** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 
| **ý** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d)**                                                                     |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | **OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                               |
|       |       | **For the Quarterly period ended June 30,  2004**                                                                         |
|       |       |                                                                                                                      |
|       |       | **OR**                                                                                                                    |
|       |       |                                                                                                                      |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d)**                                                               |
| ** ** | ** ** | **OF THE  SECURITIES EXCHANGE ACT OF 1934.**                                                                              |
|       |       | **For the Transition period  from       to       ** |

 

**Commission File Number 0-27280**

 

**META Group, Inc.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                    | ** ** | **06-0971675**                    |
|-----------------------------------------------------------------|------------|-----------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (IRS Employer Identification No.) |
|                                                            |
|                                                            |       |                              |
| **208 Harbor Drive, Stamford,  Connecticut  06912-0061**   |
| (Address of principal executive offices,  including Zip Code)   |
|                                                            |       |                              |
| **(203) 973-6700**                                              |
| (Registrant’s telephone number, including  area code)      |

 

----

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes         ý               No        o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

 

Yes         o               No        ý

 

The number of shares of the registrant’s common stock, $.01 par valueper share, outstanding as of June 30, 2004 was 13,851,375.

 

 

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**META Group, Inc.**

 

**INDEX**

 

 
| **Part I**    |    | **FINANCIAL  INFORMATION**                                                                   |   |
|---------------|---------|----------------------------------------------------------------------------------------------|--------|
|          |    |                                                                                         |   |
|          | Item 1. | Financial Statements (Unaudited)                                                             |   |
|          |    |                                                                                         |   |
|          |    | Consolidated Balance Sheets  June 30, 2004  and December 31, 2003                       |   |
|          |    |                                                                                         |   |
|          |    | Consolidated Statements of Operations  Three and six months ended June 30, 2004 and 2003     |   |
|          |    |                                                                                         |   |
|          |    | Consolidated Statements of Cash Flows  Six months ended June 30, 2004 and 2003               |   |
|          |    |                                                                                         |   |
|          |    | Notes to Consolidated Financial Statements                                                   |   |
|          |    |                                                                                         |   |
|          | Item 2. | Management’s  Discussion and Analysis of Financial Condition  and Results of Operations |   |
|          |    |                                                                                         |   |
|          | Item 3. | Quantitative  and Qualitative Disclosures About Market Risk                                  |   |
|          |    |                                                                                         |   |
|          | Item 4. | Controls  and Procedures                                                                     |   |
|          |    |                                                                                         |   |
| **Part II**   |    | **OTHER  INFORMATION**                                                                       |   |
|          |    |                                                                                         |   |
|          | Item 4. | Submission  of Matters to a Vote of Security Holders                                         |   |
|          |    |                                                                                         |   |
|          | Item 6. | Exhibits and Reports on Form 8-K                                                             |   |
|          |    |                                                                                         |   |
| **Signature** |    |

 

----

 

**PART I****- FINANCIAL INFORMATION**

**Item 1. Financial Statements**

 

**META Group, Inc.**

**CONSOLIDATED BALANCE SHEETS**

**(in thousands, except for share and per sharedata)**

(Unaudited)

 
| ** **                                                                                                                   | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| **Assets**                                                                                                                   |       |               |       |                   |       |
| Current assets:                                                                                                              |       |               |       |                   |       |
| Cash and cash equivalents                                                                                                    |       | $                  | 8,890      |                   | $          | 8,814 |   |
| Accounts receivable, net                                                                                                     |       | 28,958             |       | 38,693                 |       |
| Deferred commissions                                                                                                         |       | 2,103              |       | 1,550                  |       |
| Other current assets                                                                                                         |       | 2,131              |       | 2,591                  |       |
| Total  current assets                                                                                                        |       | 42,082             |       | 51,648                 |       |
|                                                                                                                         |       |               |       |                   |       |
| Restricted cash                                                                                                              |       | 6,000              |       | 6,000                  |       |
| Non-current portion of accounts receivable                                                                                   |       | —             |       | 184                    |       |
| Property and equipment, net                                                                                                  |       | 5,660              |       | 5,392                  |       |
| Goodwill                                                                                                                     |       | 14,530             |       | 13,016                 |       |
| Other intangibles, net                                                                                                       |       | 9,031              |       | 8,982                  |       |
| Investments and advances                                                                                                     |       | 985                |       | 1,146                  |       |
| Other assets                                                                                                                 |       | 520                |       | 344                    |       |
| Total assets                                                                                                                 |       | $                  | 78,808     |                   | $          | 86,712 |   |
|                                                                                                                         |       |               |       |                   |       |
| **Liabilities and  Stockholders’ Equity**                                                                               |       |               |       |                   |       |
| Current liabilities:                                                                                                         |       |               |       |                   |       |
| Accounts payable                                                                                                             |       | $                  | 2,035      |                   | $          | 2,041 |   |
| Deferred revenues                                                                                                            |       | 43,079             |       | 48,891                 |       |
| Borrowings under revolving credit agreement                                                                                  |       | 1,000              |       | —                 |       |
| Notes payable                                                                                                                |       | 354                |       | 294                    |       |
| Accrued compensation                                                                                                         |       | 4,613              |       | 5,495                  |       |
| Accrued and other current liabilities                                                                                        |       | 15,075             |       | 16,618                 |       |
| Total current liabilities                                                                                                    |       | 66,156             |       | 73,339                 |       |
|                                                                                                                         |       |               |       |                   |       |
| Long-term portion of notes payable                                                                                           |       | 226                |       | 389                    |       |
| Non-current deferred revenues                                                                                                |       | 245                |       | 549                    |       |
| Other non-current liabilities                                                                                                |       | 1,773              |       | 2,039                  |       |
| Total non-current liabilities                                                                                                |       | 2,244              |       | 2,977                  |       |
|                                                                                                                         |       |               |       |                   |       |
| Total liabilities                                                                                                            |       | 68,400             |       | 76,316                 |       |
|                                                                                                                         |       |               |       |                   |       |
| Minority interest                                                                                                            |       | 311                |       | 322                    |       |
| Commitments and contingencies (see notes)                                                                                    |       |               |       |                   |       |
| Stockholders’ equity:                                                                                                   |       |               |       |                   |       |
| Preferred stock, $.01 par value per-share,  authorized 2,000,000 shares; none issued                                         |       | —             |       | —                 |       |
| Common stock, $.01 par value per-share,  authorized 45,000,000 shares, issued   14,498,391 and 14,303,655, respectively |       | 145                |       | 143                    |       |
| Paid-in capital                                                                                                              |       | 61,556             |       | 61,013                 |       |
| Accumulated deficit                                                                                                          |       | (51,285            | )          | (50,197                | )          |
| Accumulated other comprehensive income  (loss)                                                                               |       | 1                  |       | (565                   | )          |
| Treasury stock, at cost, 647,016 shares                                                                                      |       | (320               | )          | (320                   | )          |
| Total stockholders’ equity                                                                                              |       | 10,097             |       | 10,074                 |       |
| Total liabilities and stockholders’ equity                                                                              |       | $                  | 78,808     |                   | $          | 86,712 |   |

 

See notes to consolidated financialstatements.

 

3

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**META Group, Inc.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(in thousands, except per-share data)**

(Unaudited)

 
| ** **                                                             | ** ** | **For the three months ended****June 30,** | ** ** | **For the six months ended****June 30,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                             | **2004**   | ** **                                 | **2003**   | ** **                               | **2004**   | ** ** | **2003** | ** ** |
|                                                                   |       |                                       |       |                                     |       |   |   |   |   |
| Revenues:                                                              |       |                                       |       |                                     |       |   |   |   |   |
| Advisory services                                                      |       | $                                          | 24,525     |                                     | $          | 19,281 |   | $ | 45,765 |   | $ | 37,663 |   |
| Strategic consulting                                                   |       | 10,590                                     |       | 8,699                                    |       | 19,929 |   | 16,157 |   |
| Published research products                                            |       | 1,363                                      |       | 1,376                                    |       | 2,880 |   | 3,190 |   |
| Reimbursable expenses                                                  |       | 702                                        |       | 701                                      |       | 1,208 |   | 1,220 |   |
|                                                                   |       |                                       |       |                                     |       |   |   |   |   |
| Total revenues                                                         |       | 37,180                                     |       | 30,057                                   |       | 69,782 |   | 58,230 |   |
|                                                                   |       |                                       |       |                                     |       |   |   |   |   |
| Operating expenses:                                                    |       |                                       |       |                                     |       |   |   |   |   |
| Cost of services and fulfillment                                       |       | 18,965                                     |       | 15,968                                   |       | 35,665 |   | 30,539 |   |
| Reimbursable expenses                                                  |       | 702                                        |       | 701                                      |       | 1,208 |   | 1,220 |   |
| Selling and marketing                                                  |       | 11,000                                     |       | 8,827                                    |       | 21,532 |   | 16,292 |   |
| General and administrative                                             |       | 4,805                                      |       | 5,030                                    |       | 10,066 |   | 9,485 |   |
| Depreciation and amortization                                          |       | 1,191                                      |       | 1,282                                    |       | 2,342 |   | 2,614 |   |
|                                                                   |       |                                       |       |                                     |       |   |   |   |   |
| Total operating expenses                                               |       | 36,663                                     |       | 31,808                                   |       | 70,813 |   | 60,150 |   |
|                                                                   |       |                                       |       |                                     |       |   |   |   |   |
| Operating income (loss)                                                |       | 517                                        |       | (1,751                                   | )          | (1,031 | ) | (1,920 | ) |
| Other income, net                                                      |       | 21                                         |       | 350                                      |       | 68 |   | 700 |   |
| Income (loss) before provision for income  taxes and minority interest |       | 538                                        |       | (1,401                                   | )          | (963 | ) | (1,220 | ) |
| Provision for income taxes                                             |       | 67                                         |       | 50                                       |       | 114 |   | 132 |   |
| Minority interest in income of consolidated  subsidiary                |       | 23                                         |       | 66                                       |       | 11 |   | 54 |   |
| Net income (loss)                                                      |       | $                                          | 448        |                                     | $          | (1,517 | ) | $ | (1,088 | ) | $ | (1,406 | ) |
|                                                                   |       |                                       |       |                                     |       |   |   |   |   |
| Net income (loss) per basic common share                               |       | $                                          | 0.03       |                                     | $          | (0.11 | ) | $ | (0.08 | ) | $ | (0.11 | ) |
|                                                                   |       |                                       |       |                                     |       |   |   |   |   |
| Net income (loss) per fully diluted common  share                      |       | $                                          | 0.03       |                                     | $          | (0.11 | ) | $ | (0.08 | ) | $ | (0.11 | ) |
|                                                                   |       |                                       |       |                                     |       |   |   |   |   |
| Weighted average number of basic common  shares outstanding            |       | 13,786                                     |       | 13,272                                   |       | 13,750 |   | 13,258 |   |
| Weighted average number of diluted common  shares outstanding          |       | 15,079                                     |       | 13,272                                   |       | 13,750 |   | 13,258 |   |

 

See notes to consolidated financialstatements.

 

4

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**META Group, Inc.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

(Unaudited)

 
| ** **                                                                       | ** ** | **For the six months ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                       | ** ** | **2004**                               | ** ** | **2003** | ** ** |
| **Operating  activities:**                                                       |       |                                   |       |   |   |
| Net loss                                                                         |       | $                                      | (1,088     | ) | $ | (1,406 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       |                                   |       |   |   |
| Depreciation and amortization                                                    |       | 2,342                                  |       | 2,614 |   |
| Gain on sale of investments                                                      |       | —                                 |       | (615 | ) |
| Minority interest in income of consolidated  subsidiary                          |       | 11                                     |       | 54 |   |
| Other non-cash charges                                                           |       | —                                 |       | 165 |   |
| Changes in assets and liabilities:                                               |       |                                   |       |   |   |
| Accounts receivable                                                              |       | 10,695                                 |       | 8,741 |   |
| Deferred commissions                                                             |       | (553                                   | )          | (507 | ) |
| Other current assets                                                             |       | 840                                    |       | 1,412 |   |
| Other assets                                                                     |       | (276                                   | )          | (34 | ) |
| Accounts payable                                                                 |       | (313                                   | )          | (949 | ) |
| Accrued liabilities                                                              |       | (4,837                                 | )          | (1,354 | ) |
| Deferred revenues                                                                |       | (6,736                                 | )          | (2,284 | ) |
| Net cash provided by operating activities                                        |       | 85                                     |       | 5,837 |   |
|                                                                             |       |                                   |       |   |   |
| **Investing  activities:**                                                       |       |                                   |       |   |   |
| Capital expenditures                                                             |       | (666                                   | )          | (323 | ) |
| Payments for acquisitions, net of cash  acquired                                 |       | (781                                   | )          | (250 | ) |
| Proceeds from sale of investments                                                |       | —                                 |       | 888 |   |
| Net cash (used in) provided by investing  activities                             |       | (1,447                                 | )          | 315 |   |
|                                                                             |       |                                   |       |   |   |
| **Financing  activities:**                                                       |       |                                   |       |   |   |
| Proceeds from exercise of stock options                                          |       | 370                                    |       | 139 |   |
| Proceeds from employee stock purchase plan                                       |       | 175                                    |       | 62 |   |
| Proceeds from bank borrowings                                                    |       | 3,000                                  |       | — |   |
| Repayment of bank borrowings                                                     |       | (2,000                                 | )          | (1,049 | ) |
| Repayment of term loan                                                           |       | —                                 |       | (5,111 | ) |
| Repayment of notes payable                                                       |       | (105                                   | )          | (369 | ) |
| Payment of capital lease obligations                                             |       | (148                                   | )          | — |   |
| Increase in restricted cash                                                      |       | —                                 |       | (6,000 | ) |
| Net cash provided by (used in) financing  activities                             |       | 1,292                                  |       | (12,328 | ) |
| Effect of exchange rate changes on cash                                          |       | 146                                    |       | (110 | ) |
| Net increase (decrease) in cash and cash  equivalents                            |       | 76                                     |       | (6,286 | ) |
| Cash and cash equivalents, beginning of  period                                  |       | 8,814                                  |       | 21,448 |   |
| Cash and cash equivalents, end of period                                         |       | $                                      | 8,890      |   | $ | 15,162 |   |

 

 

See notes toconsolidated financial statements.

 

5

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**META Group, Inc.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 1 - Interim Financial Statements**

 

The accompanying unaudited condensed consolidated financial statementsinclude the accounts of META Group, Inc. (the “Company”) and its subsidiariesand have been prepared in accordance with accounting principles generallyaccepted in the United States of America for interim financial reporting andwith the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the informationand notes required by accounting principles generally accepted in the UnitedStates of America for complete financial statements.

 

In the opinion of management, the accompanying unaudited consolidatedfinancial statements contain all adjustments (consisting of normal recurringitems) necessary for a fair presentation of results for the interim periodspresented. The results of operations for any interim period are not necessarilyindicative of results for the full year. These financial statements andfootnote disclosures should be read in conjunction with the December 31,2003 audited consolidated financial statements and the notes thereto includedin the Company’s Form 10-K for the year ended December 31, 2003, asamended.

 

The preparation of the financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the amountsreported in the accompanying consolidated financial statements and notes. Actualresults could differ from those estimates.

 

Certain2003 accounts have been reclassified to conform to the current periods’presentation.

 

###### **Note2 – Acquisitions**

 

*Acquisition of META Group Middle East*

 

In April 2004,the Company acquired 100% of META Group Middle East for $950,000 in cash.  The Company acquired this distributor inorder to have full ownership control in the Middle East to better serve itscustomers in the region.  The purchaseprice has been allocated to the assets acquired and the liabilities assumed,based on estimated fair values at the date of acquisition. The preliminaryallocation resulted in goodwill of $1.1 million recorded in the AdvisoryServices segment and $0.5 million recorded in the Consulting segment and $0.4million related to the customer list of the seller, which is being amortized onthe straight line method over 7 years.

 

*2003 Acquisitions*

 

During 2003, the Company completed three acquisitions of formerdistributors in Italy, the United Kingdom, and Northern Europe. The Companyacquired these distributors in order to have full ownership control of majoroperations in Europe, in order to better serve its customers in theregion.  A description of thesetransactions follows:

 

*Acquisition of META Group Italy*

 

In June 2003, the Company acquired 100% ofMETA Group Italia S.R.L. (“META Group Italy”) for $280,000 in cash. Thepurchase price has been allocated to the assets acquired and the liabilitiesassumed, based on estimated fair values at the date of acquisition. The allocationresulted in goodwill of $203,000 recorded in the Advisory Services segment,$60,000 recorded in the Consulting segment and $300,000 related to the customerlist of the seller, which is being amortized on the straight line method over 7years.

 

6

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*Acquisition of META Group UK*

 

In August 2003, the Company acquired 100% ofMETA Group UK Holdings Limited (“META Group UK”) for $1.6 million in cash. Thepurchase price has been allocated to the assets acquired and the liabilitiesassumed, based on estimated fair values at the date of acquisition. Thepreliminary allocation resulted in goodwill of $108,000 recorded in theAdvisory Services segment, $61,000 recorded in the Consulting segment and $1.3million related to the customer list of the seller, which is being amortized onthe straight line method over 7 years.

 

* Acquisition of META Group Northern Europe*

 

In September 2003, the Companyacquired 100% of META Group Norway A/S, META Group Sweden AB, META Group FinlandOY, META Group Denmark A/S, META Group Belgium SA and META Group Nederland BV(collectively “Northern Europe”). The purchase price consisted of $3.6 millionin cash and 175,000 shares of the Company’s common stock (valued at $700,000),as well as forgiveness of $2.6 million in promissory notes and $1.5 million intrade receivables owed to the Company by the Northern European entities. Thepurchase price has been allocated to the assets acquired and the liabilitiesassumed, based on estimated fair values at the date of acquisition.  The preliminary allocation resulted ingoodwill of approximately $ 3.7 million recorded in the Advisory Servicessegment, $352,000 recorded in the Consulting segment and $3.9 million relatedto the customer lists of the sellers, which are being amortized on the straightline method over 7 years.

 

## **Note 3 – Goodwill and OtherIntangible Assets**

 

Effective January 1, 2002, the Company adopted Statement ofFinancial Accounting Standards No. 142, *Goodwilland Other Intangible Assets*(“SFAS 142”). Under SFAS 142, goodwilland intangible assets deemed to have indefinite lives will no longer beamortized but will be subject to impairment tests on an annual basis, or morefrequently if certain indicators arise. Other finite lived intangible assetswill continue to be amortized over their useful lives.

 

The goodwill impairment test is a two-step process that requiresgoodwill to be allocated to the reporting units. In the first step, the fairvalue of the reporting unit is compared to the carrying value of the reportingunit. If the fair value of the reporting unit is less than the carrying valueof the reporting unit, goodwill impairment may exist, and the second step ofthe test is performed. In the second step, the fair value of the goodwill iscompared to the carrying value of the goodwill and an impairment loss will berecognized to the extent that the carrying value of the goodwill exceeds theimplied fair value of the goodwill.

 

In accordance with SFAS 142, the Company has selected a date by whichthe annual impairment test will be performed, such date being September 30. TheCompany performed its annual impairment test in September 2003 which resultedin no goodwill impairment.

 

A summary ofthe Company’s intangible assets as of June 30, 2004 and December 31, 2003 is asfollows (amounts in thousands):

 

7

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| ** **                      | ** ** | **June 30, 2004**             | ** **   |
|---------------------------------|------------|-------------------------------|--------------|
| **Gross****Carrying  Amount**   | ** ** | **Accumulated  Amortization** | ** **   | **Total** | ** ** |
| Amortized intangible assets:    |       |                          |         |   |   |   |   |
| Customer lists                  |       | $                             | 11,148       |   | $ | (3,444 | ) | $ | 7,704 |   |
| Intellectual property           |       | 715                           |         | (477 | ) | 238 |   |
| Non-compete agreement           |       | 375                           |         | (347 | ) | 28 |   |
| Content databases & other   |       | 2,108                         |         | (1,047 | ) | 1,061 |   |
| Total                           |       | $                             |  14,346 |   | $ |  (5,315 | ) | $ |  9,031 |   |
|                            |       |                          |         |   |   |   |   |
| Aggregate amortization expense: |       |                          |         |   |   |   |   |
| Six months ended June 30, 2004: |       |                          |         |   |   | $ | 1,043 |   |

 
| ** **                                      | ** ** | **December 31, 2003**         | ** **   |
|-------------------------------------------------|------------|-------------------------------|--------------|
| **Gross  Carrying  Amount**                     | ** ** | **Accumulated  Amortization** | ** **   | **Total** | ** ** |
| Amortized intangible assets:                    |       |                          |         |   |   |   |   |
| Customer lists                                  |       | $                             | 10,124       |   | $ | (2,715 | ) | $ | 7,408 |   |
| Intellectual property                           |       | 648                           |         | (334 | ) | 314 |   |
| Non-compete agreement                           |       | 375                           |         | (298 | ) | 77 |   |
| Content databases & other                   |       | 2,085                         |         | (902 | ) | 1,183 |   |
| Total                                           |       | $                             |  13,232 |   | $ |  (4,250 | ) | $ |  8,982 |   |
|                                            |       |                          |         |   |   |   |   |
| Aggregate amortization expense:                 |       |                          |         |   |   |   |   |
| Twelve months ended December 31, 2003:          |       |                          |         |   |   | $ | 1,481 |   |
|                                            |       |                          |         |   |   |   |   |
| Estimated amortization expense:                 |       |                          |         |   |   |   |   |
| Remaining six months ending December 31,  2004: |       | $                             | 1,128        |   |   |   |   |   |
| Year ending December 31, 2005                   |       | 2,119                         |         |   |   |   |   |
| Year ending December 31, 2006                   |       | 1,558                         |         |   |   |   |   |
| Year ending December 31, 2007                   |       | 1,451                         |         |   |   |   |   |
| Year ending December 31, 2008                   |       | 1,224                         |         |   |   |   |   |
| Thereafter                                      |       | 1,551                         |         |   |   |   |   |
| Total                                           |       | $                             | 9,031        |   |   |   |   |   |

 

The changes in the carrying amount of goodwill by reportable segmentfor the six months ended June 30, 2004 is as follows (in thousands):

 
| ** **                    | ** ** | **Advisory Services** | ** ** | **Strategic  Consulting** | ** ** | **Total** | ** ** |
|-------------------------------|------------|-----------------------|------------|---------------------------|------------|-----------|------------|
|                          |       |                  |       |                      |       |      |       |
| Balance as of January 1, 2004 |       | $                     | 12,543     |                      | $          | 473       |       | $ | 13,016 |   |
| Goodwill acquired             |       | 1,079                 |       | 485                       |       | 1,564     |       |
| Translation adjustments       |       | (48                   | )          | (2                        | )          | (50       | )          |
| Balance as of June 30, 2004   |       | $                     | 13,574     |                      | $          | 956       |       | $ | 14,530 |   |

 

8

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###### **Note4 – Comprehensive (Loss) Income**

 

Comprehensive (loss) income for the three and six months ended June 30,2004 and 2003 was as follows (in thousands):

 
| ** **                                        | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                        | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                              |       |                             |       |                           |       |   |   |   |   |
| Net income (loss):                                |       | $                                | 448        |                           | $          | (1,517 | ) | $ | (1,088 | ) | $ | (1,406 | ) |
| Other comprehensive (loss) income, net of  tax:   |       |                             |       |                           |       |   |   |   |   |
| Unrealized loss on investment in equity  security |       | (121                             | )          | —                         |       | (176 | ) | — |   |
| Foreign currency translation adjustment           |       | (423                             | )          | 63                             |       | 742 |   | 158 |   |
|                                              |       |                             |       |                           |       |   |   |   |   |
| Comprehensive loss                                |       | $                                | (96        | )                              | $          | (1,454 | ) | $ | (522 | ) | $ | (1,248 | ) |

 

During the quarter ended March31, 2004, the shares that the Company owns in Tescom became a marketable securityas a result of an initial public offering that Tescom completed.  The carrying value of the Company’s availablefor sale investment was $909,000 at June 30, 2004, which is net of anunrealized loss of $176,000.

 

###### **Note5 – Segment Reporting**

 

In the quarter ended March 31, 2004, the Company completed areorganization of the management structure overseeing Advisory Services andPublished Research Products.  Inaddition, the Company also completed a re-evaluation of its strategy aroundcontent generation and delivery as they relate to Published ResearchProducts.  As a result, the Company hasorganized itself around two business segments: Advisory Services and StrategicConsulting. The Company’s operating segments are managed separately, becauseeach operating segment represents a strategic business unit that generallyoffers distinct products / services. Advisory Services provide comprehensivecoverage of relevant information technology and business-related issues facedby its clients through client/analyst interaction, published conclusions andrecommendations to each client’s specific IT requirements, including varioustopic-specific reports and standalone deliverables that meet specificassessment requirements. Strategic Consulting provides custom consultingservices tailored to meet individual client requirements.

 

The accounting policies of the operating segments are the same as thosedescribed in Note 1 to the Company’s 2003 Annual Report on Form 10-K, asamended, except that the disaggregated financial results for the Company’soperating segments have been prepared using a management approach, which isconsistent with the basis and manner in which the Company’s managementinternally disaggregates financial information for the purposes of assistancein making internal operating decisions. In 2004, the Company also changed howit evaluates performance based on stand-alone segment gross margin, defined bythe Company as the segment revenues less segment cost of services andfulfillment excluding corporate selling, marketing, general and administrativeexpenses.  Those expenses were previouslyallocated ratably based on each operating segments’ revenues.  In 2004, the Company continued to 

 

9

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refine the measurement of segment revenues and, as a result,reclassified $1.0 million and $1.1 million for the three and six months endedJune 30, 2004, respectively, to Strategic Consulting from Advisory Services,and reclassified $0.4 million and $0.4 million for the three and six monthsended June 2003, respectively, to Strategic Consulting from Advisory Services.Management does not allocate corporate assets, non-operating income or incometaxes when measuring segment results. The Company evaluates the results of itsgeographic segments excluding intercompany royalty income and expense.

 

The Company earns revenue from clients in many countries.  In the quarters and six months ended June 30,2004 and 2003, other than the United States and Germany, there was noindividual country in which revenues from external clients represent 10% ormore of the Company’s consolidated revenues. Additionally, no single clientaccounted for 10% or more of total revenue in the quarters and six months endedJune 30, 2004 and 2003, and the loss of a single client, in management’sopinion, would not have a material adverse effect on revenues.

 

*Information by operating segment is set forth below(in thousands):*

* *
| ** **                            | ** ** | **Advisory  Services** | ** ** | **Strategic  Consulting** | ** ** | **Unallocated** | ** ** | **Consolidated  Total** | ** ** |
|---------------------------------------|------------|------------------------|------------|---------------------------|------------|-----------------|------------|-------------------------|------------|
| **Three months ended  June 30, 2004** |       |                   |       |                      |       |            |       |                    |       |
|                                  |       |                   |       |                      |       |            |       |                    |       |
| Revenues                              |       | $                      | 24,883     |                      | $          | 11,595          |       | $                       | 702        |   | $ | 37,180 |   |
| Gross Margin                          |       | 14,082                 |       | 3,431                     |       | —          |       | 17,513                  |       |
| Assets                                |       | —                 |       | —                    |       | 78,808          |       | 78,808                  |       |
|                                  |       |                   |       |                      |       |            |       |                    |       |
| **Three months ended  June 30, 2003** |       |                   |       |                      |       |            |       |                    |       |
|                                  |       |                   |       |                      |       |            |       |                    |       |
| Revenues                              |       | $                      | 20,230     |                      | $          | 9,126           |       | $                       | 701        |   | $ | 30,057 |   |
| Gross Margin                          |       | 11,186                 |       | 2,202                     |       | —          |       | 13,388                  |       |
| Assets                                |       | —                 |       | —                    |       | 77,211          |       | 77,211                  |       |
|                                  |       |                   |       |                      |       |            |       |                    |       |
| **Six months ended  June 30, 2004**   |       |                   |       |                      |       |            |       |                    |       |
|                                  |       |                   |       |                      |       |            |       |                    |       |
| Revenues                              |       | $                      | 47,533     |                      | $          | 21,041          |       | $                       | 1,208      |   | $ | 69,782 |   |
| Gross Margin                          |       | 27,202                 |       | 5,707                     |       | —          |       | 32,909                  |       |
| Assets                                |       | —                 |       | —                    |       | 78,808          |       | 78,808                  |       |
|                                  |       |                   |       |                      |       |            |       |                    |       |
| **Six months ended  June 30, 2003**   |       |                   |       |                      |       |            |       |                    |       |
|                                  |       |                   |       |                      |       |            |       |                    |       |
| Revenues                              |       | $                      | 40,424     |                      | $          | 16,586          |       | $                       | 1,220      |   | $ | 58,230 |   |
| Gross Margin                          |       | 22,785                 |       | 3,686                     |       | —          |       | 26,471                  |       |
| Assets                                |       | —                 |       | —                    |       | 77,211          |       | 77,211                  |       |

* *

The Company sells its products in the United States, andinternationally through its subsidiaries in Canada, the Asia Pacific region,Europe and the Middle East. The Company also utilizes a network of independentsales representative organizations located in South Africa, Israel, Japan andArgentina to distribute its products.

 

*10*

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* *

*Information by geographic region is set forth below(in thousands):*

 
| ** **                            | ** **   | **Americas** | ** **   | **Asia-Pacific** | ** **   | **Europe,  Middle East,  Africa** | ** **   | **Consolidated  Total** | ** **   |
|---------------------------------------|--------------|--------------|--------------|------------------|--------------|-----------------------------------|--------------|-------------------------|--------------|
| ** **                            |
| **Three  months ended June 30, 2004** | *** *** | *** *** | *** *** | *** ***     | *** *** | *** ***                      | *** *** | *** ***            | *** *** |
| Revenues                              | ** **   | $            | 24,299       |             | $            | 2,123                             |         | $                       | 10,758       |   | $ | 37,180 | ** ** |
| Operating income (loss)               | ** **   | (247         | )            | 88               |         | 676                               |         | 517                     | ** **   |
| Long – lived assets              | ** **   | 6,792        |         | 2,156            |         | 21,778                            |         | 30,726                  | ** **   |
|                                  | ** **   |         |         |             |         |                              |         |                    | ** **   |
| **Three  months ended June 30, 2003** | ** **   |         |         |             |         |                              |         |                    | ** **   |
| Revenues                              | ** **   | $            | 22,859       |             | $            | 1,833                             |         | $                       | 5,365        |   | $ | 30,057 | ** ** |
| Operating income (loss)               | ** **   | (2,080       | )            | 368              |         | (39                               | )            | (1,751                  | )            |
| Long – lived assets              | ** **   | 11,138       |         | 2,008            |         | 9,512                             |         | 22,658                  | ** **   |
| ** **                            | ** **   |         |         |             |         |                              |         |                    | ** **   |
| **Six  months ended June 30, 2004**   | ** **   |         |         |             |         |                              |         |                    | ** **   |
| Revenues                              | ** **   | $            | 45,093       |             | $            | 4,227                             |         | $                       | 20,462       |   | $ | 69,782 | ** ** |
| Operating income (loss)               | ** **   | (3,629       | )            | 363              |         | 2,235                             |         | (1,031                  | )            |
| Long – lived assets              | ** **   | 6,792        |         | 2,156            |         | 21,778                            |         | 30,726                  | ** **   |
| ** **                            | ** **   |         |         |             |         |                              |         |                    | ** **   |
| **Six  months ended June 30, 2003**   |         |         |         |             |         |                              |         |                    |         |
| Revenues                              | ** **   | $            | 45,093       |             | $            | 2,910                             |         | $                       | 10,227       |   | $ | 58,230 |   |
| Operating income (loss)               | ** **   | (2,077       | )            | 320              |         | (163                              | )            | (1,920                  | )            |
| Long – lived assets              | ** **   | 11,138       |         | 2,008            |         | 9,512                             |         | 22,658                  | ** **   |

 

###### **Note6 – Bank Debt **

 

InMarch 2003, the Company executed a new $6 million revolving credit agreement(the “Amended Facility”). Under the Amended Facility, interest on anyoutstanding borrowings will be payable at the rate of LIBOR, as determined bythe bank, plus 1.5%, or the higher of the Prime Rate or the Federal Funds Rateplus 0.5%. The Amended Facility is fully collateralized by a $6 million cashdeposit reflected as restricted cash as of June 30, 2004 and December 31, 2003.The Amended Facility contains no financial covenants, and matures in November2004. As of June 30, 2004 and December 31, 2003, there was $1,533,000 and$836,000, respectively, used under the Amended Facility in the form of standbyletters of credit issued on behalf of one of the Company’s independent salesrepresentative organizations and as collateral for a portion of the Company’sU.S. premises leases and equipment leases. There were $1 million in borrowingsoutstanding as of June 30, 2004 and no borrowings outstanding as of December31, 2003.

 

11

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###### **Note7 – Stock-Based Compensation**

 

The Company has three active stock-based employee compensation plans,which are described more fully in Note 9 to the Company’s 2003 Annual Report onForm 10-K, as amended. The Company accounts for those plans under therecognition and measurement principles of Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees”, and relatedInterpretations. No stock-based employee compensation cost is reflected in netincome (loss), as all options granted under those plans had an exercise priceequal to the market value of the underlying common stock on the date of grant.The following table illustrates the effect on net income (loss) and earnings(loss) per share if the Company had applied the fair value recognitionprovisions of Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation” to stock-based employee compensation (inthousands, except per share data):

 

 
| ** **                                                                                                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| **June 30,  2004**                                                                                                              | ** ** | **June 30,  2003**     | ** ** | **June 30,  2004**   | ** ** | **June 30,  2003** | ** ** |
|                                                                                                                            |       |                   |       |                 |       |   |   |   |   |
| Reported net income (loss)                                                                                                      |       | $                      | 448        |                 | $          | (1,517 | ) | $ | (1,088 | ) | $ | (1,406 | ) |
| Deduct: Total stock based employee  compensation expense determined under fair value based methods for all  awards, net of tax: |       | (709                   | )          | (562                 | )          | (1,279 | ) | (1,341 | ) |
| Pro forma net loss                                                                                                              |       | $                      |  (261 | )                    | $          |  (2,079 | ) | $ |  (2,367 | ) | $ |  (2,747 | ) |
|                                                                                                                            |       |                   |       |                 |       |   |   |   |   |
| Net income (loss) per share                                                                                                     |       |                   |       |                 |       |   |   |   |   |
| Reported                                                                                                                        |       |                   |       |                 |       |   |   |   |   |
| Basic                                                                                                                           |       | $                      | 0.03       |                 | $          | (0.11 | ) | $ | (0.08 | ) | $ | (0.11 | ) |
| Diluted                                                                                                                         |       | $                      | 0.03       |                 | $          | (0.11 | ) | $ | (0.08 | ) | $ | (0.11 | ) |
|                                                                                                                            |       |                   |       |                 |       |   |   |   |   |
| Pro forma                                                                                                                       |       |                   |       |                 |       |   |   |   |   |
| Basic                                                                                                                           |       | $                      | (0.02      | )                    | $          | (0.16 | ) | $ | (0.17 | ) | $ | (0.21 | ) |
| Diluted                                                                                                                         |       | $                      | (0.02      | )                    | $          | (0.16 | ) | $ | (0.17 | ) | $ | (0.21 | ) |

 

**Note  8– Net Income (Loss) Per Share**

 

The following table sets forththe computation of net income (loss) per share for the three and six monthsended June 30, 2004 and 2003 (in thousands, except per sharedata):

 
| ** **                                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                              | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income (loss)                                                       |       | $                                | 448        |                           | $          | (1,517 | ) | $ | (1,088 | ) | $ | (1,406 | ) |
|                                                                    |       |                             |       |                           |       |   |   |   |   |
| Average number of common shares outstanding  during the period          |       | 13,786                           |       | 13,272                         |       | 13,750 |   | 13,258 |   |
|                                                                    |       |                             |       |                           |       |   |   |   |   |
| Add: common share equivalents — options to  purchase common shares |       | 1,293                            |       | —                         |       | — |   | — |   |
| Total                                                                   |       | 15,079                           |       | 13,272                         |       | 13,750 |   | 13,258 |   |
|                                                                    |       |                             |       |                           |       |   |   |   |   |
| Amounts per basic common share                                          |       |                             |       |                           |       |   |   |   |   |
| Net income (loss)                                                       |       | $                                | 0.03       |                           | $          | (0.11 | ) | $ | (0.08 | ) | $ | (0.11 | ) |
|                                                                    |       |                             |       |                           |       |   |   |   |   |
| Amounts per fully diluted common share                                  |       |                             |       |                           |       |   |   |   |   |
| Net income (loss)                                                       |       | $                                | 0.03       |                           | $          | (0.11 | ) | $ | (0.08 | ) | $ | (0.11 | ) |

 

12

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For the second quarter ended June 30, 2003, options on 1,116,008 sharesof common stock were not included in the calculation of weighted average sharesfor diluted earnings per share because their effects were antidilutive.

 

For the six months ended June 30, 2004 and 2003, options on 1,468,303and 973,611 shares of common stock, respectively, were not included in thecalculation of weighted average shares for diluted earnings per share because theireffects were antidilutive.

 

###### **Note9 – Other Income, Net**

 

During the quarter ended March 31, 2003, the Companyreceived final proceeds of $588,000 on the liquidation of its investment inSpikes Cavell and recognized a gain of $315,000, which is included in otherincome, net, on the consolidated statement of operations for the quarter endedMarch 31, 2003. During the quarter ended June 30, 2003, the Company sold aninvestment to a third party and recognized a gain of $350,000, which wasincluded in other income, net, in the consolidated statement of operations forthe quarter ended June 30, 2003.

 

###### **Note10 – Commitments and Contingencies **

 

*Contingencies:*

* *

*Legal:*

* *

*Other than ordinary routine litigation incidentalto the Company’s business, the Company is neither a party, nor is any of itsproperty subject to, any pending legal proceedings.*

 

*Earnout Provision Related toAcquisition of Assets of Rubin Systems, Inc. (“RSI”)*

* *

TheCompany’s purchase agreement for the October 2000 acquisition of the assets ofRSI included certain earnout provisions. In the event certain financial targetsare met, additional contingent consideration of $2.7 million payable in cashand $1.4 million payable in the Company’s common stock may be paid throughMarch 2007. In the event the aggregate number of shares issued in satisfactionof contingent consideration exceeds 147,027, the remaining consideration willbe payable in cash. RSI is wholly owned by Dr. Howard Rubin, an officer of theCompany.  No payment was required for theyear ended December 31, 2003.

* *

*13*

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* *

*Letters of Credit:*

* *

*See Note 6 for discussion of standby letters ofcredit.*

* *

*Guarantees:*

* *

In September 2000 the Company provided a corporateguarantee in the amount of €62,000 (approximately $76,000) guaranteeing leasepayments to the landlord of one of the Company’s former independent salesrepresentative organizations. In January 2002, the landlord called theguarantee. The claim is currently being negotiated with the landlord. TheCompany is currently uncertain as to when this issue will be resolved.

 

**Note 11-****Restructuring Charges**

 

During 2003, the Company recorded restructuring charges totaling$1,642,000. These charges were associated with workforce reductions, whichtotaled 41 employees.  As of June 30,2004, $65,000 remains unpaid and is expected to be paid in 2004.

 

**Note 12-****Subsequent Event**

 

On August 12,2004, the Company completed the sale of its 50.2% owned subsidiary in Hungaryand expects a pre-tax charge to earnings in the third quarter of approximately$400,000 related to the sale.  At June30, 2004, the Company did not consider its investment in Hungary to be impairedbased on analysis of the underlying assets and liabilities.

 

14

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**Item 2****.****                              MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*The discussion and analysis below containstrend analysis and other forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934, which are subject to a number of risks and uncertainties.These forward-looking statements are typically denoted in this Quarterly Reporton Form 10-Q by words such as anticipate, believe, could, estimate, expect,intend, may, plan, project, should or will and similar words (as well as otherwords or expressions referencing future events, conditions or circumstances).Actual results could differ materially from those projected in theforward-looking statements as a result of the risk factors, including the riskfactors set forth below under “Certain Factors That May Affect Future Results.”This discussion should be read in conjunction with the consolidated financialstatements and related notes for the periods specified. Further referenceshould be made to the Company’s other filings with the Securities and ExchangeCommission, principally the Company’s Annual Report on Form 10-K for the yearended December 31, 2003, as amended, which includes a full discussion of manyof the risks we face in our business.*

 

#### **Overview**

 

META Group, Inc. with its subsidiaries (collectively the “Company”) is a leading provider of information technology(“IT”) research, advisory services, and strategic consulting. The Company’smission is to help clients be more efficient, effective, and timely in theiruse of IT to achieve their business goals.

 

In the quarter ended March 31, 2004, the Company completed areorganization of the management structure overseeing Advisory Services andPublished Research Products.  Inaddition, the Company also completed a re-evaluation of its strategy aroundcontent generation and delivery as they relate to Published Research Products.  As a result, the Company has organized itselfaround two business segments:  AdvisoryServices and Strategic Consulting. The Advisory Services segment providesannually renewable subscription services (focused on specific areas of IT, thespecial needs of the CIO and others within the IT organization, or the distinctIT/business issues of specific industry markets and the public sector), serviceanalyst briefing engagements, conferences, research reports and onlineresources which offer thorough market research, practical executive / operationalguides and in-depth IT product evaluations. Supplementing these services arethe Company’s Infusion programs, which provide an important bridge betweentraditional Advisory Services that examine broader industry issues andStrategic Consulting which drills into specific projects for a givenclient.  The Strategic Consulting segmentoffers project consulting services that address clients’ business andtechnology challenges. A significant portion of Strategic Consulting clientsare also Advisory Services subscribers.

 

***TheCurrent Economic Environment***

 

The economic climatein which we operate has been difficult over the last three years, and capitalspending has decreased dramatically, including significant decreases in ITspending. This has had a pronounced effect on our ability to generate revenuesfrom our Advisory Services, 

 

15

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Strategic Consulting and Published ResearchProducts.  We believe we are wellpositioned to provide our Advisory Services, Strategic Consulting and PublishedResearch Products to a growing customer base, but we cannot provide anyassurance that these pressures on IT spending will ease, or that the generaleconomic climate will improve.  Continuedcompetitive pressure and a weak economy could have a continuing pronouncedeffect on our operating results. We have undertaken a variety of cost reductionmeasures designed to bring our operating expenses in line with our perceptionsof the business climate, including workforce reductions.

 

***Significant Financial Events in Quarter andSix Months ended June 30, 2004***

 

During the quarterended June 30, 2004, we achieved total revenue of $37.2 million, and had incomebefore income taxes and minority interest of $0.5 million. During the sixmonths ended June 30, 2004, we achieved total revenue of $69.8 million, andincurred a loss before income taxes and minority interest of $1.0 million.

 

***Resultsof Operations***

 

The following table sets forth, for the yearsindicated, the results of operations in thousands of dollars, and results ofoperations as a percentage of total revenues:

 
| ** **                                                             | ** ** | **Quarter ended  June 30, 2004** | ** ** | **Quarter ended  June 30, 2003** | ** ** | **Six Months ended  June 30, 2004** | ** ** | **Six Months ended  June 30, 2003** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **                                                             | ** ** | **Dollars**                      | ** ** | **Percent**                      | ** ** | **Dollars**                         | ** ** | **Percent**                         | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| Revenues:                                                              |       |                             |       |                             |       |                                |       |                                |       |   |   |   |   |   |   |   |   |
| Advisory services                                                      |       | $                                | 24,525     |                             | **66.0**   | ** **                          | $          | 19,281                              |       | **64.2** | ** ** | $ | 45,765 |   | **65.6** | ** ** | $ | 37,663 |   | **64.7** | ** ** |
| Strategic consulting                                                   |       | 10,590                           |       | **28.5**                         | ** ** | 8,699                               |       | **28.9**                            | ** ** | 19,929 |   | **28.6** | ** ** | 16,157 |   | **27.7** | ** ** |
| Published research products                                            |       | 1,363                            |       | **3.6**                          | ** ** | 1,376                               |       | **4.6**                             | ** ** | 2,880 |   | **4.1** | ** ** | 3,190 |   | **5.5** | ** ** |
| Reimbursable expenses                                                  |       | 702                              |       | **1.9**                          | ** ** | 701                                 |       | **2.3**                             | ** ** | 1,208 |   | **1.7** | ** ** | 1,220 |   | **2.1** | ** ** |
| Total revenues                                                         |       | 37,180                           |       | **100.0**                        | ** ** | 30,057                              |       | **100.0**                           | ** ** | 69,782 |   | **100.0** | ** ** | 58,230 |   | **100.0** | ** ** |
|                                                                   |       |                             |       | ** **                       | ** ** |                                |       | ** **                          | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |
| Operating expenses:                                                    |       |                             |       | ** **                       | ** ** |                                |       | ** **                          | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |
|                                                                   |       |                             |       | ** **                       | ** ** |                                |       | ** **                          | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |
| Cost of services and fulfillment                                       |       | 18,965                           |       | **(51.0**                        | **)**      | 15,968                              |       | **(53.1**                           | **)**      | 35,665 |   | **(51.1** | **)** | 30,539 |   | **(52.4** | **)** |
| Reimbursable expenses                                                  |       | 702                              |       | **(1.9**                         | **)**      | 701                                 |       | **(2.3**                            | **)**      | 1,208 |   | **(1.7** | **)** | 1,220 |   | **(2.1** | **)** |
| Selling and marketing                                                  |       | 11,000                           |       | **(29.6**                        | **)**      | 8,827                               |       | **(29.4**                           | **)**      | 21,532 |   | **(30.9** | **)** | 16,292 |   | **(28.0** | **)** |
| General and administrative                                             |       | 4,805                            |       | **(12.9**                        | **)**      | 5,030                               |       | **(16.7**                           | **)**      | 10,066 |   | **(14.4** | **)** | 9,485 |   | **(16.3** | **)** |
| Depreciation and amortization                                          |       | 1,191                            |       | **(3.2**                         | **)**      | 1,282                               |       | **(4.3**                            | **)**      | 2,342 |   | **(3.4** | **)** | 2,614 |   | **(4.5** | **)** |
| Total operating expenses                                               |       | 36,663                           |       | **(98.6**                        | **)**      | 31,808                              |       | **(105.8**                          | **)**      | 70,813 |   | **(101.5** | **)** | 60,150 |   | **(103.3** | **)** |
|                                                                   |       |                             |       | ** **                       | ** ** |                                |       | ** **                          | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |
| Operating income (loss)                                                |       | 517                              |       | **1.4**                          | ** ** | (1,751                              | )          | **(5.8**                            | **)**      | (1,031 | ) | **(1.5** | **)** | (1,920 | ) | **(3.3** | **)** |
|                                                                   |       |                             |       | ** **                       | ** ** |                                |       | ** **                          | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |
| Other income, net                                                      |       | 21                               |       | **0.1**                          | ** ** | 350                                 |       | **1.2**                             | ** ** | 68 |   | **0.1** | ** ** | 700 |   | **1.2** | ** ** |
|                                                                   |       |                             |       | ** **                       | ** ** |                                |       | ** **                          | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |
| Income (loss) before provision for income  taxes and minority interest |       | 538                              |       | **1.5**                          | ** ** | (1,401                              | )          | **(4.6**                            | **)**      | (963 | ) | **(1.4** | **)** | (1,220 | ) | **(2.1** | **)** |
|                                                                   |       |                             |       | ** **                       | ** ** |                                |       | ** **                          | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |
| Provision for income taxes                                             |       | 67                               |       | **(0.2**                         | **)**      | 50                                  |       | **(0.2**                            | **)**      | 114 |   | **(0.2** | **)** | 132 |   | **(0.2** | **)** |
|                                                                   |       |                             |       | ** **                       | ** ** |                                |       | ** **                          | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |
| Minority interest in income of consolidated  subsidiary                |       | 23                               |       | **(0.1**                         | **)**      | 66                                  |       | **(0.2**                            | **)**      | 11 |   | **0.0** | ** ** | 54 |   | **(0.1** | **)** |
|                                                                   |       |                             |       | ** **                       | ** ** |                                |       | ** **                          | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |
| Net income (loss)                                                      |       | $                                | 448        |                             | **1.2**    | ** **                          | $          | (1,517                              | )          | **(5.0** | **)** | $ | (1,088 | ) | **(1.6** | **)** | $ | (1,406 | ) | **(2.4** | **)** |

 

16

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Advisory Services revenues are principally annually renewable contractsand are generally payable by clients in advance.  Billings attributable to the Company’sAdvisory Services are initially recorded as deferred revenues and thenrecognized pro rata over the contract term. Advisory Services revenues attributable to international clients notserviced by the Company’s subsidiaries are billed and collected by itsindependent sales representative organizations. The Company realizes AdvisoryServices revenues from the independent sales representative organizations atrates of 40%- 75% of the amounts billed to their clients. One measure of thevolume of the Company’s Advisory Services business is its “Contract Value,”which the Company calculates as the aggregate annual value of retainersubscription services contracts in force at a given point in time, withoutregard to the remaining duration of such contracts. Contract Value is notnecessarily indicative of future Advisory Services revenues. Contract Value was$73.1 million at June 30, 2004 versus $67.9 million at June 30, 2003, an 8% increase.

 

The Company recognizes revenue on Strategic Consultingengagements on a contract by contract basis, as the work is performed,utilizing the percentage of completion method for fixed fee projects, or asservices are rendered for time and material projects.

 

The Company recognizes revenues from the sale of Published ResearchProducts when the products are delivered.

 

The Company’s operating expenses consist of cost of services andfulfillment, selling and marketing expenses, general and administrativeexpenses and depreciation and amortization. Cost of services and fulfillmentrepresents the cost associated with production and delivery of the Company’sproducts and services and includes the costs of research, development,preparation of periodic reports, analyst telephone consultations, executivebriefings and conferences, research reports, consulting services, new productdevelopment, and all associated editorial and support services. Selling andmarketing expenses include the costs of salaries, commissions, and relatedbenefits for selling and marketing personnel as well as travel and promotion,and bad debt expense.  General andadministrative expenses include the costs of the administrative functions ofthe Company, including finance and accounting, corporate IT, legal, humanresources, and corporate management departments.  See “Segment Reporting” in Note 5 to theconsolidated financial statements for information regarding the Company’soperating segments.

 

# **Results of Operations**

# **Quarters Ended June 30, 2004 and June 30, 2003**

 

*Total Revenues.*   Total revenues increased 24% to $37.2million in 2004 from $30.1 million in 2003. The table below gives an analysisof the major changes in revenues (in thousands):

 

**Changesin Revenues – Quarters ended June 30, 2004 versus 2003**

 
| ** **                  | ** ** | **Acquisitions** | ** ** | **Ongoing Operations** | ** ** | **Foreign Exchange** | ** ** | **Net Change** | ** ** |
|-----------------------------|------------|------------------|------------|------------------------|------------|----------------------|------------|----------------|------------|
|                        |       |             |       |                   |       |                 |       |           |       |
| Advisory Services           |       | $                | 1,978      |                   | $          | 2,861                |       | $              | 405        |   | $ | 5,244 |   |
| Strategic Consulting        |       | 1,816            |       | (304                   | )          | 379                  |       | 1,891          |       |
| Published Research Products |       | 30               |       | (68                    | )          | 25                   |       | (13            | )          |
| Reimbursable Expenses       |       | 24               |       | (43                    | )          | 20                   |       | 1              |       |
| Total                       |       | $                | 3,848      |                   | $          | 2,446                |       | $              | 829        |   | $ | 7,123 |   |

 

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Revenues from Advisory Services increased 27%****to****$24.5 million in2004 from $19.3 million in 2003 and increased 2% as a percentage oftotal revenues to 66%. The increase in revenues was principally due to $2.9million of higher revenue from ongoing operations in the United States andEurope, the acquisition of subsidiaries in Italy, the United Kingdom, andNorthern Europe in 2003 and the Middle East in 2004 (which collectively addedincremental revenue of $2.0 million), as well as the impact of foreign currencyexchange rates on revenues from ongoing operations in Canada, Europe and theAsia Pacific region of $0.4 million.

 

Strategic Consulting revenues increased 22% to $10.6million in 2004 from $8.7 million in 2003, and decreased as a percentage oftotal revenues to 28% from 29%. The increase was principally due to theacquisition of subsidiaries in Italy, the United Kingdom and Northern Europe in2003 and the Middle East in 2004 (which collectively added incremental revenueof $1.8 million), and the impact of foreign currency of $0.4 million, which wassomewhat offset by a decrease of $0.3 million in the Company’s consultingrevenues from ongoing operations.

 

Published Research Productsrevenues remained basically unchanged at $1.4 million in 2004 and 2003 anddecreased as a percentage of total revenues to 4% from 5%. Theserevenues were impacted by the acquisition of subsidiaries in Italy, the United Kingdom, and Northern Europe in 2003 andthe Middle East in 2004, as well as favorable foreign exchangerates in ongoing operations, somewhat offset by lower publications revenue inthe United States.

 

*Total OperatingExpenses.*   Total operating expenses increased 15%to $36.7 million in 2004 from $31.8 million in 2003. The table below gives ananalysis of the major changes in operating expenses (in thousands):

 

 

**Changes in Operating Expenses – Quartersended June 30, 2004 versus 2003**

 
| ** **                            | ** ** | **Acquisitions** | ** ** | **Ongoing Operations** | ** ** | **Foreign Exchange** | ** ** | **Net Change** | ** ** |
|---------------------------------------|------------|------------------|------------|------------------------|------------|----------------------|------------|----------------|------------|
|                                  |       |             |       |                   |       |                 |       |           |       |
| Cost of Services and Fulfillment      |       | $                | 2,387      |                   | $          | 309                  |       | $              | 302        |   | $ | 2,998 |   |
| Selling and Marketing Expenses        |       | 2,037            |       | (145                   | )          | 281                  |       | 2,173          |       |
| General & Administrative Expenses |       | 270              |       | (563                   | )          | 68                   |       | (225           | )          |
| Depreciation and Amortization         |       | 219              |       | (334                   | )          | 24                   |       | (91            | )          |
| Total                                 |       | $                | 4,913      |                   | $          | (733                 | )          | $              | 675        |   | $ | 4,855 |   |

 

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*Cost of Services and Fulfillment*.   Cost of services and fulfillment, includingreimbursable expenses, increased 18% or approximately $3.0 million to $19.7million in 2004 from $16.7 million in 2003 and decreased as a percentage oftotal revenues to 53% from 55%. The increase was principally due to incrementalcosts of $2.4 million associated with subsidiaries in Italy, the United Kingdomand Northern Europe acquired in 2003 and the Middle East in 2004, $0.3 millionof increased costs from ongoing operations, and $0.3 million from the impact offoreign exchange rates on the costs from ongoing operations in Canada, Europeand the Asia Pacific region. On a forward-looking basis, we expect the cost ofservices and fulfillment to increase in absolute dollars, though such expensesmay vary as a percentage of revenues.

 

*Selling and Marketing Expenses*.   Selling and marketing expenses increased 25%or approximately $2.2 million to $11.0 million in 2004 from $8.8 million in2003 and increased as a percentage of total revenues to 30% from 29%. Theincrease in selling and marketing expenses was due to $2.0 million inincremental personnel costs associated with subsidiaries in Italy, the UnitedKingdom and Northern Europe acquired in 2003 and the Middle East in 2004, $0.3million from the impact of foreign exchange rates on the costs from ongoingoperations in Canada, Europe and the Asia Pacific region, offset by $0.1million of decreased expenses from ongoing operations. On a forward-lookingbasis, we expect selling and marketing expenses to increase in absolutedollars, though such expenses may vary as a percentage of revenues.

 

*General and Administrative Expenses*.   General and administrative expensesdecreased 4% or approximately $0.2 million to $4.8 million in 2004 from $5.0million in 2003. The decrease in general and administrative expenses was due to$0.6 million of decreased expenses in the ongoing operations ($0.2 million ofreduced expatriate tax reserves, and $0.4 million of lower other expenses),partially offset by $0.3 million in incremental personnel costs associated withsubsidiaries in Italy, the United Kingdom and Northern Europe acquired in 2003and the Middle East in 2004, and an increase in expenses of $0.1 million due tothe impact of foreign exchange rates on the costs from ongoing operations inCanada, Europe and the Asia Pacific region. On a forward-looking basis, weexpect general and administrative expenses to increase in absolute dollars,though such expenses may vary as a percentage of revenues.

 

*Depreciation and Amortization*.   Depreciation and amortization expensedecreased 7% or approximately  $0.1million to $1.2 million in 2004 from $1.3 million in 2003. The decrease wasprincipally due to $0.3 million in lower depreciation expense on reduced levelsof depreciable fixed assets in the United States, partially offset by $0.2million of higher depreciation and amortization expense from incremental costsassociated with subsidiaries in Italy, the United Kingdom and Northern Europeacquired in 2003 and the Middle East in 2004. On a forward-looking basis, weexpect depreciation and amortization to remain relatively constant in absolutedollars, though such expenses may vary as a percentage of revenues.

 

*Other Income, Net*.   Other income, net, decreased to $21,000 in2004 from $350,000 in 2003. The decrease is principally due to a non-recurringgain of $350,000 recognized in 2003 on the sale of one of the Company’sinvestments in a third party.  SeeFootnote 9 to the consolidated financial statements.

 

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*Provision for Income Taxes*.  In 2004, the Company recorded a provision forincome taxes of $67,000 versus an income tax provision of $50,000 in 2003.

 

# **Results of Operations**

# **Six Months Ended June 30, 2004 and June 30, 2003**

 

*Total Revenues.*   Total revenues increased 20% to $69.8million in 2004 from $58.2 million in 2003.

 

The table belowgives an analysis of the major changes in revenues (in thousands):

 

**Changes in Revenues – Six months ended June 30, 2004 versus2003**

 
| ** **                  | ** ** | **Acquisitions** | ** ** | **Ongoing Operations** | ** ** | **Foreign Exchange** | ** ** | **Net Change** | ** ** |
|-----------------------------|------------|------------------|------------|------------------------|------------|----------------------|------------|----------------|------------|
|                        |       |             |       |                   |       |                 |       |           |       |
| Advisory Services           |       | $                | 3,764      |                   | $          | 3,326                |       | $              | 1,012      |   | $ | 8,102 |   |
| Strategic Consulting        |       | 3,142            |       | (456                   | )          | 1,086                |       | 3,772          |       |
| Published Research Products |       | 50               |       | (437                   | )          | 77                   |       | (310           | )          |
| Reimbursable Expenses       |       | 123              |       | (185                   | )          | 50                   |       | (12            | )          |
| Total                       |       | $                | 7,079      |                   | $          | 2,248                |       | $              | 2,225      |   | $ | 11,552 |   |

 

Revenues from Advisory Services increased 22%****to****$45.8 million in2004 from $37.7 million in 2003 and increased 1% as a percentage oftotal revenues to 66%. The increase in revenues was principally due to theacquisition of subsidiaries in Italy, the United Kingdom, and Northern Europein 2003 and the Middle East in 2004 (which collectively added incrementalrevenue of $3.8 million), $3.3 million of higher revenue from ongoingoperations in the United States and Europe, as well as the impact of foreigncurrency exchange rates on revenues from ongoing operations in Canada, Europeand the Asia Pacific region of $1.0 million.

 

Strategic Consultingrevenues increased 23% to $19.9 million in 2004 from $16.2 million in 2003, andincreased as a percentage of total revenues to 29% from 28%. The increase wasprincipally due to the acquisition of subsidiaries in Italy, the United Kingdomand Northern Europe in 2003 and the Middle East in 2004 (which collectivelyadded incremental revenue of $3.1 million), and the impact of foreign currencyof $1.0 million. These revenue increaseswere partially offset by $0.4 million of reduced consulting revenues in theUnited States and elsewhere.

 

Published Research Products revenues decreased 10% to$2.9 million in 2004 from $3.2 million in 2003 and decreased as a percentage oftotal revenues to 4% from 5%. The decrease in revenues was principally due tolower revenues from ongoing operations in the United States of $0.4 million,partially offset by the impact of foreign currency exchange rates on revenues fromongoing operations in Canada, Europe and the Asia Pacific region of $0.1million.

 

*Total OperatingExpenses.*   Total operating expenses for the six monthsended June 30 increased 18% to $70.8 million in 2004 from $60.2 million in2003.

 

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The table below gives an analysis of the major changes in operatingexpenses (in thousands):

 

**Changes in Operating Expenses – Six Monthsended June 30, 2004 versus 2003**

 
| ** **                            | ** ** | **Acquisitions** | ** ** | **Ongoing Operations** | ** ** | **Foreign Exchange** | ** ** | **Net Change** | ** ** |
|---------------------------------------|------------|------------------|------------|------------------------|------------|----------------------|------------|----------------|------------|
| ** **                            | ** ** | ** **       | ** ** | ** **             | ** ** | ** **           | ** ** | ** **     | ** ** |
| Cost of Services and Fulfillment      |       | $                | 4,002      |                   | $          | 99                   |       | $              | 1,013      |   | $ | 5,114 |   |
| Selling and Marketing Expenses        |       | 2,973            |       | 1,495                  |       | 772                  |       | 5,240          |       |
| General & Administrative Expenses |       | 864              |       | (480                   | )          | 197                  |       | 581            |       |
| Depreciation and Amortization         |       | 430              |       | (776                   | )          | 74                   |       | (272           | )          |
| Total                                 |       | $                | 8,269      |                   | $          | 338                  |       | $              | 2,056      |   | $ | 10,663 |   |

 

*Cost of Services and Fulfillment*.   Cost of services and fulfillment, includingreimbursable expenses, increased 16% or approximately $5.1 million to $36.9million in 2004 from $31.8 million in 2003 and declined as a percentage oftotal revenues from 55% to 53%. The increase was principally due to incrementalcosts of $4.0 million associated with subsidiaries in Italy, the United Kingdomand Northern Europe acquired in 2003 and the Middle East in 2004, $1.0 millionfrom the impact of foreign exchange rates on the costs from ongoing operationsin Canada, Europe and the Asia Pacific region, and $0.1 million of increasedcosts from ongoing operations.  On aforward-looking basis, we expect the cost of services and fulfillment toincrease in absolute dollars, though such expenses may vary as a percentage ofrevenues.

 

*Selling and Marketing Expenses*.   Selling and marketing expenses increased 32%or approximately $5.2 million to $21.5 million in 2004 from $16.3 million in2003 and increased as a percentage of total revenues to 31% from 28%. Theincrease in selling and marketing expenses was due to $3.0 million inincremental personnel costs associated with subsidiaries in Italy, the United Kingdomand Northern Europe acquired in 2003 and the Middle East in 2004, $1.5 millionof increased expenses from ongoing operations due to the following: $0.5 ofhigher costs selling and marketing costs in the United States, and higherselling and marketing expenses of $1.0 million in foreign subsidiaries, and$0.7 million from the impact of foreign exchange rates on the costs fromongoing operations in Canada, Europe and the Asia Pacific region.   On a forward-looking basis, we expectselling and marketing expenses to increase in absolute dollars, though suchexpenses may vary as a percentage of revenues.

 

*General and Administrative Expenses*.   General and administrative expensesincreased 6% or approximately $0.6 million to $10.1 million in 2004 from $9.5 millionin 2003. The increase in general and administrative expenses was due to $0.9million in incremental personnel costs 

 

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associated with subsidiaries in Italy, the United Kingdom and NorthernEurope acquired in 2003 and the Middle East in 2004, an increase in expenses of$0.2 million due to the impact of foreign exchange rates on the costs fromongoing operations in Canada, Europe and the Asia Pacific region, which wasoffset by $0.5 million of decreased expenses in the ongoing operations ($0.2million of reduced expatriate tax reserves, and $0.3 million of lower otherexpenses). On a forward-looking basis, we expect general and administrativeexpenses to increase in absolute dollars, though such expenses may vary as apercentage of revenues.

 

*Depreciation and Amortization*.   Depreciation and amortization expensedecreased 10% or approximately  $0.3million to $2.3 million in 2004 from $2.6 million in 2003. The decrease wasprincipally due to $0.8 million in lower depreciation expense on reduced levelsof depreciable fixed assets in the United States, partially offset by $0.4million of higher depreciation and amortization expense from incremental costsassociated with subsidiaries in Italy, the United Kingdom and Northern Europeacquired in 2003 and the Middle East in 2004 and an increase in expenses of$0.1 million due to the impact of foreign exchange rates on the costs fromongoing operations in Canada, Europe and the Asia Pacific region. On a forward-lookingbasis, we expect depreciation and amortization to remain relatively constant inabsolute dollars, though such expenses may vary as a percentage of revenues.

 

*Other Income, Net*.   Other income, net, decreased to $68,000 in2004 from $700,000 in 2003. The decrease is principally due to a non-recurringgain of $315,000 recognized in 2003 on the final settlement of the Company’sinvestment in Spikes Cavell, and a non-recurring gain of $350,000 recognized in2003 on the sale of one of the Company’s investments in a third party.   See Footnote 9 to the consolidated financialstatements.

 

*Provision for Income Taxes*.  In 2004, the Company recorded a provision forincome taxes of $114,000 versus an income tax provision of $132,000 in 2003.

 

***Liquidityand Capital Resources***

 

TheCompany funds its operations primarily through cash generated from operations.The Company generated $85,000 in cash from operations during the six monthsended June 30, 2004, compared to $5.8 million of cash generated from operationsin the same period last year. The decrease in operating cash flow in 2004versus 2003 was due to a reduction in net working capital, largely due toreductions in deferred revenues and other liabilities offset by decreases inaccounts receivable.

 

The Company used $0.7 million of cash in the six months ended June 30,2004, compared to $0.3 million in the same period of 2003, for capitalexpenditures.  The purchases wereprincipally made to support the Company’s computer equipment, software andnetwork infrastructure. The Company currently expects to make additionalpurchases in 2004 and currently expects that such expenditures will remainapproximately the same when compared to 2003 levels. During the six monthsended June 30, 2004, the Company used $0.8 million of cash (net of cashacquired) for the acquisition of its Middle East distributor. During the sixmonths ended June 30, 2003, the Company paid $0.3 million for the purchase ofits distributor in Italy.

 

As of June 30, 2004, the Company had no material commitments forcapital expenditures; however, the Company anticipates that it will continue toupgrade its internal systems to support its business, including in particularits international subsidiaries.

 

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During the six months ended June 30, 2003, the Company liquidated itsinvestment in Spikes Cavell and received $0.6 million in final proceeds, andrecognized a gain of $0.3 million.  TheCompany also sold another of its investments in a third party entity, realizingproceeds of $0.3 million, and recognized a gain on the sale of $0.3 million.

 

Duringthe six months ended June 30, 2004, the Company generated $1.3 million of cashfrom financing activities primarily due to net borrowings of $1.0 million underits credit facility, and the exercise of stock options and employee stockpurchases. During the six months ended June 30, 2003, the Company used $12.3million of cash from financing activities primarily as a result of repaymentsof $6.1 million of borrowings outstanding under the Company’s creditfacilities, and the establishment of a $6.0 million restricted cash account asrequired by the Company’s credit facility discussed below, and repaid notes of$0.4 million.

 

As ofDecember 31, 2002, the Company had $6.2 million in borrowings outstanding ($5.2million outstanding under the term loan and $1 million outstanding under therevolving credit facility) under its $20 million credit facility (the “OldFacility”).  The Company was in breach ofa number of covenants contained in the Old Facility.  As the Company was in default under the OldFacility as of December 31, 2002, all outstanding borrowings were classified asa current liability on the consolidated balance sheet as of December 31,2002.  In January 2003, the Companyrepaid all amounts outstanding under the Old Facility from its cash on hand.

 

InMarch 2003 the Company received a waiver of all prior covenant defaults.Additionally, in March 2003 the Company executed a new $6 million revolvingcredit agreement (the “Amended Facility”). The Amended Facility replaced theOld Facility and consists of a $6 million revolving credit facility. Under theAmended Facility, interest on any outstanding borrowings will be payable at therate of LIBOR, as determined by the bank, plus 1.5% or the higher of the PrimeRate or the Federal Funds Rate plus 0.5%. The Amended Facility is fullycollateralized by a $6 million cash deposit. This cash deposit is reflected asrestricted cash on the Company’s consolidated balance sheet as of June 30, 2004and December 31, 2003. The Amended Facility contains no financial covenants,and matures in November 2004. As of June 30, 2004, there was $1,533,000 usedunder the Amended Facility in the form of standby letters of credit issued on behalfof one of the Company’s independent sales representative organizations and ascollateral for a portion of the Company’s U.S. premises leases. There were $1million in borrowings outstanding as of June 30, 2004.

 

Duringthe year 2003, the Company paid $368,000 in satisfaction of the terms of notespayable held by certain former shareholders of META Group Germany. The noteswere acquired when the Company acquired the remaining interest in META GroupGermany in September 2002.  As of June30, 2004, $580,000 remains payable under the notes, which are payable throughNovember 2008.

 

As ofJune 30, 2004 the Company had outstanding a corporate guarantee in the amountof €62,000 (approximately $76,000) guaranteeing lease payments to the landlordof one of the Company’s former independent sales representative organizations.In January 2002, the landlord called the guarantee. The claim is currentlybeing negotiated with the landlord. The Company is currently uncertain as towhen this issue will be resolved.

 

As ofJune 30, 2004, the Company had cash of $8.9 million, restricted cash of $6million 

 

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and negative working capital of $24.1 million. TheCompany generated a net loss of $1.1 million for the six months ended June 30,2004. To continue profitability, the Company will need to, among other things,achieve sustainable revenue growth and/or maintain expenses below revenuelevels. The Company cannot be certain whether any of these will continue tooccur. If the Company fails to either achieve sufficient revenue growth ormaintain expenses below revenue levels, any such failure will likely result incontinued losses that would have a material adverse effect on the Company’sfinancial statements.

* *

**The Company currently believesexisting cash balances, anticipated cash flows from operations and borrowingsunder its existing credit facility will be sufficient to meet its workingcapital and capital expenditure requirements for the next 12 months. TheCompany also believes that it has sufficient funds to maintain currentoperations and to complete its current projects and plans.  The Company intends to continue its efforts tomonitor its accounts receivable collections and manage expenses. However, theCompany also currently believes that if decreases in and delays of IT spendingcontinue, that together with competitive pricing pressure on the Company’sproducts and services, it will continue to negatively impact the Company’sbusiness.**

** **

On August 12,2004, the Company completed the sale of its 50.2% owned subsidiary in Hungaryand expects a pre-tax charge to earnings in the third quarter of approximately$400,000 related to the sale.  At June30, 2004, the Company did not consider its investment in Hungary to be impairedbased on analysis of the underlying assets and liabilities.

** **

**The following table summarizesthe Company’s contractual obligations and other commitments as of June 30, 2004and the effect such obligations are currently expected to have on its liquidityand cash flow in future periods (in thousands):**

** **
| ** **                                            | ** ** | **Twelve Months Ending December 31,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                            | ** ** | **2004(1)**                           | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **Thereafter** | ** ** |
| Operating leases                                      |       | $                                     | 3,474      |   | $ | 5,739 |   | $ | 5,083 |   | $ | 5,153 |   | $ | 2,244 |   | $ | 1,224 |   |
| Capital leases                                        |       | 175                                   |       | 361 |   | 151 |   | — |   | — |   | — |   |
| Notes payable                                         |       | 1,189                                 |       | 295 |   | 55 |   | 20 |   | 21 |   | — |   |
| Payments due under employment / severance  agreements |       | 108                                   |       | — |   | — |   | — |   | — |   | — |   |
|                                                  |       | $                                     | 4,946      |   | $ | 6,395 |   | $ | 5,289 |   | $ | 5,173 |   | $ | 2,265 |   | $ | 1,224 |   |

 

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**(1) Represents six months ending December 31, 2004.**

 

**Critical Accounting Policies**

 

Our significant accounting policies are described in Note 1 to ourconsolidated financial statements in our annual report on Form 10-K, asamended, for the year ended December 31, 2003. However, certain of ouraccounting policies are particularly important to the portrayal of ourfinancial position and results of operations and may require the application ofsignificant judgment by our management; as a result they are subject to aninherent degree of uncertainty. In applying those policies, our management usesits judgment to determine the appropriate assumptions to be used in thedetermination of certain estimates. Those estimates are based on our historicalexperience, our observance of trends in the industry, information provided byour 

 

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customers and information available from other outside sources, asappropriate. Our significant accounting policies include:

 

•                  RevenueRecognition – Revenues from our Advisory Services are recognized on astraight-line basis over the subscription contract period, generally one year.All subscription contracts are billable at signing, absent special termsgranted on a limited basis from time to time. As such, our policy is to recordat the time of signing of an Advisory Services subscription contract the feesreceivable and related deferred revenues for the full amount of thesubscription contract. Accounts receivable and deferred revenues that extendbeyond a 12-month period have been classified on the consolidated balancesheets as non-current. We also record the related sales commission obligationupon the signing of the subscription contract and amortize the correspondingdeferred commission expense over the subscription period in which the relatedAdvisory Services revenues are earned and amortized to income. We recognizerevenue on Strategic Consulting engagements on a contract by contract basis, asthe work is performed, utilizing the percentage of completion method for fixedfee projects, or as services are rendered for time and material projects. Theaverage duration of our consulting engagements is 2-3 months. Revenues fromPublished Research Products are recognized at the time the applicable productis delivered. Additionally, we record reductions to revenue for estimatedcustomer cancellations.

 

•                  Accounts Receivable Reserves – Wegenerally evaluate our accounts receivable on a monthly basis. As part of ouranalysis, we examine our collections history, the age of the receivables inquestion, any specific customer collection issues that we have identified, andgeneral market conditions. At June 30, 2004 and 2003, our total accountsreceivable balances were $29.0 million and $30.3 million, respectively. Basedupon our analysis of estimated recoveries and collections associated with thereceivables balances, we have $1.0 million and $2.2 million of accountsreceivable reserves at June 30, 2004 and 2003, respectively.  The determination of the amount of accountsreceivable reserves is subject to significant levels of judgment and estimationby our management.  If circumstanceschange or economic conditions deteriorate, we may need to increase the reserve.

 

•                  Deferred Tax Valuation Allowance – During 2002, werecorded a full valuation allowance against our deferred tax assets as a resultof our losses over our recent history. We considered future taxable incomeversus the cumulative losses incurred during the previous three years anddetermined that, in light of the cumulative losses over our recent history, wecould not support a conclusion that realization of the existing deferred taxassets was more likely than not. During the quarters ended June 30, 2004 and2003, there was no substantive change in the above circumstances. Should wedetermine that we would be able to realize our deferred tax assets in thefuture, an adjustment will be made to the valuation allowance.

 

•                  Goodwill Valuation - Effective January 1, 2002,we adopted Statement of Financial Accounting Standards No. 142, “Goodwilland Other Intangible Assets”**(“SFAS142”). SFAS 142 provides guidance on the financial accounting and reporting foracquired goodwill and other intangible assets. Under SFAS 142, goodwill andintangible assets deemed to have indefinite lives will no longer be amortized,but will be subject to 

 

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impairment tests on anannual basis, or more frequently if certain indicators arise.  Intangible assets with finite lives willcontinue to be amortized over their useful lives.

 

As of September 30, 2003we completed the annual impairment test for 2003 in accordance with the provisionsof SFAS 142.  There was no impairment ofgoodwill noted as a result of this test.

 

As of June 30, 2004, wehave on our consolidated balance sheet goodwill of $13.6 million associatedwith the Advisory Services segment and $0.9 million associated with theStrategic consulting segment. We will test this goodwill annually, or morefrequently if certain indicators arise.

 

**CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS**

 

From time to time, information provided by the Company or statementsmade by its employees may contain “forward-looking” statements.  In particular, this Form 10-Q containsforward-looking statements made pursuant to the safe harbor provisions of thePrivate Securities Litigation Reform Act of 1995.  Such forward-looking statements include statementsconcerning:

 

•                  informationtechnology spending;

•                  generaleconomic conditions;

•                  competitivepricing pressure;

•                  anticipatedexpense levels relative to the Company’s total revenues;

•                  workingcapital;

•                  capitalexpenditures and capital requirements;

•                  cashflows and cash balances;

 

Forward-looking statements also include statements that are nothistorical facts or statements using words such as “anticipate”, “believe”,“could”, “estimate”, “expect”, “intend”, “likely”, “may”, “opportunity”,“plan”, “potential”, “project”, “should” or “will”.

 

Forward-looking statements are neither promises nor guarantees, butinvolve risks and uncertainties that could have a material adverse effect onthe Company’s business, results of operations and financial condition or causeactual results to differ materially from those set forth in the forward-lookingstatements.  These risks anduncertainties include the items listed below, which are discussed in detail inthe Company’s annual report on Form 10-K, as amended, for the year endedDecember 31, 2003 filed with the Securities and Exchange Commission:

 

•                  theCompany’s ability to manage expense levels;

•                  generaleconomic conditions;

•                  decreasesand delays in information technology spending;

•                  productpricing limiting the potential market for the Company’s Advisory Services,Strategic Consulting and Published Research Products;

•                  thelevel and timing of subscription renewals to the Company’s Advisory Services;

•                  thelevel and timing of non-recurring Strategic Consulting engagements;

•                  thelevel and timing of production and delivery of Published Research Products;

•                  marketacceptance of and demand for the Company’s products and services and the timingthereof, both domestically and internationally;

 

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•                  theCompany’s ability to increase its penetration of existing customers and expandto additional customers;

•                  theCompany’s ability to deliver consistent, high-quality and timely analysis andadvice to its clients;

•                  theCompany’s ability to recruit, retain and develop research analysts,consultants, management and administrative staff;

•                  theCompany’s ability to anticipate changing market needs;

•                  fluctuationsin the Company’s operating results;

•                  changesin competitive conditions in the Company’s industry;

•                  theintegration of new businesses into the Company’s operations;

•                  theCompany’s ability to manage and fund its international operations;

•                  theCompany’s ability to find distributors for its products and services internationally;

•                  politicaland social turmoil in foreign markets and other international risks;

•                  goodwilland any impairment thereof;

•                  strategicinvestments and any impairment thereof;

•                  volatilityand unpredictability of the Company’s stock price; and

•                  otherrisks detailed in the Company’s filings with the Securities and ExchangeCommission.

 

Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date the statements weremade.  Readers are also advised toconsider such forward-looking statements in light of the risks anduncertainties discussed above.  TheCompany undertakes no obligation to update any forward-looking statementscontained in the Quarterly Report on Form 10-Q.

 

**Item 3****.**        **QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

*Interest RateRisk*

 

TheCompany’s exposure to market risk for changes in interest rates relatesprimarily to borrowings under its $6 million amended and restated creditfacility. As of June 30, 2004, there was $1 million in borrowings outstandingunder this facility. Interest on the facility is computed on outstandingborrowings at the rate of LIBOR as determined by the bank plus 1.5% or thehigher of the Prime Rate or the Federal Funds Rate plus 0.5%. The Companybelieves that an increase or a decrease of ten percent in the effectiveinterest rate on available borrowings on its facility, if fully utilized, wouldnot have a material effect on future results of operations.

 

*Investment Risk*

 

The Company is exposed to market risk as it relates to changes in themarket value of its investments. There were no impairment losses recognizedduring the quarter and six months ended June 30, 2004. As of June 30, 2004, theCompany had investments and advances totaling $1.0 million.  Adverse changes in market conditions and pooroperating results of the underlying investments may result in the Companyincurring additional losses or an inability to recover the remaining value ofits investments and advances.

 

*Foreign Currency Exchange Risk*

 

The Company is exposed to market risk as it relates to foreign currencyexchange rates. Revenues and expenses in foreign currencies translate intohigher or lower revenues and expenses in U.S. dollars as the U.S. dollarweakens or strengthens against foreign currencies. Changes in foreign currencyexchange rates may therefore negatively affect the Company’s consolidatedrevenues and expenses. 

 

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** **

Currency transaction gains or losses arising from transactions incurrencies other than the functional currency of the Company’s foreignsubsidiaries are included in the results of operations. Such gains and losseswere not material to the Company’s consolidated results of operations duringthe quarters and six month periods ended June 30, 2004 and 2003. The Companyhas not entered into foreign currency forward exchange contracts or otherderivative financial instruments to hedge the effects of adverse fluctuationsin foreign currency exchange rates.

 

**Item 4****.**        **CONTROLSAND PROCEDURES**

 

In accordance with Rule 13a-15(b) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), within 90days prior to the filing date of this report, the Company carried out anevaluation, under the supervision and with the participation of the Company’smanagement, including the Company’s President and Chief Operating Officer alongwith its Vice President and Chief Financial Officer, of the effectiveness ofthe design and operation of the Company’s disclosure controls and procedures(as defined in Rule 13a-14(c) under the Exchange Act). Based upon theirevaluation of these disclosure controls and procedures, the Company’s Presidentand Chief Operating Officer along with the Vice President and Chief FinancialOfficer concluded that the Company’s disclosure controls and procedures areeffective to ensure that information required to be disclosed by us in reportswe file under the Exchange Act is recorded, processed, summarized and reportedby management of the Company on a timely basis in order to comply with theCompany’s disclosure obligations under the Exchange Act and the SEC rulesthereunder.

 

## ***Changes in Internal Controls***

* *

*Therehave been no significant changes in the Company’s internal controls or otherfactors that could significantly affect internal controls subsequent to thedate the Company carried out this evaluation, including any corrective actionswith regard to significant deficiencies and material weaknesses.*

 

# **PART II**- OTHER INFORMATION

 

Item 4.    Submission of Matters to a Vote ofSecurity Holders.

 

*On May 24, 2004, the Company held its AnnualMeeting of Stockholders. At such Annual Meeting, the stockholders of theCompany voted on (i) the election of one Class III Director to serve for athree-year term and until his successor has been duly elected and qualified,(ii) the adoption of the Company’s 2004 Stock Plan and reservation of 600,000shares of Common Stock for issuance thereunder, plus (1) an additional 600,000shares (or such lesser number as is determined by the Board) on the first dayof each of the fiscal years 2005, 2006, 2007 and 2008 and (2) up to anadditional 1,500,000 shares that (a) remain available for issuance under theCompany’s 1995 Stock Plan upon termination of the 1995 Stock Plan, and (b) aresubject to options and other awards granted under the 1995 Stock Plan uponcancellation or expiration of such options and other awards, where suchcancellations or expirations occur after termination of the 1995 Stock Plan,(iii) the adoption of the Company’s 2004 Non-Employee Director Stock OptionPlan and the reservation of 225,000 shares for issuance thereunder and (iv) toratify the appointment of Deloitte & Touche LLP as the Company’sindependent registered public accounting firm for the fiscal year endingDecember 31, 2004.*

 

The number ofvotes cast for the re-election of the Class III Director listed below were asfollows:

 
| ** **      | ** ** | **Number of Shares** | ** ** |
|-----------------|------------|----------------------|------------|
| **Nominees**    | ** ** | **For**              | ** ** | **Against** | ** ** | **Withhold Authority** | ** ** |
| Michael Simmons |       | 4,997,554            |       | — |   | 1,897,976 |   |

* *

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* *

Each of Alfred Amoroso, Dale Kutnick, Gayl Doster, Francis Saldutti,Harry Gruner and Monte Ford continued as directors of the Company after theAnnual Meeting of Stockholders. In June 2004, Alfred Amoroso resigned from theBoard of Directors.

 

The number of votes cast for the 2004 Stock Plan were as follows:

 
| **Number of Shares** | ** ** |
|----------------------|------------|
| **For**              | ** ** | **Against** | ** ** | **Withhold Authority** | ** ** |
| 5,523,093            |       | 1,372,437 |   | — |   |

 

The number of votes cast for the 2004 Non-Employee Director Stock OptionPlan were as follows:

 
| **Number of Shares** | ** ** |
|----------------------|------------|
| **For**              | ** ** | **Against** | ** ** | **Withhold Authority** | ** ** |
| 5,608,580            |       | 1,283,113 |   | 3,837 |   |

 

*The number of votes cast to ratify the appointmentof Deloitte & Touche LLP as the Company’s independent registered publicaccounting firm were as follows:*

* *
| **Number of Shares** | ** ** |
|----------------------|------------|
| **For**              | ** ** | **Against** | ** ** | **Withhold Authority** | ** ** |
| 6,809,331            |       | 56,067 |   | 30,132 |   |

* *

Item 6.    Exhibits and Reports onForm 8-K.

 

(a)           Exhibits.

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                         |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                    |
| 10.45               |       | Transition and Severance Agreement, Amendment to Option Agreements  between Alfred J. Amoroso and META Group, Inc. |
| 31.1                |       | Certifications pursuant to Section 302(a) of the Sarbanes-Oxley Act  of 2002                                            |
| 32.1                |       | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of  2002                                                |

 

(b)           Reports on Form 8-K.

 

On May 6, 2004, the Company filed a report onForm 8-K in connection with the release of the Company’s results of operationsfor the quarter ended March 31, 2004.

 

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**SIGNATURE**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Company has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
| ** ** | ** **      | **META  Group, Inc.** |
|------------|-----------------|-----------------------|
|       |            |                  |   |
|       |            |                  |   |
| Date:      | August 13, 2004 | By:                   | /s/ John W. Riley |   |
|       |            |                  | John W. Riley |
|       |            |                  | Vice President, Chief Financial Officer,  Treasurer and Secretary |
|       |            |                  | (Principal Financial and Accounting Officer) |

 

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