the related consolidated statements
      of income, stockholders’ equity, and cash flows for each of the three years in
      the period ended December 31, 2006. Our report on these financial
      statements dated, March 1, 2007, expressed an unqualified opinion thereon.







Houston,
      Texas


March
      1, 2007





54





**PART
      III**





**Item
      10.**  **Directors,
      Executive Officers and Corporate Governance.**




**Executive
      Officers**




Our
      executive officers and directors, including their ages as of the date of this
      filing are as follows:




**Name**
            
            **Age**
            
            **Position**John
                T. McDonald
            
            43
            
            Chairman
                of the Board and Chief Executive OfficerJeffrey
                S. Davis
            
            42
            
            President
                and Chief Operating OfficerPaul
                E. Martin
            
            46
            
            Chief
                Financial Officer, Treasurer and SecretaryRichard
                T. Kalbfleish
            
            51
            
            Controller
                and Vice President of Finance & AdministrationRalph
                C. Derrickson
            
            48
            
            DirectorMax
                D. Hopper
            
            71
            
            DirectorKenneth
                R. Johnsen
            
            53
            
            DirectorDavid
                S. Lundeen
            
            44
            
            Director




*John
      T. McDonald* joined
      us in April 1999 as Chief Executive Officer and was elected Chairman of the
      Board in March 2001. From April 1996 to October 1998, Mr. McDonald was
      president of VideoSite, Inc., a multimedia software company that was acquired
      by
      GTECH Corporation in October 1997, 18 months after Mr. McDonald became
      VideoSite's president. From May 1995 to April 1996, Mr. McDonald was a
      Principal with Zilkha & Co., a New York-based merchant banking firm.
      From June 1993 to April 1996, Mr. McDonald served in various positions at
      Blockbuster Entertainment Group, including Director of Corporate Development
      and
      Vice President, Strategic Planning and Corporate Development of NewLeaf
      Entertainment Corporation, a joint venture between Blockbuster and IBM. From
      1987 to 1993, Mr. McDonald was an attorney with Skadden, Arps, Slate,
      Meagher & Flom in New York, focusing on mergers and acquisitions and
      corporate finance. Mr. McDonald currently serves as a member of the board
      of directors of Interstate Connections, Inc. Mr. McDonald received a B.A.
      in Economics from Fordham University and a J.D. from Fordham Law
      School.




*Jeffrey
      S. Davis* became
      our Chief Operating Officer upon the closing of the acquisition of Vertecon
      in
      April 2002 and was named our President in 2004. He previously served the same
      role since October 1999 at Vertecon prior to its acquisition by Perficient.
      Mr. Davis has 13 years of experience in technology management and
      consulting. Prior to Vertecon, Mr. Davis was a Senior Manager and member of
      the leadership team in Arthur Andersen's Business Consulting Practice starting
      in January 1999 where he was responsible for defining and managing internal
      processes, while managing business development and delivery of products,
      services and solutions to a number of large accounts. Prior to Arthur Andersen,
      Mr. Davis worked at Ernst & Young LLP for two years, Mallinckrodt,
      Inc. for two years, and spent five years at McDonnell Douglas in many different
      technical and managerial positions. Mr. Davis has a M.B.A. from Washington
      University and a B.S. degree in Electrical Engineering from the University
      of
      Missouri.





*Paul
      E. Martin* joined
      us in August 2006 as Chief Financial Officer, Treasurer and Secretary. From
      August 2004 until February 2006, Mr. Martin was the Interim co-Chief Financial
      Officer and Interim Chief Financial Officer of Charter Communications, Inc.
      ("Charter"), a publicly traded multi-billion dollar in revenue domestic cable
      television multi-system operator. From April 2002 through April 2006, Mr. Martin
      was the Senior Vice President, Principal Accounting Officer and Corporate
      Controller of Charter and was Charter's Vice President and Corporate Controller
      from March 2000 to April 2002. Prior to Charter, Mr. Martin was Vice President
      and Controller for Operations and Logistics for Fort James Corporation, a
      manufacturer of paper products with multi-billion dollar revenues. From 1995
      to
      February 1999, Mr. Martin was Chief Financial Officer of Rawlings Sporting
      Goods
      Company, Inc., a publicly traded multi-million dollar revenue sporting goods
      manufacturer and distributor. Mr. Martin received a B.S. degree with honors
      in
      accounting from the University of Missouri - St. Louis.




*Richard
      T. Kalbfleish* joined
      us as Controller in November 2004 and became Vice President of Finance &
Administration and Assistant Treasurer in May 2005. Prior to joining Perficient,
      Mr. Kalbfleish served as Vice President of Finance & Administration
      with IntelliMark/Technisource, a national IT staffing company, for
      11 years. Mr. Kalbfleish has over 21 years of experience at the
      Controller level and above in a number of service industries with an emphasis
      on
      acquisition integration and accounting, human resources and administrative
      support. Mr. Kalbfleish has a B.S.B.A. in Accountancy from the University
      of Missouri at Columbia.




55





*Ralph
      C. Derrickson* became a
      member of our board of directors in July 2004. Mr. Derrickson has more than
      25 years of technology management experience in a wide range of settings
      including start-up, interim management and restructuring situations. Currently
      Mr. Derrickson is President and CEO of Carena, Inc. Prior to joining Carena,
      Inc., Mr. Derrickson was managing director of venture investments at Vulcan
      Inc., an investment management firm with headquarters in Seattle, Washington
      from October 2001 to July 2004. Mr. Derrickson is a founding partner of
      Watershed Capital, an early-stage venture capital firm, and is the managing
      member of RCollins Group, LLC, a management advisory firm. He served as a board
      member of Metricom, Inc., a publicly traded company, from April 1997 to November
      2001 and as Interim CEO of Metricom from February 2001 to August 2001. Metricom,
      Inc. voluntarily filed a bankruptcy petition in US Bankruptcy Court for the
      Northern District of California in July of 2001. He served as vice president
      of
      product development at Starwave Corporation, one of the pioneers of the
      Internet. Earlier, Mr. Derrickson held senior management positions at NeXT
      Computer, Inc. and Sun Microsystems, Inc. He has served on the boards of
      numerous start-up technology companies. Mr. Derrickson serves on the
      Executive Advisory Board of the Center for Entrepreneurship and Innovation
      at
      the University of Washington, as well as on the Board of the Center for
      Materials and Devices for Information Technology Research, an NSF Science and
      Technology Center. Mr. Derrickson holds a bachelor’s degree in systems
      software from the Rochester Institute of Technology.




*Max
      D. Hopper* became a
      member of our board of directors in September 2002. Mr. Hopper began his
      information systems career in 1960 at Shell Oil and served with EDS, United
      Airlines and Bank of America prior to joining American Airlines. During
      Mr. Hopper's twenty-year tenure at American Airlines he served as CIO, and
      as CEO of several business units. Most recently, he founded Max D. Hopper
      Associates, Inc., a consulting firm that specializes in the strategic use of
      information technology and eBusiness. Mr. Hopper currently serves on the
      board of directors for several companies such as Gartner Group, and several
      other private corporations.




*Kenneth
      R. Johnsen* became a
      member of our board of directors in July 2004. Mr. Johnsen is currently a
      partner with Aspen Advisors, LP. From January 1999 to October 2006, Mr. Johnsen
      served as President, CEO and Chairman of the Board of Parago Inc., a marketing
      services transaction processor. Before joining Parago Inc. in 1999, he served
      as
      President, Chief Operating Officer and Board Member of Metamor Worldwide Inc.,
      an $850 million public technology services company specializing in
      information technology consulting and implementation. Metamor was later acquired
      by PSINet for $1.7 billion. At Metamor, Mr. Johnsen grew the IT
      Solutions Group revenues from $20 million to over $300 million within
      two years. His experience also includes 22 years at IBM where he held
      general management positions, including Vice President of Business Services
      for
      IBM Global Services and General Manager of IBM China/ Hong Kong Operations.
      He
      achieved record revenues, profit and customer satisfaction levels in both
      business units.




*David
      S. Lundeen* became a
      member of our board of directors in April 1998. From March 1999
      through 2002, Mr. Lundeen was a partner with Watershed Capital, a private
      equity firm based in Mountain View, California. From June 1997 to
      February 1999, Mr. Lundeen was self-employed, managed his personal
      investments and acted as a consultant and advisor to various businesses. From
      June 1995 to June 1997, he served as the Chief Financial Officer and Chief
      Operating Officer of BSG. From January 1990 until June 1995,
      Mr. Lundeen served as President of Blockbuster Technology and as Vice
      President of Finance of Blockbuster Entertainment Corporation. Prior to that
      time, Mr. Lundeen was an investment banker with Drexel Burnham Lambert in
      New York City. Mr. Lundeen currently serves as a member of the board of
      directors of Parago, Inc., and as Chairman of the Board of Interstate
      Connections, Inc. Mr. Lundeen received a B.S. in Engineering from the
      University of Michigan in 1984 and an M.B.A. from the University of Chicago
      in
      1988. The board of directors has determined that Mr. Lundeen is an audit
      committee financial expert, as such term is defined in the rules and regulations
      promulgated by the Securities and Exchange Commission.





**Codes
      of Conduct and Ethics**




The
      Company has adopted a Corporate Code of Business Conduct and Ethics that applies
      to all employees and directors of the Company while acting on the Company's
      behalf and has adopted a Financial Code of Ethics applicable to the chief
      executive officer, the chief financial officer, and other senior financial
      officials.





**Audit
      Committee of the Board of Directors**




The
      board
      of directors has created an audit committee. Each committee member is
      independent as defined by NASDAQ Global Select Market listing
      standards.




The
      audit
      committee has the sole authority to appoint, retain and terminate our
      independent accountants and is directly responsible for the compensation,
      oversight and evaluation of the work of the independent accountants. The
      independent accountants report directly to the audit committee. The audit
      committee also has the sole authority to approve all audit engagement fees
      and
      terms and all non-audit engagements with our independent accountants and must
      pre-approve all auditing and permitted non-audit services to be performed for
      us
      by the independent accountants, subject to certain exceptions provided by the
      Securities Exchange Act of 1934. The members of the audit committee are Max
      D.
      Hopper, David S. Lundeen and Ralph C. Derrickson. Mr. Lundeen serves as
      chairman of the audit committee. The board of directors has determined that
      Mr. Lundeen is qualified as our audit committee financial expert within the
      meaning of Securities and Exchange Commission regulations and that he has
      accounting and related financial management expertise within the meaning of
      the
      listing standards of the NASDAQ Global Select Market. The board of directors
      has
      affirmatively determined that Mr. Lundeen qualified as an independent
      director as defined by the NASDAQ Global Select Market listing
      standards.




56





Additional
      information with respect to Directors and Executive Officers of the Company
      is
      incorporated by reference to the Proxy Statement under the captions "Nominees
      and Continuing Directors", "Composition and Meetings of the Board of Directors
      and Committees", and "Section 16(a) Beneficial Ownership Reporting Compliance."
      The Proxy Statement will be filed pursuant to Regulation 14A within 120 days
      of
      the end of the Company's fiscal year.





**Item
      11. Executive Compensation.**





Information
      on this subject is found in the Proxy Statement under the captions "Compensation
      of Directors and Executive Officers” and "Nominees and Continuing Directors" and
      is incorporated herein by reference. The proxy Statement will be filed pursuant
      to Regulation 14A within 120 days of the end of the Company's fiscal
      year.





**Item
      12.****Security
      Ownership of Certain Beneficial Owners and Management and Related Stockholder
      Matters.**




Information
      of this subject is found in the Proxy Statement under the captions "Security
      Ownership of Certain Beneficial Owners and Management ", "Nominees and
      Continuing Directors", and "Equity Compensation Plan Information" and is
      incorporated herein by reference. The Proxy Statement will be filed pursuant
      to
      Regulations 14A within 120 days of the end of the Company's fiscal
      year.





**Item
      13.****Certain
      Relationships and Related Transactions, and Director
      Independence.**




Information
      on this subject is found in the Proxy Statement under the caption "Certain
      Relationships and Related Transactions" and incorporated herein by reference.
      The Proxy Statement will be filed pursuant to Regulation 14A within 120 days
      of
      the end of the Company's fiscal year.





**Item
      14.****Principal
      Accounting Fees and Services.**




Information
      on this subject is found in the Proxy Statement under the caption "Principal
      Accounting Firm Fees and Services" and incorporated herein by reference. The
      Proxy Statement will be filed pursuant to Regulation 14A within 120 days of
      the
      end of the Company's fiscal year.





57





**PART
      IV**





**Item
      15.**  **Exhibits,
      Financial Statement Schedules.**




(a)
              1.
            Financial
                Statements




The
        following consolidated statements are included within Item 8 under the following
        captions:




**Index**
            
            
            **Page**Consolidated
                Balance Sheets
            
            
            28Consolidated
                Statements of Income
            
            
            29Consolidated
                Statements of Changes in Stockholders' Equity
            
            
            30Consolidated
                Statements of Cash Flows
            
            
            31Notes
                to Consolidated Financial Statements
            
            
            32-50Report
                of Independent Registered Public Accounting Firm
            
            
            51




2.
              Financial
                  Statement Schedules


No
        financial statement schedules are required to be filed by Items 8 and 15(d)
        because they are not required or are not applicable, or the required information
        is set forth in the applicable financial statements or notes
        thereto.


3.
              Exhibits
 See
          Index
          to Exhibits on page 60.
  58





**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.


PERFICIENT,
                INC.Date:
                March 1, 2007
            By:
            /s/ John
                T. McDonaldJohn
                T. McDonaldChief
                Executive Officer*(Principal
                Executive Officer)*




Date:
                March 1, 2007
            By:
            /s/ Paul
                E. MartinPaul
                E. MartinChief
                Financial Officer*(Principal
                Financial Officer)*




Date:
                March 1, 2007
            By:
            /s/ Richard
                T. KalbfleishRichard
                T. KalbfleishVice
                President of Finance and Administration*(Principal Accounting Officer)*





KNOW
      ALL
      MEN BY THESE PRESENTS, that each person whose signature appears below
      constitutes and appoints John T. McDonald and Paul E. Martin, and each of them
      (with full power to each of them to act alone), his or her true and lawful
      attorney-in-fact and agent, with full power of substitution and resubstitution,
      for him or her and in his or her name, place and stead, in any and all
      capacities, to sign on his or her behalf individually and in each capacity
      stated below any and all amendments (including post-effective amendments) to
      this annual report, and to file the same, with all exhibits thereto and other
      documents in connection therewith, with the Securities and Exchange Commission,
      granting unto said attorneys-in-fact and agents, and each of them, full power
      and authority to do and perform each and every act and thing requisite and
      necessary to be done in and about the premises, as fully to all intents and
      purposes as he or she might or could do in person, hereby ratifying and
      confirming all that said attorneys-in-fact and agents and either of them, or
      their substitutes, may lawfully do or cause to be done by virtue
      hereof.




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




**Signature**
            
            **Title**
            
            **Date**/s/
                John T. McDonald
            
            
            Chief
                Executive Officer and
            
            
            March
                1, 2007John
                T. McDonald
            
            
            Chairman
                of the Board (*Principal
                Executive Officer)*/s/
                Ralph C. Derrickson
            
            
            Director
            
            
            March
                1, 2007Ralph
                C. Derrickson/s/
                Max D. Hopper
            
            
            Director
            
            
            March
                1, 2007Max
                D. Hopper/s/
                Kenneth R. Johnsen
            
            
            Director
            
            
            March
                1, 2007Kenneth
                R. Johnsen/s/
                David S. Lundeen
            
            
            Director
            
            
            March
                1, 2007David
                S. Lundeen





59




**INDEX
      TO EXHIBITS**





**Exhibit**
              **Number******
            
            **Description**2.1
            
            Asset
                Purchase Agreement, dated as of June 10, 2005, by and among
                Perficient, Inc., Perficient iPath, Inc. and iPath Solutions, Ltd.,
                previously filed with the Securities and Exchange Commission as an
                Exhibit
                to our Current Report on Form 8-K filed on June 15, 2005 and incorporated
                herein by reference2.2
            
            Asset
                Purchase Agreement, dated as of September 2, 2005, by and among
                Perficient, Inc., Perficient Vivare, Inc., Vivare, LP and the other
                signatories thereto, previously filed with the Securities and Exchange
                Commission as an Exhibit to our Current Report on Form 8-K filed
                on
                September 9, 2005 and incorporated herein by reference2.3
            
            Agreement
                and Plan of Merger, dated as of April 6, 2006, by and among Perficient,
                Inc., PFT MergeCo, Inc., Bay Street Solutions, Inc. and the other
                signatories thereto, previously filed with the Securities and Exchange
                Commission as an Exhibit to our Current Report on Form 8-K filed
                on April
                12, 2006 and incorporated herein by reference2.4
            
            Agreement
                and Plan of Merger, dated as of May 31, 2006, by and among Perficient,
                Inc., PFT MergeCo II, Inc., Insolexen, Corp., HSU Investors, LLC,
                Hari
                Madamalla, Steve Haglund and Uday Yallapragada, previously filed
                with the
                Securities and Exchange Commission as an Exhibit to our Current Report
                on
                Form 8-K filed on June 5, 2006 and incorporated herein by
                reference2.5
            
            Asset
                Purchase Agreement, dated as of July 20, 2006, by and among Perficient,
                Inc., Perficient DCSS, Inc. and Digital Consulting & Software
                Services, Inc., previously filed with the Securities and Exchange
                Commission as an Exhibit to our Current Report on Form 8-K filed
                on July
                26, 2006 and incorporated herein by reference3.1
            
            Certificate
                of Incorporation of Perficient, Inc., previously filed with the Securities
                and Exchange Commission as an Exhibit to our Registration Statement
                on
                Form SB-2 (File No. 333-78337) declared effective on July 28, 1999
                by the
                Securities and Exchange Commission and incorporated herein by
                reference3.2
            
            Certificate
                of Amendment to Certificate of Incorporation of Perficient, Inc.,
                previously filed with the Securities and Exchange Commission as an
                Exhibit
                to our Form 8-A filed with the Securities and Exchange Commission
                pursuant
                to Section 12(g) of the Securities Exchange Act of 1934 on February
                15,
                2005 and incorporated herein by reference3.3
            
            Certificate
                of Amendment to Certificate of Incorporation of Perficient, Inc.,
                previously filed with the Securities and Exchange Commission as an
                Exhibit
                to our Registration Statement on Form S-8 (File No. 333-130624) filed
                on
                December 22, 2005 and incorporated herein by reference3.4
            
            Bylaws
                of Perficient, Inc., previously filed with the Securities and Exchange
                Commission as an Exhibit to our Registration Statement on Form SB-2
                (File
                No. 333-78337) declared effective on July 28, 1999 by the Securities
                and
                Exchange Commission and incorporated herein by
                reference4.1
            
            Specimen
                Certificate for shares of common stock, previously filed with the
                Securities and Exchange Commission as an Exhibit to our Registration
                Statement on Form SB-2 (File No. 333-78337) declared effective on
                July 28,
                1999 by the Securities and Exchange Commission and incorporated herein
                by
                reference4.2
            
            Warrant
                granted to Gilford Securities Incorporated, previously filed with
                the
                Securities and Exchange Commission as an Exhibit to our Registration
                Statement on Form SB-2 (File No. 333-78337) declared effective on
                July 28,
                1999 by the Securities and Exchange Commission and incorporated herein
                by
                reference




60




**Exhibit**
              **Number**
            
            **Description**4.3
            
            Form
                of Common Stock Purchase Warrant, previously filed with the Securities
                and
                Exchange Commission as an Exhibit to our Current Report on Form 8-K
                filed
                on January 17, 2002 and incorporated herein by
                reference4.4
            
            Form
                of Warrant, previously filed with the Securities and Exchange Commission
                as an Exhibit to our Registration Statement on Form S-3 (File No.
                333-117216) and incorporated by reference herein10.1
            
            Perficient,
                Inc. Amended and Restated 1999 Stock Option/Stock Issuance Plan,
                previously filed with the Securities and Exchange Commission as an
                Exhibit
                to our annual report on Form 10-K for the year ended December 31,
                2005 and
                incorporated by reference herein10.2
            
            Form
                of Stock Option Agreement, previously filed with the Securities and
                Exchange Commission as an Exhibit to our Annual Report on Form 10-KSB
                for
                the fiscal year ended December 31, 2004 and incorporated herein by
                reference10.3
            
            Perficient,
                Inc. Employee Stock Purchase Plan, previously filed with the Securities
                and Exchange Commission as Appendix A to the Registrant's Schedule
                14A
                (File No. 001-15169) on October 13, 2005 and incorporated herein
                by
                reference10.4
            
            Form
                of Restricted Stock Agreement, previously filed with the Securities
                and
                Exchange Commission as an Exhibit to our annual report on Form 10-K
                for
                the year ended December 31, 2005 and incorporated by reference
                herein10.5
            
            Form
                of Indemnity Agreement between Perficient, Inc. and each of our directors
                and officers, previously filed with the Securities and Exchange Commission
                as an Exhibit to our Registration Statement on Form SB-2 (File No.
                333-78337) declared effective on July 28, 1999 by the Securities
                and
                Exchange Commission and incorporated herein by
                reference10.6
            
            Offer
                Letter, dated July 20, 2006, by and between Perficient, Inc. and
                Mr. Paul
                E. Martin, previously filed with the
              Securities
                and Exchange Commission as an Exhibit to our Current Report on Form
                8-K
                filed on July 26, 2006 and
              incorporated
                herein by reference10.7
            
            Offer
                Letter Amendment, dated August 31, 2006, by and between Perficient,
                Inc.
                and Mr. Paul E. Martin, previously
              filed
                with the Securities and Exchange Commission as an Exhibit to our
                Current
                Report on Form 8-K filed on September 1, 2006 and incorporated herein
                by
                reference10.8†
            
            Employment
                Agreement between Perficient, Inc. and John T. McDonald dated March
                28,
                2006, and effective as of January 1, 2006, previously filed with
                the
                Securities and Exchange Commission as an Exhibit to our annual report
                on
                Form 10-K for the year ended December 31, 2005 and incorporated by
                reference herein10.9†
            
            Employment
                Agreement between Perficient, Inc. and Jeffrey Davis dated August
                3, 2006,
                and effective as of July 1, 2006 filed with the Securities and Exchange
                Commission as an Exhibit to our Quarterly Report on Form 10-Q filed
                on
                August 9, 2006 and incorporated herein by reference10.10
            
            Amended
                and Restated Loan and Security Agreement by and among Silicon Valley
                Bank,
                KeyBank National Association, Perficient, Inc., Perficient Canada
                Corp.,
                Perficient Genisys, Inc., Perficient Meritage, Inc. and Perficient
                Zettaworks, Inc. dated effective as of June 3, 2005, previously filed
                with
                the Securities and Exchange Commission as an Exhibit to our annual
                report
                on Form 10-K for the year ended December 31, 2005 and incorporated
                herein
                by reference10.11
            
            Amendment
                to Amended and Restated Loan and Security Agreement, dated as of
                June 29,
                2006, by and among Silicon Valley Bank, KeyBank National Association,
                Perficient, Inc., Perficient Genisys, Inc., Perficient Canada Corp.,
                Perficient Meritage, Inc., Perficient Zettaworks, Inc., Perficient
                iPath,
                Inc., Perficient Vivare, Inc., Perficient Bay Street, LLC and Perficient
                Insolexen, LLC, previously filed with the Securities and Exchange
                Commission as an Exhibit to our Current Report on Form 8-K filed
                on July
                5, 2006 and incorporated herein by
                reference




61




**Exhibit**
              **Number**
            
            **Description**10.12
            
            Lease
                by and between Cornerstone Opportunity Ventures, LLC and Perficient,
                Inc.,
                previously filed with the Securities and Exchange Commission as an
                Exhibit
                to our annual report on Form 10-K for the year ended December 31,
                2005 and
                incorporated by reference herein10.13
            
            First
                Amended and Restated Investor Rights Agreements dated as of June
                26, 2002
                by and between Perficient, Inc. and the Investors listed on Exhibits
                A and
                B thereto, previously filed with the Securities and Exchange Commission
                as
                an Exhibit to our Current Report on Form 8-K filed on July 18, 2002
                and
                incorporated by reference herein10.14
            
            Securities
                Purchase Agreement, dated as of June 16, 2004, by and among Perficient,
                Inc., Tate Capital Partners Fund, LLC, Pandora Select Partners, LP,
                and
                Sigma Opportunity Fund, LLC, previously filed with the Securities
                and
                Exchange Commission as an Exhibit to our Current Report on Form 8-K
                filed
                on June 23, 2004 and incorporated by reference herein14.1
            
            Corporate
                Code of Business Conduct and Ethics, previously filed with the Securities
                and Exchange Commission on Form 10-KSB/A for the year ended December
                31,
                2003 and incorporated by reference herein14.2
            
            Financial
                Code of Ethics, previously filed with the Securities and Exchange
                Commission on Form 10-KSB/A for the year ended December 31, 2003
                and
                incorporated by reference herein21.1*
            
            Subsidiaries23.1*
            
            Consent
                of BDO Seidman, LLP24.1
            
            Power
                of Attorney (included on the signature page hereto)31.1*
            
            Certification
                by the Chief Executive Officer of Perficient, Inc. as required by
                Section
                302 of the Sarbanes-Oxley Act of 200231.2*
            
            Certification
                by the Chief Financial Officer of Perficient, Inc. as required by
                Section
                302 of the Sarbanes-Oxley Act of 200232.1*
            
            Certification
                by the Chief Executive Officer and Chief Financial Officer of Perficient,
                Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of the Sarbanes-Oxley Act of
                2002








†
            Identifies
                an Exhibit that consists of or includes a management contract or
                compensatory plan or arrangement.




*
            Filed
                herewith.




62