##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2007.
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number 001-31451
 
 BEARINGPOINT, INC.
 (Exact name of Registrant as specified in its charter)
 
 DELAWARE
(State or other jurisdiction of 
incorporation or organization)
    
    22-3680505
(IRS Employer
Identification No.)1676 International Drive, McLean, VA
(Address of principal executive offices)
    
    22102
(Zip Code)
 (703) 747-3000
(Registrants telephone number, including area code)
 
  o þ
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
 o þ




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##### 



BEARINGPOINT, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2007
 EXPLANATORY NOTE
   2




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##### 



BEARINGPOINT, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2007
 TABLE OF CONTENTS
 PagePART IFINANCIAL INFORMATIONItem 1: Financial Statements (unaudited)
    
    
    4Consolidated Condensed Statements of Operations for the Three Months Ended March 31, 2007 and 2006
    
    
    4Consolidated Condensed Balance Sheets as of March 31, 2007 and December 31, 2006
    
    
    5Consolidated Condensed Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006
    
    
    6Notes to Consolidated Condensed Financial Statements
    
    
    7Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3: Quantitative and Qualitative Disclosures about Market Risk
    
    
    32Item 4: Controls and Procedures
    
    
    32PART IIOTHER INFORMATIONItem 1: Legal Proceedings
    
    
    32Item 1A: Risk Factors
    
    
    34Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 3: Defaults Upon Senior Securities
    
    
    34Item 4: Submission of Matters to a Vote of Security Holders
    
    
    34Item 5: Other Information
    
    
    34Item 6: Exhibits
    
    
    35
 3




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##### 



PART I, ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
 BEARINGPOINT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
 Three Months EndedMarch 31,2007
    
    
    2006Revenue
    
    $
    866,252
    
    
    $
    833,744Costs of service:Professional compensation
    
    
    471,715
    
    
    
    429,249Other direct contract expenses
    
    
    198,771
    
    
    
    242,394Lease and facilities restructuring (credits) charges
    
    
    (4,887
    )
    
    
    2,800Other costs of service
    
    
    68,593
    
    
    
    60,827Total costs of service
    
    
    734,192
    
    
    
    735,270Gross profit
    
    
    132,060
    
    
    
    98,474Amortization of purchased intangible assets
    
    
    
    
    
    
    515Selling, general and administrative expenses
    
    
    177,244
    
    
    
    188,913Operating loss
    
    
    (45,184
    )
    
    
    (90,954
    )Interest income
    
    
    1,752
    
    
    
    2,251Interest expense
    
    
    (10,869
    )
    
    
    (8,966
    )Insurance settlement
    
    
    
    
    
    
    38,000Other income, net
    
    
    95
    
    
    
    378Loss before taxes
    
    
    (54,206
    )
    
    
    (59,291
    )Income tax expense
    
    
    7,500
    
    
    
    13,422Net loss
    
    $
    (61,706
    )
    
    $
    (72,713
    )Loss per share  basic and diluted
    
    $
    (0.29
    )
    
    $
    (0.34
    )Weighted average shares  basic and diluted
    
    
    214,372,953
    
    
    
    211,704,290
  4




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##### 



BEARINGPOINT, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
 March 31,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    245,479
    
    
    $
    389,571Restricted cash
    
    
    3,288
    
    
    
    3,097Accounts receivable, net of allowances of $5,938 at
March 31, 2007 and $5,927 at December 31, 2006
    
    
    341,417
    
    
    
    361,638Unbilled revenue
    
    
    432,487
    
    
    
    341,357Income tax receivable
    
    
    9,192
    
    
    
    1,414Deferred income taxes
    
    
    8,555
    
    
    
    7,621Prepaid expenses
    
    
    30,620
    
    
    
    33,677Other current assets
    
    
    27,473
    
    
    
    65,611Total current assets
    
    
    1,098,511
    
    
    
    1,203,986Property and equipment, net
    
    
    141,112
    
    
    
    146,392Goodwill
    
    
    460,759
    
    
    
    463,446Deferred income taxes, less current portion
    
    
    46,142
    
    
    
    41,663Other assets
    
    
    89,775
    
    
    
    83,753Total assets
    
    $
    1,836,299
    
    
    $
    1,939,240LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Current portion of notes payable
    
    $
    
    
    
    $
    360Accounts payable
    
    
    251,688
    
    
    
    295,109Accrued payroll and employee benefits
    
    
    384,264
    
    
    
    344,715Deferred revenue
    
    
    117,697
    
    
    
    131,313Income tax payable
    
    
    30,223
    
    
    
    33,324Current portion of accrued lease and facilities charges
    
    
    15,474
    
    
    
    17,126Deferred income taxes
    
    
    26,881
    
    
    
    20,109Accrued legal settlements
    
    
    7,443
    
    
    
    59,718Other current liabilities
    
    
    131,808
    
    
    
    135,837Total current liabilities
    
    
    965,478
    
    
    
    1,037,611Notes payable, less current portion
    
    
    672,454
    
    
    
    671,490Accrued employee benefits
    
    
    120,056
    
    
    
    116,087Accrued lease and facilities charges, less current portion
    
    
    42,050
    
    
    
    49,792Deferred income taxes, less current portion
    
    
    13,794
    
    
    
    7,984Income tax reserve
    
    
    224,325
    
    
    
    108,499Other liabilities
    
    
    136,387
    
    
    
    125,078Total liabilities
    
    
    2,174,544
    
    
    
    2,116,541Commitments and contingencies (note 9)Stockholders deficit:Preferred stock, $.01 par value 10,000,000 shares authorized
    
    
    
    
    
    
    Common stock, $.01 par value 1,000,000,000 shares authorized,
205,406,249 shares issued and 201,593,999 shares outstanding
on March 31, 2007 and December 31, 2006
    
    
    2,044
    
    
    
    2,044Additional paid-in capital
    
    
    1,331,420
    
    
    
    1,315,190Accumulated deficit
    
    
    (1,879,561
    )
    
    
    (1,697,639
    )Notes receivable from stockholders
    
    
    (7,466
    )
    
    
    (7,466
    )Accumulated other comprehensive income
    
    
    251,045
    
    
    
    246,297Treasury stock, at cost (3,812,250 shares)
    
    
    (35,727
    )
    
    
    (35,727
    )Total stockholders deficit
    
    
    (338,245
    )
    
    
    (177,301
    )Total liabilities and stockholders deficit
    
    $
    1,836,299
    
    
    $
    1,939,240
  5




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##### 



BEARINGPOINT, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Three Months EndedMarch 31,2007
    
    
    2006Cash flows from operating activities:Net loss
    
    $
    (61,706
    )
    
    $
    (72,713
    )Adjustments to reconcile net loss to net cash used in
operating activities:Deferred income taxes
    
    
    7,127
    
    
    
    4,985Allowance (benefit) for doubtful accounts
    
    
    1,352
    
    
    
    (3,271
    )Stock-based compensation
    
    
    16,230
    
    
    
    9,984Depreciation and amortization of property and equipment
    
    
    17,896
    
    
    
    19,595Amortization of purchased intangible assets
    
    
    
    
    
    
    515Lease and facilities restructuring (credits) charges
    
    
    (4,887
    )
    
    
    2,800Amortization of debt issuance costs and debt accretion
    
    
    2,844
    
    
    
    2,078Other
    
    
    (412
    )
    
    
    2,159Changes in assets and liabilities:Accounts receivable
    
    
    20,285
    
    
    
    51,839Unbilled revenue
    
    
    (89,713
    )
    
    
    (71,520
    )Income tax receivable, prepaid expenses and other
current assets
    
    
    33,711
    
    
    
    (33,523
    )Other assets
    
    
    (7,657
    )
    
    
    2,553Accounts payable, accrued legal settlements and other current liabilities
    
    
    (100,583
    )
    
    
    27,438Accrued payroll and employee benefits
    
    
    37,854
    
    
    
    3,261Deferred revenue
    
    
    (13,875
    )
    
    
    (28,532
    )Income tax reserve and other liabilities
    
    
    4,688
    
    
    
    36,881Net cash used in operating activities
    
    
    (136,846
    )
    
    
    (45,471
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (12,319
    )
    
    
    (14,099
    )(Increase) decrease in restricted cash
    
    
    (191
    )
    
    
    89,452Net cash (used in) provided by investing activities
    
    
    (12,510
    )
    
    
    75,353Cash flows from financing activities:Repayments of notes payable
    
    
    (360
    )
    
    
    (3,163
    )Increase in book overdrafts
    
    
    4,191
    
    
    
    6,458Net cash provided by financing activities
    
    
    3,831
    
    
    
    3,295Effect of exchange rate changes on cash and cash equivalents
    
    
    1,433
    
    
    
    2,340Net (decrease) increase in cash and cash equivalents
    
    
    (144,092
    )
    
    
    35,517Cash and cash equivalents  beginning of period
    
    
    389,571
    
    
    
    255,340Cash and cash equivalents  end of period
    
    $
    245,479
    
    
    $
    290,857
  6




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##### 



BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 Note 1. Basis of Presentation
   Note 2. Stock-Based Compensation and Employee Stock Purchase Plan
   Three Months EndedMarch 31,2007
    
    
    2006Stock option awards
    
    $
    2,418
    
    
    $
    6,469RSUs
    
    
    5,416
    
    
    
    1,887PSUs
    
    
    7,219
    
    
    
    ESPP and BE an Owner
    
    
    1,177
    
    
    
    1,628Total
    
    $
    16,230
    
    
    $
    9,984
 Stock Options
  WeightedWeighted
    
    AverageStock Price
    
    Risk-Free
    
    Expected
    
    Expected
    
    Average
    
    Grant DateExpected
    
    Interest
    
    Life
    
    Dividend
    
    Exercise
    
    FairVolatility
    
    Rate
    
    (years)
    
    Yield
    
    Price
    
    ValueThree months ended March 31, 2006
    
    
    50.80
    %
    
    
    4.59
    %
    
    
    6
    
    
    
    
    $
    8.95
    
    
    $
    4.82
 7




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##### 



BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS  (continued)
 Restricted Stock Units
  WeightedAverageGrantDate FairNumber of RSUs
    
    
    ValueOutstanding at December 31, 2006
    
    
    20,416,520
    
    
    $
    7.93Granted
    
    
    1,402,550
    
    
    
    7.86Settled
    
    
    
    
    
    
    Forfeited
    
    
    (194,326
    )
    
    
    8.30Outstanding at March 31, 2007 (1)
    
    
    21,624,744
    
    
    $
    7.92
 
 (1)
    
    Excludes approximately 141,143 RSUs awarded to recipients in China where local laws require a
cash settlement.   Performance Share Units
  WeightedAverageGrantDate FairNumber of PSUs
    
    
    ValueOutstanding at December 31, 2006
    
    
    
    
    
    $
    Granted
    
    
    21,942,385
    
    
    
    12.51Settled
    
    
    
    
    
    
    Forfeited
    
    
    (25,384
    )
    
    
    12.80Outstanding at March 31, 2007
    
    
    21,917,001
    
    
    $
    12.51
  (i)
    
    the Company must first achieve a compounded average annual growth target in consolidated
business unit contribution; and(ii)
    
    total shareholder return (TSR) for shares of the Companys common stock must be at
least equal to the 25th percentile of TSR of the Standard & Poors 500 (the S&P
500) in order for any portion of the award to vest. Depending on the Companys TSR
performance relative to those companies that comprise the S&P 500, the PSU awards will vest
on December 31, 2009 at percentages varying from 0% to 250% of the number of PSU awards
originally awarded.
 8




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##### 



BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS  (continued)
   
    
    a performance period of February 2, 2007 to December 31, 2009;
    
    a grant date closing stock price equal to the closing price of a share of
the Companys common stock as reported on the New York Stock Exchange;
    
    a risk free rate using a term structure over the performance period; and
    
    a volatility assumption using a term structure over the performance
period incorporating an average blended rate of the Companys historical volatility
and implied volatility from the Companys peer group within the S&P 500.
 ESPP
  Note 3. Notes Payable
  March 31,
    
    
    December 31,2007
    
    
    2006Current portion:Other
    
    $
    
    
    
    $
    360Long-term portion:Series A and Series B Convertible Debentures
    
    
    450,000
    
    
    
    450,000April 2005 Convertible Debentures
    
    
    200,000
    
    
    
    200,000July 2005 Convertible Debentures (net of discount of
$17,546 and $18,510, respectively)
    
    
    22,454
    
    
    
    21,490Total long-term portion
    
    
    672,454
    
    
    
    671,490Total notes payable
    
    $
    672,454
    
    
    $
    671,850
   9




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##### 



BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS  (continued)
  2007 Credit Facility
     
    
    The affirmative covenantsinclude, among other things: the delivery of unaudited quarterly
and audited annual financial statements, all in accordance with generally accepted accounting
principles, certain monthly operating metrics and budgets; compliance with applicable laws
and regulations (excluding, prior to October 31, 2008, compliance with certain filing
requirements under the securities laws); maintenance of existence and insurance; after
October 31, 2008, as requested by the Administrative Agent, maintenance of credit ratings;
and maintenance of books and records (subject to the material weaknesses previously disclosed
in the Companys Annual Report on Form 10-K for the year ended December 31, 2005).
    
    The negative covenants, which (subject to exceptions) restrict certain of the Companys
corporate activities, include, among other things, limitations on: disposition of assets;
mergers and acquisitions; payment of dividends; stock repurchases and redemptions; incurrence
of additional indebtedness; making of loans and investments; creation of liens; prepayment of
other indebtedness; and engaging in certain transactions with affiliates.
  10




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##### 



BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS  (continued)
    Discontinued 2005 Credit Facility
  Note 4. Earnings (Loss) Per Share
  Note 5. Comprehensive Loss
  Three Months EndedMarch 31,2007
    
    
    2006Net loss
    
    $
    (61,706
    )
    
    $
    (72,713
    )Foreign currency translation adjustment (1)
    
    
    4,748
    
    
    
    4,736Minimum pension liability
    
    
    
    
    
    
    5,329Comprehensive loss
    
    $
    (56,958
    )
    
    $
    (62,648
    )
 
 (1)
    
    Movement in the foreign currency translation adjustment is primarily due to exchange-rate
fluctuations of the Euro and Japanese Yen against the U.S. dollar. Note 6. Segment Reporting
  11




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##### 



BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS  (continued)
  Three Months EndedMarch 31,2007
    
    
    2006Operating
    
    
    
    
    
    
    OperatingRevenue
    
    
    Income (Loss)
    
    
    Revenue
    
    
    Income (Loss)Public Services
    
    $
    361,693
    
    
    $
    64,960
    
    
    $
    331,116
    
    
    $
    52,153Commercial Services
    
    
    136,282
    
    
    
    20,827
    
    
    
    117,107
    
    
    
    (28,519
    )Financial Services
    
    
    72,205
    
    
    
    3,898
    
    
    
    110,502
    
    
    
    36,751EMEA
    
    
    188,805
    
    
    
    36,029
    
    
    
    164,180
    
    
    
    25,647Asia Pacific
    
    
    83,155
    
    
    
    11,541
    
    
    
    90,435
    
    
    
    17,355Latin America
    
    
    22,266
    
    
    
    (4,255
    )
    
    
    19,221
    
    
    
    1,039Corporate/Other
    
    
    1,846
    
    
    
    (178,184
    )
    
    
    1,183
    
    
    
    (195,380
    )Total
    
    $
    866,252
    
    
    $
    (45,184
    )
    
    $
    833,744
    
    
    $
    (90,954
    )
 Note 7. Goodwill
  ForeignBalance
    
    
    
    
    
    
    Currency
    
    
    BalanceDecember 31,
    
    
    
    
    
    
    Translation
    
    
    March 31,2006
    
    
    Reductions
    
    
    Adjustment
    
    
    2007Public Services
    
    $
    23,581
    
    
    $
    
    
    
    $
    
    
    
    $
    23,581Financial Services
    
    
    9,210
    
    
    
    
    
    
    
    
    
    
    
    9,210EMEA
    
    
    359,133
    
    
    
    (7,495
    ) (1)
    
    
    3,822
    
    
    
    355,460Asia Pacific
    
    
    70,402
    
    
    
    
    
    
    
    970
    
    
    
    71,372Latin America
    
    
    918
    
    
    
    
    
    
    
    16
    
    
    
    934Corporate/Other
    
    
    202
    
    
    
    
    
    
    
    
    
    
    
    202Total
    
    $
    463,446
    
    
    $
    (7,495
    )
    
    $
    4,808
    
    
    $
    460,759
 
 (1)
    
    Amount represents the reversal of uncertain income tax liabilities recorded as part of
the acquisition of a consulting practice in EMEA against goodwill, whereas the statute of
limitations for the potential tax liability expired during the first quarter of 2007. 12




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##### 



BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS  (continued)
 Note 8. Lease and Facilities Restructuring Activities
    TotalBalance at December 31, 2006
    
    $
    66,918Adjustment to the provision
    
    
    (4,887
    )Utilization
    
    
    (4,769
    )Other (1)
    
    
    262Balance at March 31, 2007
    
    $
    57,524
 
 (1)
    
    Other changes in the restructuring accrual consist primarily of foreign currency translation
adjustments. Note 9. Commitments and Contingencies
  
    
    Claims and investigations arising from its continuing inability to timely file
periodic reports under the Exchange Act (the Exchange Act), and the restatement of its
financial statements for certain prior periods to correct accounting errors and departures
from generally accepted accounting principles for those years (SEC Reporting Matters);
    
    Claims and investigations being conducted by agencies or officers of the U.S. Federal
government and arising in connection with its provision of services under contracts with
agencies of the U.S. Federal government (Government Contracting Matters); and
    
    Claims made in the ordinary course of business by clients seeking damages for alleged
breaches of contract or failure of performance, by current or former employees seeking
damages for alleged acts of wrongful termination or discrimination, and by creditors or
other vendors alleging defaults in payment or performance (Other Matters).
  13




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##### 



BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS  (continued)
 SEC Reporting Matters
 2005 Class Action Suits
 Makor Issues & Rights, Ltd v. Tellabs, Tellabs Tellabs
 2005 Shareholders Derivative Demand
  SEC Investigation
   14




---



##### 



BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS  (continued)
 Government Contracting Matters
  Other Matters
 Peregrine Litigation
 In re Peregrine Systems, Inc. Securities Litigation Simpson v. AOL Time Warner Inc. Stoneridge Investment Partners LLC v. Scientific-Atlanta, Inc In re
Peregrine Systems
 Hawaiian Telcom Communications, Inc.
  Telecommunications Company
  15




---



##### 



BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS  (continued)
  Michael Donahue
  Canon Australia
  Transition Services Provided By KPMG LLP
   Softline Acquisition Obligation
  16




---



##### 



BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS  (continued)
   Other Commitments
    Note 10. Pension and Postretirement Benefits
  17




---



##### 



BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS  (continued)
 Three Months EndedMarch 31,2007
    
    
    2006Components of net periodic pension cost:Service cost
    
    $
    1,589
    
    
    $
    1,792Interest cost
    
    
    1,165
    
    
    
    1,107Expected return on plan assets
    
    
    (243
    )
    
    
    (269
    )Amortization of loss
    
    
    95
    
    
    
    256Amortization of prior service cost
    
    
    163
    
    
    
    159Curtailment
    
    
    
    
    
    
    30Settlement
    
    
    
    
    
    
    (91
    )Net periodic pension cost
    
    $
    2,769
    
    
    $
    2,984Components of net periodic postretirement medical cost:Service cost
    
    $
    618
    
    
    $
    480Interest cost
    
    
    217
    
    
    
    184Amortization of losses
    
    
    13
    
    
    
    39Amortization of prior service cost
    
    
    119
    
    
    
    120Net periodic postretirement medical cost
    
    $
    967
    
    
    $
    823
 Note 11. Income Taxes
       Note 12. Recently Issued Accounting Pronouncements
  18




---



##### 



BEARINGPOINT, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS  (continued)
   19




---



##### 



PART I, ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 The following Managements Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) should be read in conjunction with the interim Consolidated Condensed Financial
Statements and the Notes to the Consolidated Condensed Financial Statements included elsewhere in
this Quarterly Report on Form 10-Q .
 Disclosure Regarding Forward-Looking Statements
  
    
    Our continuing failure to timely file certain periodic reports with the SEC poses
significant risks to our business, each of which could materially and adversely affect our
financial condition and results of operations.
    
    In 2004, we identified material weaknesses in our internal control over financial
reporting, the remediation of which continues to materially and adversely affect our
business and financial condition, and as of March 31, 2007, the existence and remediation of
these material weaknesses largely remain.
    
    We face risks related to securities litigation and regulatory actions that could
adversely affect our financial condition and business.
    
    Our business may be adversely impacted as a result of changes in demand, both globally
and in individual market segments, for our consulting and systems integration services.
    
    Our operating results will suffer if we are not able to maintain our billing and
utilization rates or control our costs.
    
    We continue to incur selling, general and administrative (SG&A) expenses at levels
significantly higher than those of our competitors. If we are unable to significantly reduce
SG&A expenses over the near term, our ability to achieve, and make significant improvements
in, net income and profitability will remain in jeopardy.
    
    The systems integration consulting markets are highly competitive, and we may not be able
to compete effectively if we are not able to maintain our billing rates or control our costs
related to these engagements.
    
    Contracting with the Federal government is inherently risky and exposes us to risks that
may materially and adversely affect our business.
    
    Our ability to attract, retain and motivate our managing directors and other key
employees is critical to the success of our business. We continue to experience sustained,
higher-than-industry average levels of voluntary turnover among our workforce, which has
impacted our ability to grow our business.
    
    Our contracts can be terminated by our clients with short notice, or our clients may
cancel or delay projects.
    
    If we are not able to keep up with rapid changes in technology or maintain strong
relationships with software providers, our business could suffer.
    
    Loss of our joint marketing relationships could reduce our revenue and growth prospects.
 20




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##### 




    
    We are not likely to be able to significantly grow our business through mergers and acquisitions in the near term.
    
    There will not be a consistent pattern in our financial results from quarter to quarter,
which may result in increased volatility of our stock price.
    
    Our profitability may decline due to financial, regulatory and operational risks inherent in worldwide operations.
    
    We may bear the risk of cost overruns relating to our services, thereby adversely affecting our profitability.
    
    We may face legal liabilities and damage to our professional reputation from claims made against our work.
    
    Our services may infringe upon the intellectual property rights of others.
    
    We have only a limited ability to protect our intellectual property rights, which are important to our success.
    
    Our current cash resources might not be sufficient to meet our expected cash needs over time.
    
    We have been unable to issue shares of our common stock under our ESPP since February 1,
2005. The longer we are unable to issue shares of our common stock, the more likely our ESPP
participants may elect to withdraw their accumulated cash contributions from the ESPP at
rates higher than those we have historically experienced.
    
    Our 2007 Credit Facility imposes a number of restrictions on the way in which we operate
our business and may negatively affect our ability to finance future needs, or do so on
favorable terms. If we violate these restrictions, we will be in default under the 2007
Credit Facility, which may cross-default to our other indebtedness.
    
    If we cannot generate positive cash flow from our operations, we eventually may not be
able to service our indebtedness.
    
    We may be unable to obtain new surety bonds, letters of credit or bank guarantees in
support of client engagements on acceptable terms.
    
    Downgrades of our credit ratings may increase our borrowing costs and materially and
adversely affect our financial condition.
    
    Our leverage may adversely affect our business and financial performance and may restrict
our operating flexibility.
    
    The holders of our debentures have the right, at their option, to require us to purchase
some or all of their debentures upon certain dates or upon the occurrence of certain
designated events, which could have a material adverse effect on our liquidity.
    
    The price of our common stock may decline due to the number of shares that may be
available for sale in the future.
    
    There are significant limitations on the ability of any person or company to acquire the
Company without the approval of our Board of Directors.
  EXPLANATORY NOTE
   21




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##### 



Overview
   Economic and Industry Factors
   Revenue and Income Drivers
     22




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##### 



Key Performance Indicators
  
    
    Bookings.We believe that information regarding our new contract bookings provides useful
trend information regarding how the volume of our new business changes over time. Comparing
the amount of new contract bookings and revenue provides us with an additional measure of the
short-term sustainability of revenue growth. Information regarding our new bookings should
not be compared to, or substituted for, an analysis of our revenue over time. There are no
third-party standards or requirements governing the calculation of bookings. New contract
bookings are recorded using then existing currency exchange rates and are not subsequently
adjusted for currency fluctuations. These amounts represent our estimate at contract signing
of the net revenue expected over the term of that contract and involve estimates and
judgments regarding new contracts as well as renewals, extensions and additions to existing
contracts. Subsequent cancellations, extensions and other matters may affect the amount of
bookings previously reported; however, we do not revise previously reported bookings.
Bookings do not include potential revenue that could be earned from a client relationship as
a result of future expansion of service offerings to that client, nor does it reflect option
years under contracts that are subject to client discretion. We do not record unfunded
Federal contracts as new contract bookings while appropriation approvals remain pending as
there can be no assurances that these approvals will be forthcoming in the near future, if at
all. Consequently, there can be significant differences between the time of contract signing
and new contract booking recognition. Although our level of bookings provides an indication
of how our business is performing, we do not characterize our bookings, or our engagement
contracts associated with new bookings, as backlog because our engagements generally can be
cancelled or terminated on short notice or without notice.
    
    Revenue Growth.Unlike bookings, which provide only a general sense of future expectations,
period-over-period comparisons of revenue provide a meaningful depiction of how successful we
have been in growing our business over time.
    
    Gross Margin (gross profit as a percentage of revenue).Gross margin is a meaningful tool
for monitoring our ability to control our costs of services. Analysis of the various cost
elements, including professional compensation expense, effects of foreign exchange rate
changes and the use of subcontractors, as a percentage of revenue over time can provide
additional information as to the key challenges we are facing in our business. The cost of
subcontractors is generally more expensive than the cost of our own workforce and can
negatively impact our gross profit. While the use of subcontractors can help us to win
larger, more complex deals, and also may be mandated by our clients, we focus on limiting the
use of subcontractors whenever possible in order to minimize our costs. We also utilize
certain adjusted gross margin metrics in connection with the vesting and settlement of
certain employee incentive awards. For a discussion of these metrics, see Item 11, Executive
Compensation  Compensation Discussion and Analysis, included in our 2006 Form 10-K.
    
    Utilization.Utilization represents the percentage of time our consultants are performing
work, and is defined as total hours charged to client engagement or to non-chargeable
client-relationship projects divided by total available hours for any specific time period,
net of holiday and paid vacation hours.
    
    Days Sales Outstanding (DSO).DSO is an operational metric that approximates the amount
of earned revenue that remains unpaid by clients at a given time. DSOs are derived by
dividing the sum of our outstanding accounts receivable and unbilled revenue, less deferred
revenue, by our average net revenue per day. Average net revenue per day is determined by
dividing total net revenue for the most recently ended trailing twelve-month period by 365.
    
    Free Cash Flow.Free cash flow is calculated by subtracting purchases of property and
equipment from cash provided by operating activities. We believe free cash flow is a useful
measure because it allows better understanding and assessment of our ability to meet debt
service requirements and the amount of recurring cash generated from operations after
expenditures for fixed assets. Free cash flow does not represent our residual cash flow
available for discretionary expenditures as it excludes certain mandatory expenditures such
as repayment of maturing debt. We use free cash flow as a measure of recurring operating cash
flow. Free cash flow is a non-GAAP financial measure. The most directly comparable financial
measure calculated in accordance with generally accepted accounting principles in the United
States of America (GAAP) is net cash provided by operating activities.
    
    Attrition.Attrition, or voluntary total employee turnover, is calculated by dividing the
number of our employees who have chosen to leave the Company within a certain period by the
total average number of all employees during that same period. Our
 23




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##### 



attrition statistic covers all of our employees, which we believe provides metrics that are
more compatible with, and comparable to, those of our competitors.
  First Quarter of 2007 Highlights
  
    
    New contract bookings for the three months ended March 31, 2007 were approximately $709.5
million, a decrease of $95.1 million, or 11.8%, from new contract bookings of $804.6 million
for the three months ended March 31, 2006. Bookings growth in our international operations
was not sufficient to offset contraction in our North American industry groups. In North
America, Public Service bookings appear to have been impacted by increasing uncertainty
surrounding the timing of approval of various Federal contract appropriations being
precipitated by various factors, including ongoing congressional debates regarding military
operations in Iraq and Afghanistan and the 2008 Federal budget. Year-over-year decreases in
Public Services bookings for the three months ended March 31, 2007 are substantially
attributable to growth in the first quarter of 2007 of the total contract value of new
Federal contracts signed for which appropriations approval remained pending (unfunded
Federal contracts) at March 31, 2007. We do not record unfunded Federal contracts as new
contract bookings while appropriation approvals remain pending as there can be no assurances
that these approvals will be forthcoming in the near future, if at all. The decrease in
Public Services bookings in the first quarter of 2007 as compared to the comparable period in
2006 were also affected by one exceptionally large booking in our State, Local and Education
(SLED) sector in the first quarter of 2006. Outside of our Public Services business unit,
new contract bookings in North America were also negatively affected by commercial clients
segregating larger projects into series of smaller work orders.
    
    Our revenue for the first quarter of 2007 was $866.3 million, representing an increase of
$32.5 million, or 3.9%, over first quarter of 2006 revenue of $833.7 million. Revenue
increases in Public Services, EMEA and Commercial Services more than offset revenue declines
in Financial Services.
    
    Our gross profit for the first quarter of 2007 was $132.1 million, compared with $98.5
million for the first quarter of 2006. Gross profit as a percentage of revenue increased to
15.2% during the first quarter of 2007 from 11.8% during the first quarter of 2006. This
improvement was the result of revenue increases and a decline in other direct contract
expenses more than offsetting increases in professional compensation.
    
    We incurred SG&A expenses of $177.2 million in the first quarter of 2007, representing a
decrease of $11.7 million, or 6.2%, from SG&A expenses of $188.9 million in the first quarter
of 2006. The decrease was primarily due to cost savings from the reduction in the size of the
Companys sales force and reducing other business development expenses as well as a
non-recurring expense for a legal settlement recorded in the first quarter of 2006.
    
    During the first quarter of 2007, we incurred external costs related to the closing of our financial statements
of approximately $30.6 million, compared to approximately $32.3 million for the first quarter of 2006.
We currently expect our costs for the remainder of 2007 related to these efforts to be approximately $53 million.
    
    During the first quarter of 2007, we realized a net loss of $61.7 million, or a loss of
$0.29 per share, compared to a net loss of $72.7 million, or a loss of $0.34 per share,
during the first quarter of 2006. This change in net loss was attributable to several
factors, including:
 
    
    Increase in revenue for the first quarter of 2007 of $32.5 million and net decrease in
cost of services for the first quarter of 2007 of $1.1 million. These results include
the impact of our settlement of the HT
Contract, which was recorded in the first quarter of 2006, as the financial statements
for 2006 were not yet issued at the settlement date (the HT Contract settlement recorded
during the first quarter of 2006 consisted of a reduction in revenue of $27.7 million and
an increase in cost of services of $23.9 million, as well as insurance settlement payments
made on behalf of the Company of $38.0 million recorded as a separate component of other
income);
    
    Decrease in SG&A expenses of $11.7 million in the first quarter of 2007 for reasons discussed above; and
    
    Decrease in income tax expense of $5.9 million in the first quarter of 2007.
 
    
    Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 supersedes SFAS No. 5,
Accounting for Contingencies, as it relates to income tax liabilities and changes the
standard of recognition that a tax contingency is required to meet before being recognized
in the financial statements. Upon adoption of FIN 48 and after examining our existing tax
contingencies under the standards of FIN 48, we recognized an increase of approximately
$119.8 million in our long-term liability for unrecognized tax benefits, which was
reflected as an increase to the January 1, 2007 balance of accumulated deficit.Final determination of a significant portion of the Companys tax liabilities that will
effectively be settled remains subject to ongoing examination by various taxing authorities,
including the Internal Revenue Service. We are aggressively pursuing strategies to favorably
settle or resolve these liabilities for unrecognized tax benefits. If we are successful in
mitigating these liabilities, in whole or in part, the impact will be recorded as an
adjustment to income tax expense in the period of settlement.
 
    
    Utilization for the first quarter of 2007 was 76.6%, an increase of 320 basis points over the first quarter of 2006.
 24




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##### 




    
    As of March 31, 2007, our DSOs stood at 91 days, representing a decrease of 11 days, or
10.8%, from our DSOs at March 31, 2006, and an increase of 9 days, or 11.0%, over our DSOs at
December 31, 2006.
    
    Free cash flow for the first quarters of 2007 and 2006 was ($149.2) million and ($59.6)
million, respectively. Net cash used in operating activities in the first quarters of 2007
and 2006 was ($136.8) million and ($45.5) million, respectively. Purchases of property and
equipment in the first quarters of 2007 and 2006 were $12.3 million and $14.1 million,
respectively. The change in free cash flow for the first quarter of 2007 compared to the
first quarter of 2006 was primarily attributable to the timing of our payments to vendors,
decreases in accounts receivable collections, and the settlement of the HT Contract.
    
    As of March 31, 2007, we had approximately 17,500 full-time employees, including
approximately 15,200 consulting professionals. This represented a decrease in billable
headcount of approximately 0.7% from our headcount as of December 31, 2006.
    
    Our voluntary, annualized attrition rate for the first quarter of 2007 was 23.9%, compared
to 24.2% for the first quarter of 2006. The highly competitive industry in which we operate,
and our continuing issues related to our North American financial reporting systems and
internal controls, continue to make it particularly critical and challenging for us to
attract and retain experienced personnel.
 Principal Business Priorities for 2007 and Beyond
   
    
    Enhance Shareholder Value.Working with our financial
and legal advisors, we have completed a preliminary
feasibility study and legal analysis relating to our
previously announced exploration of a sale of a significant
portion of our EMEA segment to our European managing
directors. Financial advisors have now been engaged to
identify potential financing sources to support a proposed
transaction structure. We have also engaged Ernst & Young to
conduct a financial due diligence review of the EMEA segment
that could be used in discussions with financing parties,
should our Board of Directors decide to move forward with this
transaction with our European managing directors. We do not
expect our Board of Directors to take a final decision
regarding whether or not to proceed with this transaction
before late 2007.
    
    Become Timely in our Financial and SEC Periodic
Reporting. We continue to target timely filing with the SEC
of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2007. While we will not timely file our SEC
periodic reports for the second and third fiscal quarters of
2007, it is possible that those reports will be filed such
that we may become current and up to date in our SEC periodic
reports. In the case of the second fiscal quarter of 2007, we
may only temporarily remain current in our reporting, as we do
not expect to file the quarterly report for the third fiscal
quarter of 2007 by the date it is due under SEC reporting
rules.To date in 2007, substantial progress has been made in remediating material weaknesses in our
internal control over financial reporting. We have now created a framework for monitoring our
progress so as to better maintain proper focus on the most critical remediation actions that
remain, which include those remaining deficiencies that impact the timing of closing our
financial books and records. We continue to believe we are on track to eliminate certain of our
existing material weakness disclosures in fiscal 2007 and to achieve full remediation of all of
our material weaknesses in fiscal 2008.
    
    Replace Our North American Financial Reporting Systems.We
are planning to begin our transition to new North American
financial reporting systems in the second half of 2008. In the
interim, it is critical that we continue to make incremental
improvements on our existing North American financial
reporting systems to be able to support and achieve our goal of
remaining timely in our SEC periodic reporting in fiscal 2008.
    
    Reduce Employee Attrition.While attrition has not
become significantly worse, we have seen virtually no
improvement in our voluntary employee attrition rate. At this
time, we believe that becoming timely in our financial and SEC
periodic reporting is of
 25




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##### 



critical importance to reduce attrition over the short term. We must provide our employees the
ability to freely trade the shares that they have purchased and earned in the Company and
diffuse lingering concerns regarding our stability.
    
    Increase Client Awareness, Confidence and Satisfaction.
To date in 2007, we were named as a leader providing of risk
consulting by Forrester in its 2007 vendor summary and as
2007 Global System Integrator of the Year by Cognos for the
second year in a row. In addition, we ranked 24th in
Washington Technology Magazines 2007 ranking of Top 100
government contractors.
    
    Strengthen Our Balance Sheet.In addition to our
continued exploration of a possible sale of our EMEA business
segment to our European managing directors, we are also moving
on plans to aggressively reduce our ongoing SG&A expenditures
by the end of fiscal 2007. We hope to be able to reduce
fiscal 2007 SG&A expenses by approximately $60 million
year-over-year. A significant portion of these savings are expected to come from year-over-year savings in the external costs associated with completing our consolidated financial statements and filing our SEC periodic reports and, based on our activities through August 31, 2007, we continue to believe these external cost savings are achievable.
To achieve further reductions in 2008 and beyond, we must continue to reduce the
relatively high SG&A costs that we continue to
experience in a number of areas of our corporate
infrastructure and business segments. We also continue to strive to improve our cash collections through a program recently initiated by our
Office of the Chief Executive Officer. At March 31, 2007, our DSOs stood at 91 days. If we are to generate significant amounts of cash from
operations in the latter part of 2007, by the fourth fiscal quarter of 2007
we must again meet or exceed our cash collections for the fourth quarter of fiscal 2006 when our DSOs stood at 82 days.
 Segments
   26




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##### 



Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006
 Revenue.
 Three Months EndedMarch 31,2007
    
    
    2006
    
    
    $ Change
    
    
    % ChangeRevenuePublic Services
    
    $
    361,693
    
    
    $
    331,116
    
    
    $
    30,577
    
    
    
    9.2
    %Commercial Services
    
    
    136,282
    
    
    
    117,107
    
    
    
    19,175
    
    
    
    16.4
    %Financial Services
    
    
    72,205
    
    
    
    110,502
    
    
    
    (38,297
    )
    
    
    (34.7
    %)EMEA
    
    
    188,805
    
    
    
    164,180
    
    
    
    24,625
    
    
    
    15.0
    %Asia Pacific
    
    
    83,155
    
    
    
    90,435
    
    
    
    (7,280
    )
    
    
    (8.0
    %)Latin America
    
    
    22,266
    
    
    
    19,221
    
    
    
    3,045
    
    
    
    15.8
    %Corporate/Other
    
    
    1,846
    
    
    
    1,183
    
    
    
    663
    
    
    
    n/mTotal
    
    $
    866,252
    
    
    $
    833,744
    
    
    $
    32,508
    
    
    
    3.9
    %
 Impact of
    
    Revenue growthcurrency
    
    (decline), net offluctuations
    
    currency impact
    
    TotalRevenuePublic Services
    
    
    0.0
    %
    
    
    9.2
    %
    
    
    9.2
    %Commercial Services
    
    
    0.0
    %
    
    
    16.4
    %
    
    
    16.4
    %Financial Services
    
    
    0.0
    %
    
    
    (34.7
    %)
    
    
    (34.7
    %)EMEA
    
    
    9.5
    %
    
    
    5.5
    %
    
    
    15.0
    %Asia Pacific
    
    
    0.2
    %
    
    
    (8.2
    %)
    
    
    (8.0
    %)Latin America
    
    
    2.3
    %
    
    
    13.5
    %
    
    
    15.8
    %Corporate/Other
    
    
    n/m
    
    
    
    n/m
    
    
    
    n/mTotal
    
    
    1.9
    %
    
    
    2.0
    %
    
    
    3.9
    %
 
 n/m
    
    = not meaningful 
    
    Public Servicesrevenue increased during the first quarter of 2007, led by significant
revenue growth in our State, Local and Education (SLED), Emerging Markets and Civilian
sectors, which partially offset a significant revenue decline in our Defense sector.
    
    Commercial Servicesrevenue increased during the first quarter of 2007, primarily due to
a reduction in the first quarter of 2006 revenue of $48.2 million attributable to the
settlement of disputes with two significant telecommunications industry clients, which
expenses were recorded in the first quarter of 2006, as the financial statements for 2006
were not yet issued at each settlement date. In addition, revenue in our Manufacturing,
Energy and Consumer Markets increased due to greater demand for the solutions provided by
our professionals who service these sectors. Reduced customer demand for our services
within the telecommunications and high technology industries negatively affected our
revenue.
    
    Financial Servicesrevenue decreased during the first quarter of 2007, due to significant
revenue declines in most of its business sectors. Revenue decreases were attributable to
several factors, including the winding down of a large client engagement during the first
quarter of 2007, the loss of senior staff in certain of our higher rate business sectors and
difficulties in securing long-term client commitments, due in part to client concerns and
perceptions regarding our financial position.
    
    EMEArevenue increased during the first quarter of 2007, primarily as a result of the
favorable impact of the strengthening of foreign currencies (primarily the Euro) against the
U.S. dollar and significant revenue increases in the United Kingdom, Switzerland and France,
partially offset by revenue declines in Germany. Revenue growth in the United Kingdom was
driven by our continued expansion in that market, while Switzerland and France revenue
growth were attributable to increased demand for consulting services in those local markets.
Revenue in Germany declined due to prior year restructuring efforts, resulting in continued
reductions in billable headcount while increasing focus on delivering more profitable
engagements.
 27




---



##### 




    
    Asia Pacificrevenue decreased during the first quarter of 2007, primarily due to a
decline in revenue recognized in Australia at a significant client engagement in the
telecommunications industry and a revenue decline in Korea due to the completion of several
large contracts, partially offset by revenue growth in Japan. The revenue increase in Japan
was due to revenue growth
from system implementation contracts and projects involving compliance with Japans Financial
Instruments and Exchange Law.
    
    Latin Americarevenue increased during the first quarter of 2007, due to revenue growth
in Mexico, resulting from strengthening our relationships with existing clients.
    
    Corporate/Other: Our Corporate/Other segment does not contribute significantly to our
revenue.
 Gross Profit .
 
    
    Professional compensation expense increased as a percentage of revenue to 54.5% for the
first quarter of 2007, compared to 51.5% for the first quarter of 2006. We experienced a net
increase in professional compensation expense of $42.5 million, or 9.9%, to $471.7 million
for the first quarter of 2007 from $429.2 million for the first quarter of 2006. The
increase in professional compensation expense over the first quarter of 2006 was primarily
due to cash bonuses earned for our highest-performing employees, stock-based compensation
expenses for RSUs and our new PSU plan, and merit-based annual salary increases to our
billable staff.
    
    Other direct contract expenses decreased as a percentage of revenue to 22.9% for the
first quarter of 2007, compared to 29.1% for the first quarter of 2006. We experienced a net
decrease in other direct contract expenses of $43.6 million, or 18.0%, to $198.8 million for
the first quarter of 2007 from $242.4 million for the first quarter of 2006. The decrease
from the first quarter of 2006 was driven primarily by higher other direct contract expenses
recorded in the first quarter of 2006 related to the settlement of the HT Contract. In
addition, the decline was driven by reduced subcontractor expenses as a result of increased
use of internal resources.
    
    Other costs of service as a percentage of revenue increased to 7.9% for the first quarter
of 2007 from 7.3% for the first quarter of 2006. We experienced a net increase in other
costs of service of $7.8 million, or 12.8%, to $68.6 million for the first quarter of 2007
from $60.8 million for the first quarter of 2006. The increase was primarily due to
increases in bad debt expense and recruiting costs.
    
    In the first quarter of 2007 we recorded, within the Corporate/Other operating segment, a
restructuring credit of $4.9 million related to lease, facilities and other exit activities,
compared with a $2.8 million charge in the first quarter of 2006. These charges related
primarily to the fair value of future lease obligations associated with office space, which
we will no longer be using, primarily within the EMEA and North America regions. The
restructuring credit for the three months ended March 31, 2007 represents a net reduction of
accruals, primarily attributable to the change in sublease income assumptions associated
with vacated leased facilities.
 28




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##### 



Gross Profit by Segment.
 Three Months EndedMarch 31,2007
    
    
    2006
    
    
    $ Change
    
    
    % ChangeGross ProfitPublic Services
    
    $
    71,005
    
    
    $
    59,380
    
    
    $
    11,625
    
    
    
    19.6
    %Commercial Services
    
    
    25,980
    
    
    
    (23,166
    )
    
    
    49,146
    
    
    
    n/mFinancial Services
    
    
    8,265
    
    
    
    41,936
    
    
    
    (33,671
    )
    
    
    (80.3
    %)EMEA
    
    
    41,869
    
    
    
    32,909
    
    
    
    8,960
    
    
    
    27.2
    %Asia Pacific
    
    
    13,996
    
    
    
    20,841
    
    
    
    (6,845
    )
    
    
    (32.8
    %)Latin America
    
    
    (2,786
    )
    
    
    1,961
    
    
    
    (4,747
    )
    
    
    n/mCorporate/Other
    
    
    (26,269
    )
    
    
    (35,387
    )
    
    
    9,118
    
    
    
    n/mTotal
    
    $
    132,060
    
    
    $
    98,474
    
    
    $
    33,586
    
    
    
    34.1
    %
 Three Months EndedMarch 31,2007
    
    2006Gross Profit as a % of revenuePublic Services
    
    
    19.6
    %
    
    
    17.9
    %Commercial Services
    
    
    19.1
    %
    
    
    (19.8
    %)Financial Services
    
    
    11.4
    %
    
    
    38.0
    %EMEA
    
    
    22.2
    %
    
    
    20.0
    %Asia Pacific
    
    
    16.8
    %
    
    
    23.0
    %Latin America
    
    
    (12.5
    %)
    
    
    10.2
    %Corporate/Other
    
    
    n/m
    
    
    
    n/mTotal
    
    
    15.2
    %
    
    
    11.8
    %
 
 n/m
    
    = not meaningful  
    
    Public Servicesgross profit increased in the first quarter of 2007, primarily due to revenue increases
in our SLED, Emerging Markets and Civilian sectors described above combined with substantial
improvement in gross profit in our SLED sector. This increase in revenue more than offset
increases in professional compensation expense related to additional headcount to meet the
demand for our services as well as increases in cash bonuses and stock-based compensation
expense for RSUs and PSUs.
    
    Commercial Servicesgross profit increased in the first quarter of 2007, primarily due to
losses recorded in the first quarter of 2006 attributable to the settlement of disputes with
two significant telecommunications industry clients.
    
    Financial Servicesgross profit decreased in the first quarter of 2007, primarily due to
significantly lower revenue in the first quarter of 2007 compared to the first quarter of
2006 as well as a decline in the mix of higher margin engagements. Despite a decrease in
billable headcount, compensation expense had not yet declined due to increases in bonuses
and stock-based compensation expense.
    
    EMEAgross profit increased in the first quarter of 2007, primarily due to overall higher
revenue in the EMEA region as well as improved profitability in Germany and France as a
result of higher utilization and reduced costs. Despite the increased revenue, other direct
contract expenses remained flat, which is attributable to reduced use of subcontractors and
increased use of internal resources.
    
    Asia Pacificgross profit decreased in the first quarter of 2007, due primarily to lower
revenue recognized in that region, estimated accruals to resolve issues related to a
previously completed client engagement, as well as a decrease in staff utilization in the
Companys business in Korea.
    
    Latin Americagross profit decreased in the first quarter of 2007, as increases in
compensation expense more than offset higher revenue.
 29




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
    
    Corporate/Otherconsists primarily of rent expense and other facilities related charges,
which decreased in the first quarter of 2007 primarily due to the cost savings realized from
office space reduction efforts taken to-date and increased estimates of sub-lease income
related to vacated office space.
 Amortization of Purchased Intangible Assets .
 Selling, General and Administrative Expenses .
 Interest Income.
 Interest Expense.
 Insurance Settlement.
 Income Tax Expense .
 Net Loss .
  Liquidity and Capital Resources
  Three Months EndedMarch 31,2006 to 20072007
    
    
    2006
    
    
    ChangeNet cash provided by (used in):Operating activities
    
    $
    (136,846
    )
    
    $
    (45,471
    )
    
    $
    (91,375
    )Investing activities
    
    
    (12,510
    )
    
    
    75,353
    
    
    
    (87,863
    )Financing activities
    
    
    3,831
    
    
    
    3,295
    
    
    
    536Effect of exchange rate changes on cash and cash equivalents
    
    
    1,433
    
    
    
    2,340
    
    
    
    (907
    )Net (decrease) increase in cash and cash equivalents
    
    $
    (144,092
    )
    
    $
    35,517
    
    
    $
    (179,609
    )
 30




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Operating Activities.
 Investing Activities.
 Financing Activities.
  Additional Cash Flow Information
  March 31, 2007
   Debt Ratings
  Recently Issued Accounting Pronouncements
  31




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PART I, ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  PART I, ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
    Changes in Internal Control over Financial Reporting
  PART II. OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
 Overview
  
    
    Claims and investigations arising from our continuing inability to timely file periodic
reports under the Exchange Act, and the
 32




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restatement of our financial statements for certain prior periods to correct accounting errors
and departures from generally accepted accounting principles for those years (SEC Reporting
Matters);
 
    
    Claims and investigations being conducted by agencies or officers of the U.S. Federal
government and arising in connection with our provision of services under contracts with
agencies of the U.S. Federal government (Government Contracting Matters); and
    
    Claims made in the ordinary course of business by clients seeking damages for alleged
breaches of contract or failure of performance, by current or former employees seeking
damages for alleged acts of wrongful termination or discrimination, and by creditors or
other vendors alleging defaults in payment or performance (Other Matters).
   SEC Reporting Matters
 2005 Class Action Suits. Makor Issues & Rights, Ltd v. Tellabs Tellabs
 2005 Shareholders Derivative Demand.
 Peregrine Litigation. In re Peregrine Systems, Inc. Securities Litigation
 33




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##### 



Simpson v.
AOL Time Warner Inc. Stoneridge Investment Partners LLC v.
Scientific-Atlanta, Inc
  ITEM 1A. RISK FACTORS
 The price of our common stock may decline due to the number of shares that may be available
for sale in the future.
     ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  ITEM 5. OTHER INFORMATION
  34




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ITEM 6. EXHIBITS
 ExhibitNo.
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation, dated as of February 7, 2001,
which is incorporated herein by reference to Exhibit 3.1 from the Companys Form
10-Q for the quarter ending March 31, 2001.3.2
    
    Amended and Restated Bylaws, amended and restated as of August 2, 2007, which is
incorporated herein by reference to Exhibit 3.1 from the Companys Form 8-K
filed with the SEC on August 8, 2007.3.3
    
    Certificate of Ownership and Merger merging Bones Holding into the Company,
dated October 2, 2002, which is incorporated herein by reference to Exhibit 3.3
from the Companys Form 10-Q for the quarter ended September 30, 2002.4.1
    
    Rights Agreement, dated as of October 2, 2001, between the Company and EquiServe
Trust Company, N.A., which is incorporated herein by reference to Exhibit 1.1
from the Companys Registration Statement on Form 8-A dated October 3, 2001.4.2
    
    Certificate of Designation of Series A Junior Participating Preferred Stock,
which is incorporated herein by reference to Exhibit 1.2 from the Companys
Registration Statement on Form 8-A dated October 3, 2001.4.3
    
    Amendment No. 1 to the Rights Agreement between the Company and EquiServe Trust
Company, N.A., which is incorporated herein by reference to Exhibit 99.1 from
the Companys Form 8-K filed with the SEC on September 6, 2002.10.1
    
    Amended and Restated 2000 Long-Term Incentive Plan, effective as of February 2,
2007, which is incorporated by reference to Exhibit 10.24 from the Companys
Form 10-K for the year ended December 31, 2006.10.2
    
    Employee Stock Purchase Plan, as amended and restated as of February 1, 2007,
which is incorporated by reference to Exhibit 10.25 from the Companys Form 10-K
for the year ended December 31, 2004.10.3
    
    Form of Performance Share Award Unit Agreement, which is incorporated by
reference to Exhibit 99.1 from the Companys Form 8-K filed with the SEC on
February 8, 2007.10.4
    
    Form of Performance Cash Award Agreement, which is incorporated by reference to
Exhibit 99.2 from the Companys Form 8-K filed with the SEC on February 8, 2007.10.5
    
    Form of Restricted Stock Unit Agreement awarded to Harry You and Roderick C.
McGeary, which is incorporated by reference to Exhibit 99.2 from the Companys
Form 8-K filed with the SEC on February 13, 2007.10.6
    
    Employment Letter, effective as of January 8, 2007, between the Company and F.
Edwin Harbach, which is incorporated by reference to Exhibit 99.2 from the
Companys Form 8-K filed with the SEC on January 12, 200710.7
    
    Managing Director Agreement, dated as of January 8, 2007, between the Company
and F. Edwin Harbach, which is incorporated by reference to Exhibit 99.3 from
the Companys Form 8-K filed with the SEC on January 12, 2007.10.8
    
    Special Termination Agreement, dated as of January 8, 2007, between the Company
and F. Edwin Harbach, which is incorporated by reference to Exhibit 99.4 from
the Companys Form 8-K filed with the SEC on January 12, 2007.10.9
    
    Restricted Stock Unit Agreement, dated January 8, 2007, between the Company and
F. Edwin Harbach, which is incorporated by reference to Exhibit 99.5 from the
Companys Form 8-K filed with the SEC on January 12, 2007.31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a).31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a).32.1
    
    Certification of Chief Executive Officer pursuant to Section 1350.32.2
    
    Certification of Chief Financial Officer pursuant to Section 1350.
 35




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SIGNATURES
  BearingPoint, Inc.DATE: September 7, 2007
    
    By:
    
    /s/ Judy A. EthellJudy A. EthellChief Financial Officer