**UNITEDSTATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**
| **(Mark One)** |
|----------------|
| ** **     |
| **x**          | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**For the quarterly period ended June 29, 2007**

**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 0-23651**

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**First Consulting Group, Inc.**

(Exact name of registrant as specified in its charter)

| **Delaware**                     |   | **95-3539020**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

**111 W.Ocean Blvd., 4****th**** Floor, Long Beach, CA  90802**

(Address of principal executive offices, including zip code)

**(562)624-5200**

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed sincelast report)

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 x  No o

**Indicate by check mark whether theregistrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerate filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct.**
| Large accelerated filer o | Accelerated filer x | Non-accelerated filer  o |
|---------------------------|---------------------|-------------------------------|

 

**Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act).**Yes o   No x

**Indicate the number of sharesoutstanding of each of the Registrant’s classes of common stock, as of thelatest practicable date.**

| **Common Stock, $.001 par value** |   | **27,065,211**                  |
|-----------------------------------|--------|---------------------------------|
| (Class)                           |   | (Outstanding at  July 27, 2007) |

 

 

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**First Consulting Group, Inc.**

**Table of Contents**
| COVER PAGE                                                                                          |                   |   |
|-----------------------------------------------------------------------------------------------------|------------------------|--------|
|                                                                                                |                   |   |
| TABLE OF CONTENTS                                                                                   |                   |
|                                                                                                |                   |   |
| PART I.                                                                                             | FINANCIAL  INFORMATION |   |
|                                                                                                |                   |   |
| ITEM 1. FINANCIAL STATEMENTS                                                                        |                   |
|                                                                                                |                   |
| Consolidated Balance Sheets                                                                         |                   |
|                                                                                                |                   |
| Consolidated Statements of Operations                                                               |                   |
|                                                                                                |                   |
| Consolidated Statements of Cash Flows                                                               |                   |
|                                                                                                |                   |
| 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  1. LEGAL PROCEEDINGS                                                                          |                   |
|                                                                                                |                   |
| ITEM  1A. RISK FACTORS                                                                              |                   |
|                                                                                                |                   |
| ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS                                |                   |
|                                                                                                |                   |
| ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                             |                   |
|                                                                                                |                   |
| ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS                                        |                   |
|                                                                                                |                   |
| ITEM  5. OTHER INFORMATION                                                                          |                   |
|                                                                                                |                   |
| ITEM 6.  EXHIBITS                                                                                   |                   |
|                                                                                                |                   |
| SIGNATURES                                                                                          |                   |
|                                                                                                |                   |
| EXHIBIT INDEX                                                                                       |                   |
|                                                                                                     |                        |        |  |

 

2

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# **Part I.  Financial Information**

## **Item1. Financial Statements**

**First Consulting Group, Inc. and Subsidiaries**

### **Consolidated Balance Sheets**

**(in thousands, except share andper share data)**

**(unaudited)**
| ** **                                                                                                         | ** ** | **June 29,  2007** | ** ** | **December 29,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                         | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                    | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Cash and cash  equivalents                                                                                         |       | $                       | 74,512     |                        | $          | 58,493 |   |
| Short-term  investments                                                                                            |       | 2,495                   |       | 5,004                       |       |
| Accounts  receivable, less allowance of $1,348 and $1,648 as of June 29, 2007 and  December 29, 2006, respectively |       | 19,417                  |       | 20,559                      |       |
| Unbilled  receivables                                                                                              |       | 15,827                  |       | 12,252                      |       |
| Prepaid expenses  and other current assets                                                                         |       | 5,033                   |       | 3,971                       |       |
| Total current  assets                                                                                              |       | 117,284                 |       | 100,279                     |       |
|                                                                                                               |       |                    |       |                        |       |
| Property and equipment:                                                                                            |       |                    |       |                        |       |
| Furniture,  equipment, and leasehold improvements                                                                  |       | 7,228                   |       | 6,905                       |       |
| Information  systems equipment and software                                                                        |       | 29,169                  |       | 29,874                      |       |
|                                                                                                               |       | 36,397                  |       | 36,779                      |       |
| Less accumulated  depreciation and amortization                                                                    |       | 27,133                  |       | 25,680                      |       |
|                                                                                                               |       | 9,264                   |       | 11,099                      |       |
|                                                                                                               |       |                    |       |                        |       |
| Other assets:                                                                                                      |       |                    |       |                        |       |
| Executive  benefit trust                                                                                           |       | 11,756                  |       | 11,079                      |       |
| Long-term  accounts receivable, net                                                                                |       | 2,298                   |       | 2,413                       |       |
| Long-term  investments                                                                                             |       | 2,788                   |       | 325                         |       |
| Deferred  contract costs                                                                                           |       | 8,502                   |       | 5,585                       |       |
| Goodwill, net                                                                                                      |       | 18,042                  |       | 17,820                      |       |
| Intangibles, net                                                                                                   |       | 324                     |       | 456                         |       |
| Other                                                                                                              |       | 1,780                   |       | 2,437                       |       |
|                                                                                                               |       | 45,490                  |       | 40,115                      |       |
| Total assets                                                                                                       |       | $                       | 172,038    |                        | $          | 151,493 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

3

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**First Consulting Group, Inc. and Subsidiaries**

**Consolidated Balance Sheets (Continued)**

**(inthousands, except share and per share data)**

**(unaudited)**
| ** **                                                                                                                                                                                 | ** ** | **June 29,  2007** | ** ** | **December 29,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                              | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current  liabilities:                                                                                                                                                                      | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Accounts payable                                                                                                                                                                           |       | $                       | 3,318      |                        | $          | 2,381 |   |
| Accrued liabilities                                                                                                                                                                        |       | 2,487                   |       | 2,377                       |       |
| Accrued payroll and payroll taxes                                                                                                                                                          |       | 3,159                   |       | 2,694                       |       |
| Accrued vacation                                                                                                                                                                           |       | 6,614                   |       | 5,975                       |       |
| Accrued employee benefits                                                                                                                                                                  |       | 3,642                   |       | 2,108                       |       |
| Accrued incentive compensation                                                                                                                                                             |       | 2,083                   |       | 937                         |       |
| Customer advances                                                                                                                                                                          |       | 15,413                  |       | 11,856                      |       |
| Taxes payable                                                                                                                                                                              |       | 4,325                   |       | 1,630                       |       |
| Total current liabilities                                                                                                                                                                  |       | 41,041                  |       | 29,958                      |       |
| Non-current  liabilities:                                                                                                                                                                  |       |                    |       |                        |       |
| Supplemental executive retirement plan                                                                                                                                                     |       | 8,483                   |       | 10,193                      |       |
|                                                                                                                                                                                       |       |                    |       |                        |       |
| Commitments and  contingencies                                                                                                                                                             |       | —                  |       | —                      |       |
|                                                                                                                                                                                       |       |                    |       |                        |       |
| Stockholders’  equity:                                                                                                                                                                |       |                    |       |                        |       |
| Preferred Stock, $.001 par value; 9,500,000 shares  authorized, no shares issued and outstanding                                                                                           |       | —                  |       | —                      |       |
| Series A Junior Participating Preferred Stock, $.001  par value; 500,000 shares authorized, no shares issued and outstanding                                                               |       | —                  |       | —                      |       |
| Common Stock, $.001 par value; 50,000,000 shares  authorized, 27,058,634 shares issued and outstanding at June 29, 2007 and  26,253,061 shares issued and outstanding at December 29, 2006 |       | 27                      |       | 26                          |       |
| Additional paid-in capital                                                                                                                                                                 |       | 107,153                 |       | 102,739                     |       |
| Retained earnings                                                                                                                                                                          |       | 14,779                  |       | 8,302                       |       |
| Accumulated other comprehensive income                                                                                                                                                     |       | 555                     |       | 275                         |       |
| Total stockholders’ equity                                                                                                                                                            |       | 122,514                 |       | 111,342                     |       |
| Total  liabilities and stockholders’ equity                                                                                                                                           |       | $                       | 172,038    |                        | $          | 151,493 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

4

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**First Consulting Group, Inc. and Subsidiaries**

### **Consolidated Statements of Operations**

**(in thousands, except per sharedata)**

**(unaudited)**
| ** **                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                     | ** ** | **June  29, 2007**          | ** ** | **June  30, 2006**        | ** ** | **June  29, 2007** | ** ** | **June  30, 2006** | ** ** |
| Revenues before  reimbursements                |       | $                                | 67,260     |                           | $          | 65,526 |   | $ | 134,175 |   | $ | 132,212 |   |
| Reimbursements                                 |       | 3,470                            |       | 3,491                          |       | 6,844 |   | 7,270 |   |
| Total revenues                                 |       | 70,730                           |       | 69,017                         |       | 141,019 |   | 139,482 |   |
|                                           |       |                             |       |                           |       |   |   |   |   |
| Cost of services  before reimbursable expenses |       | 49,322                           |       | 47,086                         |       | 98,919 |   | 95,679 |   |
| Reimbursable  expenses                         |       | 3,470                            |       | 3,491                          |       | 6,844 |   | 7,270 |   |
| Total cost of services                         |       | 52,792                           |       | 50,577                         |       | 105,763 |   | 102,949 |   |
|                                           |       |                             |       |                           |       |   |   |   |   |
| Gross profit                                   |       | 17,938                           |       | 18,440                         |       | 35,256 |   | 36,533 |   |
|                                           |       |                             |       |                           |       |   |   |   |   |
| Selling expenses                               |       | 4,274                            |       | 4,043                          |       | 8,296 |   | 8,422 |   |
| General and  administrative expenses           |       | 10,335                           |       | 9,274                          |       | 19,514 |   | 18,449 |   |
| Income from operations                         |       | 3,329                            |       | 5,123                          |       | 7,446 |   | 9,662 |   |
| Other income  (expense):                       |       |                             |       |                           |       |   |   |   |   |
| Interest income, net                           |       | 946                              |       | 425                            |       | 1,794 |   | 763 |   |
| Other income (expense), net                    |       | 15                               |       | 2                              |       | (11 | ) | (13 | ) |
| Income before income tax provision             |       | 4,290                            |       | 5,550                          |       | 9,229 |   | 10,412 |   |
| Income tax  provision                          |       | 1,116                            |       | 389                            |       | 2,400 |   | 729 |   |
| Net income                                     |       | $                                | 3,174      |                           | $          | 5,161 |   | $ | 6,829 |   | $ | 9,683 |   |
|                                           |       |                             |       |                           |       |   |   |   |   |
| Basic and  diluted net income per share:       |       |                             |       |                           |       |   |   |   |   |
| Basic net income per share                     |       | $                                | 0.12       |                           | $          | 0.21 |   | $ | 0.26 |   | $ | 0.39 |   |
| Diluted net income per share                   |       | 0.12                             |       | 0.20                           |       | 0.25 |   | 0.38 |   |
|                                           |       |                             |       |                           |       |   |   |   |   |
| Weighted average  shares used in computing:    |       |                             |       |                           |       |   |   |   |   |
| Basic net income per share                     |       | 26,879                           |       | 25,045                         |       | 26,718 |   | 24,875 |   |
| Diluted net  income per share                  |       | 27,386                           |       | 25,790                         |       | 27,444 |   | 25,350 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

5

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**First Consulting Group, Inc. and Subsidiaries**

### **Consolidated Statements of Cash Flows**

**(in thousands)**

**(unaudited)**
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **June 29,  2007**        | ** ** | **June 30,  2006** | ** ** |
| Cash flows from  operating activities:                                             |       |                           |       |   |   |
| Net income:                                                                        |       | $                              | 6,829      |   | $ | 9,683 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                      |       | 3,133                          |       | 3,604 |   |
| Intangible amortization                                                            |       | 312                            |       | 386 |   |
| Provision for bad debts                                                            |       | (300                           | )          | (100 | ) |
| Loss on sale/disposal of assets                                                    |       | 243                            |       | 374 |   |
| Stock-based compensation                                                           |       | 813                            |       | 347 |   |
| In-process research and development expenses  acquired                             |       | 1,580                          |       | — |   |
| Change in assets and liabilities:                                                  |       |                           |       |   |   |
| Accounts receivable                                                                |       | 1,442                          |       | (3,155 | ) |
| Unbilled receivables                                                               |       | (3,575                         | )          | (2,233 | ) |
| Prepaid expenses and other current assets                                          |       | (1,048                         | )          | (862 | ) |
| Long term accounts receivable                                                      |       | 115                            |       | (669 | ) |
| Deferred contract costs                                                            |       | (2,917                         | )          | (323 | ) |
| Other assets                                                                       |       | 635                            |       | (575 | ) |
| Accounts payable                                                                   |       | 937                            |       | 919 |   |
| Accrued liabilities                                                                |       | 110                            |       | (1,057 | ) |
| Accrued payroll and payroll taxes                                                  |       | 465                            |       | 1,318 |   |
| Accrued vacation                                                                   |       | 639                            |       | (872 | ) |
| Accrued employee benefits                                                          |       | 1,534                          |       | 223 |   |
| Accrued severance                                                                  |       | —                         |       | (2,797 | ) |
| Accrued incentive compensation                                                     |       | 1,146                          |       | 866 |   |
| Customer advances                                                                  |       | 3,557                          |       | 2,946 |   |
| Accrued restructuring costs                                                        |       | —                         |       | (1,692 | ) |
| Taxes payable                                                                      |       | 2,399                          |       | 411 |   |
| Supplemental executive retirement plan                                             |       | (2,387                         | )          | (683 | ) |
| Other                                                                              |       | (110                           | )          | (113 | ) |
| Net cash provided by operating activities                                          |       | 15,552                         |       | 5,946 |   |
| Cash flows from  investing activities:                                             |       |                           |       |   |   |
| Proceeds from sale/maturity of investments                                         |       | 46                             |       | — |   |
| Purchase of property and equipment                                                 |       | (1,379                         | )          | (2,410 | ) |
| Acquisition of business, net of cash                                               |       | (2,061                         | )          | — |   |
| Net cash used in investing activities                                              |       | (3,394                         | )          | (2,410 | ) |
| Cash flows from  financing activities:                                             |       |                           |       |   |   |
| Proceeds from issuance of capital stock, net                                       |       | 3,621                          |       | 4,011 |   |
| Collections of loan receivable                                                     |       | 3                              |       | 45 |   |
| Net cash provided by financing activities                                          |       | 3,624                          |       | 4,056 |   |
| Effect of exchange rate changes on cash and cash  equivalents                      |       | 237                            |       | 153 |   |
| Net change in cash and cash equivalents                                            |       | 16,019                         |       | 7,745 |   |
| Cash and cash  equivalents at beginning of period                                  |       | 58,493                         |       | 35,106 |   |
| Cash and cash  equivalents at end of period                                        |       | $                              | 74,512     |   | $ | 42,851 |   |
| Supplemental  disclosure of cash flow information                                  |       |                           |       |   |   |
| Cash paid during the period for interest                                           |       | $                              | 2          |   | $ | 5 |   |
| Cash paid during  the period for income taxes, net of refunds                      |       | $                              | 51         |   | $ | 318 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

6

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**First Consulting Group, Inc. and Subsidiaries**

### **Notes to Consolidated Financial Statements**

**June 29,2007**

**Note 1                    AccountingPolicies**

Basisof Presentation

The accompanying consolidated balance sheet of First Consulting Group,Inc. and subsidiaries (the “Company” or “FCG”) at June 29, 2007 andconsolidated statements of operations and consolidated statements of cash flowsfor the three-month and six-month periods ended June 29, 2007 and June 30, 2006are unaudited.  These interim financialstatements reflect all adjustments, consisting of only normal recurringadjustments, which, in the opinion of management, are necessary to fairlypresent the financial position of the Company at June 29, 2007 and the resultsof operations for the three-month and six-month periods ended June 29, 2007 andJune 30, 2006.  The results of operationsand cash flows for the three-month and six-month period ended June 29, 2007 arenot necessarily indicative of the results to be expected for the year endingDecember 28, 2007.  For more completefinancial information, these financial statements should be read in conjunctionwith the audited financial statements for the year ended December 29, 2006included in the Company’s Annual Report on Form 10-K.

Principlesof Consolidation

The consolidatedfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries. All material intercompany accounts and transactions have beeneliminated.  The Company operates on afiscal year consisting of a 52 or 53 week period ending on the last Friday inDecember.

Stock-BasedCompensation

*Restricted Stock*

A summary of restricted stock activity for the six months ended June29, 2007 is as follows:
|                               | ** ** | **Shares** | ** ** | **Weighted Average  Grant Date  Fair Value** | ** ** |
|-------------------------------|------------|------------|------------|-------------------------------------------------------------|------------|
| Balance at  December 29, 2006 |       | 130,000    |       | $                                                           | 8.49       |   |
| Grants                        |       | 260,100    |       | 13.31                                                       |       |
| Cancelled                     |       | (78,400    | )          | 11.66                                                       |       |
| Balance at June 29,  2007     |       | 311,700    |       | 11.71                                                       |       |
|                               |            |            |            |                                                             |            |  |

 

During the sixmonths ended June 29, 2007, the Company issued 260,100 shares of restrictedstock awards with a vesting period of three and four years to eight boardmembers and 42 vice presidents, respectively. For the three months ended June 29, 2007, the Company recognized$164,000 of compensation costs related to these awards of which $86,000 was acomponent of cost of services, $16,000 was a component of selling expense, and$62,000 was a component of general and administrative expense.  For the six months ended June 29, 2007, theCompany recognized $406,000 of compensation costs related to these awards ofwhich $196,000 was a component of cost of services, $35,000 was a component ofselling expense, and $175,000 was a component of general and administrativeexpense.  There was no such expense forthe six months ended June 30, 2006.  AtJune 29, 2007, there was $3.2 million of total unrecognized compensation costsrelated to unvested stock, which is expected to be recognized over a weightedaverage period of 3.7 years.

7

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*Accounting for Stock Options*

OnDecember 31, 2005, the Company adopted No. 123 (revised 2004),*“*Share-BasedPayment” (“SFAS 123R”) using the modified prospective transition method.  Upon adoption of SFAS 123R, the Companychanged its method of attributing the value of stock-based compensation expensefrom the multiple-option (i.e., accelerated) approach to the single-option(i.e., straight-line) method. Compensation expense for share-based awards granted throughDecember 30, 2005 continues to be subject to the acceleratedmultiple-option method, while compensation expense for share-based awardsgranted on or after December 31, 2005 is recognized using a straight-line,or single-option method.  The Companyrecognizes these compensation costs over the service period of the award, whichis generally the option vesting term of three to four years.

SFAS 123R requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates in orderto derive the Company’s best estimate of awards ultimately expected to vest.Forfeitures have been estimated based on the Company’s historical experience.

*Valuationand Expense Information under SFAS 123R*

As a result ofadopting SFAS 123R, expense associated with stock-based compensation for thethree and six months ended June 29, 2007 is $184,000 and $407,000,respectively, which had the effect of reducing operating income and net incomeby this amount, and reducing basic and diluted earnings per share by less than$0.01 for the three-month period and less than $0.02 for the six-monthperiod.  For the three and six monthsended June 30, 2006, the stock-based compensation was $154,000 and $347,000,respectively which had the effect of reducing basic and diluted earnings pershare by less than $0.01 for the three-month period and $0.01 for the six-monthperiod.

The following represents the cost classification of the stock-basedcompensation for the three and six months ended June 29, 2007 and June 30, 2006(in thousands):
|                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **June  29, 2007**          | ** ** | **June  30, 2006**        | ** ** | **June  29, 2007** | ** ** | **June  30, 2006** | ** ** |
| Cost of services                |       | $                                | 18         |                           | $          | 61 |   | $ | 53 |   | $ | 137 |   |
| Selling                         |       | 6                                |       | 30                             |       | 17 |   | 67 |   |
| General and  administrative     |       | 160                              |       | 63                             |       | 337 |   | 143 |   |
| Total  stock-based compensation |       | $                                | 184        |                           | $          | 154 |   | $ | 407 |   | $ | 347 |   |

 

Tax benefitsresulting from tax deductions in excess of the compensation cost recognized forthose options are classified as financing cash flows.  For the six months ended June 29, 2007 andJune 30, 2006, there were no tax benefits resulting from tax deductions inexcess of the compensation cost recognized. Because the Company maintained a full valuation allowance on itsdeferred tax assets, the Company did not recognize any tax benefit related tostock-based compensation expense for the six months ended June 29, 2007 andJune 30, 2006.

8

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The Company usesthe Black-Scholes option pricing model to value its options.  There were no options granted during the sixmonths ended June 29, 2007.  The fairvalue of the options granted during the six months ended June 30, 2006calculated using the Black-Scholes pricing model was $4.30 per share. Thefollowing assumptions were used in the Black-Scholes pricing model:
|                                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | **June 30, 2006**      | ** ** | **June 30, 2006**    | ** ** |
| Dividend yield                        |       | —                           |       | —                         |       |
| Expected  volatility                  |       | 0.46  – 0.56                |       | 0.46  - 0.59                   |       |
| Weighted average  expected volatility |       | 0.46                             |       | 0.47                           |       |
| Risk-free  interest rate              |       | 4.92%  - 5.02%                   |       | 4.28%  - 5.02%                 |       |
| Expected life                         |       | 5 to 6 years                     |       | 5 to 6 years                   |       |

 

Expectedvolatilities are based on the Company’s historical volatility of its commonshares over a period of time equal to the expected term of the stock option.The risk-free interest rate assumption is based upon observed interest ratesappropriate for the term of the stock option. The expected dividend yield iszero as the Company does not expect to pay dividends in the future.

Stock option activityfor the six months ended June 29, 2007 is as follows:
| ** **                        | ** ** | **Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Remaining  Contractual Life  (Years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------|------------|------------|------------|------------------------------------------------|------------|----------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  December 29, 2006 |       | 2,915,960  |       | $                                              | 7.73       |                                                                 |       |                            |       |   |
| Exercised                         |       | (626,163   | )          | $                                              | 5.88       |                                                                 |       |                            |       |   |
| Cancelled                         |       | (143,612   | )          | $                                              | 10.10      |                                                                 |       |                            |       |   |
| Outstanding at  June 29, 2007     |       | 2,146,185  |       | $                                              | 8.11       |                                                                 | 5.48       |                            | $          | 4,370,191 |   |
|                              |       |       |       |                                           |       |                                                                 |       |                            |       |
| Exercisable at June 29,  2007     |       | 1,610,619  |       | $                                              | 8.10       |                                                                 | 4.55       |                            | $          | 3,631,489 |   |

 

The aggregate intrinsic value in the table above representsthe total pre-tax intrinsic value, based on the Company’s closing stock priceof $9.50 on June 29, 2007, which would have been received by the optionholders had all option holders exercised their options on June 29, 2007.  This amount changes based on the fair marketvalue of the Company’s stock.  Totalintrinsic value of options exercised for the six months ended June 29, 2007 andJune 30, 2006 were $2.9 million and $1.2 million, respectively.  As of June 29, 2007, there was $1.8 million of totalunrecognized compensation cost related to unvested stock options.  This cost is expected to be recognized over aweighted average period of approximately 2.3 years.  

Basicand Diluted Net Income per Share

Basic net incomeper share is computed using the weighted average number of common sharesoutstanding.  Diluted net income pershare is computed using the assumption that stock options were exercised.  Dilution is computed by applying the treasurystock method. Under this method, options are assumed to be exercised at thebeginning of the period (or at the time of issuance, if later), and as if fundsobtained by the Company from such exercise were used by the Company to purchasecommon stock at the average market price during the period.

9

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The following represents a reconciliation of basic and diluted netincome per share for the three and six months ended June 29, 2007 and June 30,2006 (in thousands, except per share data):
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                             | ** ** | **June 29,  2007**          | ** ** | **June 30,  2006**        | ** ** | **June 29,  2007** | ** ** | **June 30,  2006** | ** ** |
| Net income                                             |       | $                                | 3,174      |                           | $          | 5,161 |   | $ | 6,829 |   | $ | 9,683 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Basic weighted  average number of shares outstanding   |       | 26,879                           |       | 25,045                         |       | 26,718 |   | 24,875 |   |
| Effect of  dilutive options and contingent shares      |       | 507                              |       | 745                            |       | 726 |   | 475 |   |
| Diluted weighted average number of shares  outstanding |       | 27,386                           |       | 25,790                         |       | 27,444 |   | 25,350 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Basic and  diluted net income per share:               |       |                             |       |                           |       |   |   |   |   |
| Diluted weighted average number of shares  outstanding |       | $                                | 0.12       |                           | $          | 0.21 |   | $ | 0.26 |   | $ | 0.39 |   |
| Diluted weighted  average number of shares outstanding |       | 0.12                             |       | 0.20                           |       | 0.25 |   | 0.38 |   |

 

For the three months ended June 29, 2007 and June 30, 2006, there were900,711 and 1,135,146 anti-dilutive outstanding stock options, respectively,excluded from the calculation of diluted income per share.  For the six months ended June 29, 2007 andJune 30, 2006, there were 787,395 and 1,952,065 anti-dilutive outstanding stockoptions, respectively, excluded from the calculation of diluted income pershare.

Useof Estimates

In preparingfinancial statements in conformity with accounting principles generallyaccepted in the United States of America, management is required to makeestimates and assumptions that affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities at the date ofthe financial statements, and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from thoseestimates.  On an ongoing basis,management evaluates its estimates, including those related to revenuerecognition, valuation of goodwill, stock-based compensation, long-lived andintangible assets, accrued liabilities, income taxes including the amount oftax asset valuation allowance required, facility closure costs, litigation anddisputes, and the allowance for doubtful accounts.

Management basesits estimates on historical experience and on various other assumptions thatare believed to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources.  Such estimates are subject to a number ofassumptions, risks, and uncertainties, many of which are beyond the Company’scontrol.  The Company’s actual resultsmay differ from its estimates.

Cash and Cash Equivalents

For purposes ofreporting, cash and cash equivalents include cash and interest-earning depositsor securities purchased with original maturities of three months or less.

Recent Accounting Pronouncements

*Fair Value Measurements*

InSeptember 2006 and February 2007, respectively, the FASB issued SFASNo. 157, “Fair Value Measurements” (“SFAS 157”), which provides guidancefor using fair value to measure assets and liabilities, and SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”(“SFAS 159”), which allows the measurement of many financial instruments andcertain other items at fair value. SFAS 157 will apply whenever another standard requires or permits assetsor liabilities to be measured at fair value. The standard does not expand theuse of fair value to any new circumstances. 

10

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SFAS 159 will permitcompanies to use fair value measurements in certain circumstances.  Both standards are effective for financialstatements issued for fiscal years beginning after November 15, 2007.  The Company is currently evaluating theimpact of SFAS 157 and SFAS 159 on its consolidated financial position andresults of operations.

*Accounting for Uncertainty inIncome Taxes*

In June 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes” (“FIN 48”).  FIN 48 clarifies theapplication of SFAS No. 109, “Accounting for Income Taxes”, by establishing athreshold condition that a tax position must meet for any part of the benefitof that position to be recognized in the financial statements.  In addition to recognition, FIN 48 providesguidance concerning measurement, de-recognition, classification, and disclosureof tax positions.  FIN 48 is effectivefor fiscal years beginning after December 15, 2006.  The Company adopted FIN 48 in the firstquarter of 2007 and recorded a cumulative effect adjustment of $352,000 whichwas accounted for as an adjustment to the beginning balance of retainedearnings.  See Note 8, “Income Taxes” foradditional information regarding such adoption.

**Note 2                    Investments**

The Company had$2.5 million in short-term investments and $2.5 million in long-terminvestments at June 29, 2007 and $5.0 million in short-term investments atDecember 29, 2006.  Such investments wereheld primarily in corporate notes and government agency securities.  Gross and net unrealized gains and losses oninvestments were immaterial at June 29, 2007. Additionally, the Company had $325,000 of non-marketable equityinvestments at June 29, 2007 and December 29, 2006, valued at the lower of costor estimated fair value, which were included within long-term investments.

**Note 3                    Long-TermAccounts Receivable**

The Company hadlong-term accounts receivable at June 29, 2007 and December 29, 2006 of $2.3million and $2.4 million.  Of thelong-term account receivable of $2.3 million at June 29, 2007, $1.3 million wascreated in August 2005 through the deferral until 2009 of the first month offees of a new outsourcing contract.  InJanuary 2006, an additional amount of approximately $800,000 related to thiscontract was deferred until 2009.  Bothdeferrals were in accordance with the terms of the contract executed with thisclient in July 2005.  Imputed interestincome at a rate of 7.0% of $79,000 was accrued during the first six months of2007 on this receivable.  Unamortizeddiscount of $438,000 remained at June 29, 2007.

**Note 4                    BusinessAcquisition**

On June 15, 2007,the Company acquired 100% of the outstanding common stock of Zorch, Inc.(Zorch), a Salt Lake City, Utah-based company that has developed a proprietaryenterprise software solution to provide regulated content management andcollaboration for the life sciences industry using the Microsoft OfficeSharePoint Server 2007 platform.  TheCompany paid $2.0 million in cash to the shareholders of Zorch.  Additionally, the shareholders may earn up to$2.0 million of additional consideration for the sale if the business achievescertain revenue targets during the period from acquisition through June 30,2008, and further consideration if operating income from the acquired businessexceeds 14% of revenues during an earnout period that commences in the secondhalf of 2008 and ends in the first quarter of 2011. The Company incurred aone-time charge of approximately $1.6 million during the second quarter offiscal year 2007 in recognition of acquired in-process software research anddevelopment expenses.

11

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The followingtable summarizes the estimated fair values of assets acquired as of June 15,2007 in connection with the Zorch acquisition (in thousands):
| Other current assets                 |   | $     | 14     |   |
|--------------------------------------|--------|-------|--------|--------|
| Property, plant,  and equipment      |   | 9     |   |
| Software                             |   | 180   |   |
| Goodwill                             |   | 278   |   |
| In-process  research and development |   | 1,580 |   |
| Cash  consideration                  |   | $     | 2,061  |   |

 

The accounts of Zorch have been included in theaccompanying financial statements for the period from June 16, 2007 throughJune 29, 2007.  Pro forma information asif Zorch had been acquired on January 1, 2006 has not been provided, since suchpro forma results do not differ materially from those reported in theaccompanying financial statements.

**Note 5                    Goodwilland Intangible Assets**

Under SFAS 142,the Company completes an annual impairment testing which is performed duringthe fourth quarter of each year.  The Company believes that the accountingassumptions and estimates related to the annual goodwill impairment testing arecritical because these can change from period to period.  Variousassumptions, such as discount rates, and comparable company analysis are usedin performing these valuations.  Theimpairment test requires the Company to forecast future cash flows, whichinvolves significant judgment.  Accordingly, if expectations of futureoperating results change, or if there are changes to other assumptions,estimates of the fair value of reporting units could change significantlyresulting in a goodwill impairment charge, which could have a significantimpact on the consolidated financial statements.  The Company performed animpairment test on each of its components of goodwill as of the fourth quarterof fiscal year 2006 and determined that none of its goodwill was impaired.  As of June 29, 2007, the Company had $18.0million of goodwill and $324,000 of amortizable intangible assets recorded onits balance sheet.

The amounts of goodwill at June 29, 2007 are as follows (in thousands):
| ** **                                      | ** ** | **Health  Delivery  Services** | ** ** | **Health  Delivery  Outsourcing** | ** ** | **Life  Sciences** | ** ** | **Software  Services** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|--------------------|------------|------------------------|------------|-----------|------------|
| Balance as of  December 29, 2006                |       | $                              | 3,225      |                              | $          | 5,193              |       | $                      | 1,481      |      | $          | 7,921 | ** ** | **$** | **17,820** | ** ** |
| Acquired                                        |       | —                         |       | —                            |       | 278                |       | —                 | ** ** | **278**   | ** ** |
| Use of acquired net operating loss carryforward |       | —                         |       | —                            |       | —             |       | (56                    | )          | **(56**   | **)**      |
| Balance as of June 29,  2007                    |       | $                              | 3,225      |                              | $          | 5,193              |       | $                      | 1,759      |      | $          | 7,865 | ** ** | **$** | **18,042** | ** ** |

 

As of June 29, 2007, the Company had the following acquired intangibleassets (in thousands):
|                                  | ** ** | **Customer Related** | ** ** | **Software** | ** ** | **Total** | ** ** |
|----------------------------------|------------|---------------------------|------------|--------------|------------|-----------|------------|
| Balance as of  December 29, 2006 |       | $                         | 456        |         | $          | —    | ** ** | **$** | **456** | ** ** |
| Acquired                         |       |                      |       | 180          | ** ** | **180**   | ** ** |
| Amortization                     |       | (312                      | )          | —       | ** ** | **(312**  | **)**      |
| Balance as of  June 29, 2007     |       | $                         | 144        |         | $          | 180       |       | $ | 324 |   |
| Amortization Period in  Years    |       | 4                         |       | 5            |       |      |       |

 

The remaining$144,000 of customer related intangible assets at June 29, 2007 is scheduled tobe amortized in full during fiscal year 2007.

12

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**Note 6                    ComprehensiveIncome**

Comprehensive income, net of taxes, for the three and six months endedJune 29, 2007 and June 30, 2006, is as follows (in thousands):
|                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | **June 29,  2007**          | ** ** | **June 30,  2006**        | ** ** | **June 29,  2007** | ** ** | **June 30,  2006** | ** ** |
| Net income                               |       | $                                | 3,174      |                           | $          | 5,161 |   | $ | 6,829 |   | $ | 9,683 |   |
|                                     |       |                             |       |                           |       |   |   |   |   |
| Foreign currency  translation adjustment |       | 251                              |       | 5                              |       | 281 |   | 10 |   |
| Unrealized loss  on investments          |       | —                           |       | (6                             | )          | (1 | ) | (12 | ) |
| Other  comprehensive loss, net of tax    |       | 251                              |       | (1                             | )          | 280 |   | (2 | ) |
|                                     |       |                             |       |                           |       |   |   |   |   |
| Comprehensive income                     |       | $                                | 3,425      |                           | $          | 5,160 |   | $ | 7,109 |   | $ | 9,681 |   |

 

**Note 7                    Disclosureof Segment Information**

For fiscal year2007, the Company has the following six reportable segments:

·                  HealthDelivery Services - the delivery of consulting and systems integration servicesto health delivery and government clients;

·                  HealthDelivery Outsourcing - the delivery of outsourcing services to health deliveryclients;

·                  LifeSciences - the sale of enterprise content management software and the deliveryof related consulting and systems integration services to pharmaceutical andother life sciences clients;

·                  HealthPlans - the delivery of consulting and systems integration services andoutsourcing services to health plan clients;

·                  SoftwareServices - the delivery of blended shore software development; and

·                  SoftwareProducts - the delivery of solutions involving the use of software to healthdelivery clients.

Additionally, theCompany has four shared service centers that provide services to multiplebusiness segments.  These shared servicecenters include FCG India, FCG Vietnam, Integration Services, andInfrastructure Services.  The costs ofthese services are internally billed and reported in the individual businesssegments as cost of services at a standard transfer cost.

The Companyevaluates its segments’ performance based on revenues and operatingincome.  Certain selling and general andadministrative expenses (including corporate functions, occupancy relatedcosts, depreciation, professional development, recruiting, and marketing) aremanaged at the corporate level and allocated to each operating segment based oneither net revenues and/or actual usage. The Company does not manage or track most assets by segment.  As a result, interest and other charges arenot included in the tables below.

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The followingsegment information is for the three months and six months ended June 29, 2007and June 30, 2006 (inthousands):

**For thethree months ended June 29, 2007:**
| **(in thousands)**                       | ** ** | **Health  Delivery  Services** | ** ** | **Health  Delivery  Outsourcing** | ** ** | **Life  Sciences** | ** ** | **Health  Plans** | ** ** | **Software  Services** | ** ** | **Software  Products** | ** ** | **Other** | ** ** | **Totals** | ** ** |
|-----------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|--------------------|------------|-------------------|------------|------------------------|------------|------------------------|------------|-----------|------------|------------|------------|
|                                          |       |                           |       |                              |       |               |       |              |       |                   |       |                   |       |      | ** ** | ** ** | ** ** |
| Revenues before reimbursements                |       | $                              | 15,159     |                              | $          | 28,336             |       | $                 | 9,582      |                   | $          | 7,714                  |       | $         | 5,978      |       | $          | 491 |   | $ | — | ** ** | **$** | **67,260** | ** ** |
| Reimbursements                                |       | 2,354                          |       | 159                               |       | 101                |       | 743               |       | 109                    |       | 4                      |       | —    | ** ** | **3,470**  | ** ** |
| Total revenues                                |       | 17,513                         |       | 28,495                            |       | 9,683              |       | 8,457             |       | 6,087                  |       | 495                    |       | —    | ** ** | **70,730** | ** ** |
| Cost of services before reimbursable expenses |       | 9,611                          |       | 24,633                            |       | 3,904              |       | 5,571             |       | 4,466                  |       | 768                    |       | 369       | ** ** | **49,322** | ** ** |
| Reimbursable expenses                         |       | 2,354                          |       | 159                               |       | 101                |       | 743               |       | 109                    |       | 4                      |       | —    | ** ** | **3,470**  | ** ** |
| Total cost of services                        |       | 11,965                         |       | 24,792                            |       | 4,005              |       | 6,314             |       | 4,575                  |       | 772                    |       | 369       | ** ** | **52,792** | ** ** |
| Gross profit                                  |       | 5,548                          |       | 3,703                             |       | 5,678              |       | 2,143             |       | 1,512                  |       | (277                   | )          | (369      | )          | **17,938** | ** ** |
| Selling expenses                              |       | 1,561                          |       | 191                               |       | 1,199              |       | 656               |       | 556                    |       | 182                    |       | (71       | )          | **4,274**  | ** ** |
| General & administrative expenses         |       | 2,112                          |       | 2,008                             |       | 3,965              |       | 1,159             |       | 572                    |       | 298                    |       | 221       | ** ** | **10,335** | ** ** |
|                                          |       |                           |       |                              |       |               |       |              |       |                   |       |                   |       |      | ** ** | ** ** | ** ** |
| Income (loss) from operations                 |       | $                              | 1,875      |                              | $          | 1,504              |       | $                 | 514        |                   | $          | 328                    |       | $         | 384        |       | $          | (757 | ) | $ | (519 | ) | **$** | **3,329** | ** ** |

 

**For thethree months ended June 30, 2006:**
| **(in thousands)**                       | ** ** | **Health  Delivery  Services** | ** ** | **Health  Delivery  Outsourcing** | ** ** | **Life  Sciences** | ** ** | **Health  Plan** | ** ** | **Software  Services** | ** ** | **Software  Products** | ** ** | **Other** | ** ** | **Totals** | ** ** |
|-----------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|--------------------|------------|------------------|------------|------------------------|------------|------------------------|------------|-----------|------------|------------|------------|
|                                          |       |                           |       |                              |       |               |       |             |       |                   |       |                   |       |      | ** ** | ** ** | ** ** |
| Revenues before reimbursements                |       | $                              | 15,020     |                              | $          | 26,780             |       | $                | 8,339      |                   | $          | 7,410                  |       | $         | 6,782      |       | $          | 787 |   | $ | 408 | ** ** | **$** | **65,526** | ** ** |
| Reimbursements                                |       | 2,178                          |       | 32                                |       | 188                |       | 938              |       | 135                    |       | 18                     |       | 2         | ** ** | **3,491**  | ** ** |
| Total revenues                                |       | 17,198                         |       | 26,812                            |       | 8,527              |       | 8,348            |       | 6,917                  |       | 805                    |       | 410       | ** ** | **69,017** | ** ** |
| Cost of services before reimbursable expenses |       | 9,277                          |       | 23,044                            |       | 4,545              |       | 5,302            |       | 3,976                  |       | 670                    |       | 272       | ** ** | **47,086** | ** ** |
| Reimbursable expenses                         |       | 2,178                          |       | 32                                |       | 188                |       | 938              |       | 135                    |       | 18                     |       | 2         | ** ** | **3,491**  | ** ** |
| Total cost of services                        |       | 11,455                         |       | 23,076                            |       | 4,733              |       | 6,240            |       | 4,111                  |       | 688                    |       | 274       | ** ** | **50,577** | ** ** |
| Gross profit                                  |       | 5,743                          |       | 3,736                             |       | 3,794              |       | 2,108            |       | 2,806                  |       | 117                    |       | 136       | ** ** | **18,440** | ** ** |
| Selling expenses                              |       | 1,709                          |       | 270                               |       | 846                |       | 564              |       | 501                    |       | 123                    |       | 30        | ** ** | **4,043**  | ** ** |
| General & administrative expenses         |       | 2,591                          |       | 1,950                             |       | 2,076              |       | 1,014            |       | 764                    |       | 247                    |       | 632       | ** ** | **9,274**  | ** ** |
|                                          |       |                           |       |                              |       |               |       |             |       |                   |       |                   |       |      | ** ** | ** ** | ** ** |
| Income (loss) from operations                 |       | $                              | 1,443      |                              | $          | 1,516              |       | $                | 872        |                   | $          | 530                    |       | $         | 1,541      |       | $          | (253 | ) | $ | (526 | ) | **$** | **5,123** | ** ** |

 

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**For the sixmonths ended June 29, 2007:**
| **(in thousands)**                       | ** ** | **Health  Delivery  Services** | ** ** | **Health  Delivery  Outsourcing** | ** ** | **Life  Sciences** | ** ** | **Health  Plans** | ** ** | **Software  Services** | ** ** | **Software  Products** | ** ** | **Other** | ** ** | **Totals**  | ** ** |
|-----------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|--------------------|------------|-------------------|------------|------------------------|------------|------------------------|------------|-----------|------------|-------------|------------|
|                                          |       |                           |       |                              |       |               |       |              |       |                   |       |                   |       |      | ** ** | ** **  | ** ** |
| Revenues before reimbursements                |       | $                              | 29,765     |                              | $          | 56,624             |       | $                 | 18,272     |                   | $          | 16,015                 |       | $         | 12,523     |        | $          | 976 |   | $ | — | ** ** | **$** | **134,175** | ** ** |
| Reimbursements                                |       | 4,595                          |       | 229                               |       | 221                |       | 1,558             |       | 236                    |       | 5                      |       | —    | ** ** | **6,844**   | ** ** |
| Total revenues                                |       | 34,360                         |       | 56,853                            |       | 18,493             |       | 17,573            |       | 12,759                 |       | 981                    |       | —    | ** ** | **141,019** | ** ** |
| Cost of services before reimbursable expenses |       | 19,133                         |       | 49,771                            |       | 7,655              |       | 11,545            |       | 9,211                  |       | 1,372                  |       | 232       | ** ** | **98,919**  | ** ** |
| Reimbursable expenses                         |       | 4,595                          |       | 229                               |       | 221                |       | 1,558             |       | 236                    |       | 5                      |       | —    | ** ** | **6,844**   | ** ** |
| Total cost of services                        |       | 23,728                         |       | 50,000                            |       | 7,876              |       | 13,103            |       | 9,447                  |       | 1,377                  |       | 232       | ** ** | **105,763** | ** ** |
| Gross profit                                  |       | 10,632                         |       | 6,853                             |       | 10,617             |       | 4,470             |       | 3,312                  |       | (396                   | )          | (232      | )          | **35,256**  | ** ** |
| Selling expenses                              |       | 3,141                          |       | 547                               |       | 2,064              |       | 1,221             |       | 1,128                  |       | 363                    |       | (168      | )          | **8,296**   | ** ** |
| General & administrative expenses         |       | 4,081                          |       | 3,992                             |       | 5,973              |       | 2,177             |       | 1,513                  |       | 511                    |       | 1,267     | ** ** | **19,514**  | ** ** |
|                                          |       |                           |       |                              |       |               |       |              |       |                   |       |                   |       |      | ** ** | ** **  | ** ** |
| Income (loss) from operations                 |       | $                              | 3,410      |                              | $          | 2,314              |       | $                 | 2,580      |                   | $          | 1,072                  |       | $         | 671        |        | $          | (1,270 | ) | $ | (1,331 | ) | **$** | **7,446** | ** ** |

 

**For the sixmonths ended June 30, 2006:**
| **(in thousands)**                       | ** ** | **Health  Delivery  Services** | ** ** | **Health  Delivery  Outsourcing** | ** ** | **Life  Sciences** | ** ** | **Health  Plan** | ** ** | **Software  Services** | ** ** | **Software  Products** | ** ** | **Other** | ** ** | **Totals**  | ** ** |
|-----------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|--------------------|------------|------------------|------------|------------------------|------------|------------------------|------------|-----------|------------|-------------|------------|
|                                          |       |                           |       |                              |       |               |       |             |       |                   |       |                   |       |      | ** ** | ** **  | ** ** |
| Revenues before reimbursements                |       | $                              | 31,554     |                              | $          | 54,213             |       | $                | 16,086     |                   | $          | 14,233                 |       | $         | 13,341     |        | $          | 1,745 |   | $ | 1,040 | ** ** | **$** | **132,212** | ** ** |
| Reimbursements                                |       | 4,642                          |       | 69                                |       | 399                |       | 1,854            |       | 265                    |       | 31                     |       | 10        | ** ** | **7,270**   | ** ** |
| Total revenues                                |       | 36,196                         |       | 54,282                            |       | 16,485             |       | 16,087           |       | 13,606                 |       | 1,776                  |       | 1,050     | ** ** | **139,482** | ** ** |
| Cost of services before reimbursable expenses |       | 19,423                         |       | 47,090                            |       | 9,290              |       | 9,853            |       | 8,045                  |       | 1,482                  |       | 496       | ** ** | **95,679**  | ** ** |
| Reimbursable expenses                         |       | 4,642                          |       | 69                                |       | 399                |       | 1,854            |       | 265                    |       | 31                     |       | 10        | ** ** | **7,270**   | ** ** |
| Total cost of services                        |       | 24,065                         |       | 47,159                            |       | 9,689              |       | 11,707           |       | 8,310                  |       | 1,513                  |       | 506       | ** ** | **102,949** | ** ** |
| Gross profit                                  |       | 12,131                         |       | 7,123                             |       | 6,796              |       | 4,380            |       | 5,296                  |       | 263                    |       | 544       | ** ** | **36,533**  | ** ** |
| Selling expenses                              |       | 3,929                          |       | 432                               |       | 1,729              |       | 1,037            |       | 975                    |       | 241                    |       | 79        | ** ** | **8,422**   | ** ** |
| General & administrative expenses         |       | 5,011                          |       | 3,833                             |       | 4,237              |       | 2,117            |       | 1,558                  |       | 505                    |       | 1,188     | ** ** | **18,449**  | ** ** |
|                                          |       |                           |       |                              |       |               |       |             |       |                   |       |                   |       |      | ** ** | ** **  | ** ** |
| Income (loss) from operations                 |       | $                              | 3,191      |                              | $          | 2,858              |       | $                | 830        |                   | $          | 1,226                  |       | $         | 2,763      |        | $          | (483 | ) | $ | (723 | ) | **$** | **9,662** | ** ** |

 

The “other” column includes reclassifications related to the charging outof the shared service centers described above, with the net loss in that columnprimarily consisting of under absorption of shared service centers or supportcosts into the segments.

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**Note 8                    IncomeTaxes**

The Company recorded a $1.1 million and $2.4 million tax provision forthe three and six months ended June 29, 2007 versus a $389,000 and $729,000 taxprovision for the three and six months ended June 30, 2006.

The 7% tax provision for the six months ended June 30, 2006 was onlyfor current taxes payable for U.S. federal alternative minimum tax and certainstate and foreign income taxes, as the net operating loss carryforwards offsetmost of the federal and certain state tax liabilities.  Since these carryforwards have a fullvaluation allowance applied against them, their use reduces the income taxrate.

The estimated tax rate in fiscal year 2007 of 26% hasincreased significantly from the rate experienced in fiscal year 2006 as theCompany exhausts its remaining loss carryforwards.  During 2007, when the Company’s losscarryforwards are covering only a part of the expected pretax income, theestimated full year tax rate may be more volatile than typical as changes inthe estimated level of pretax income will significantly impact the tax rate.

The Company adopted the provisions of FASBInterpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes” onthe first day of fiscal year 2007.  As aresult of the implementation of FIN 48, the Company recognized a $352,000increase to its liability for uncertain tax positions, which was accounted foras an adjustment to the beginning balance of retained earnings.  Including the amount recognized upon adoptionat December 30, 2006, the Company had approximately $1.8 million of liabilitiesfor unrecognized tax positions, all of which, if recognized, would favorablyaffect the Company’s effective income tax rate.

The Company recognizes interest related to uncertaintax positions as part of interest expense, and penalties as a component ofincome tax expense.  As of the first dayof fiscal year 2007, the Company had accrued interest and penalty ofapproximately $500,000 associated with its uncertain tax positions.  During the three and six months ended June29, 2007, the Company recorded an additional $51,000 and $101,000 of interestfor uncertain tax positions within interest expense.

The Company files a consolidated federal income taxreturn and income tax returns with various states and foreign countries.  The Company is currently not underexamination by the Internal Revenue Service and is no longer subject to federalincome tax examination for years before 2003. However, the Company is undergoing income tax audits with various statesand the earliest open tax year under examination in any such state is 1999.

**Note 9                    HealthPlans Outsourcing Contract**

In April 2006, the Company began a $12 million outsourcing contract inthe Health Plans segment.  This contractrequires the Company to complete a system implementation prior to beginning theoperations phase of the contract.  Sincethe fair value of the operations phase is difficult to objectively verify inorder to separately account for it under EITF 00-21, the Company is accountingfor the arrangement as a single outsourcing service arrangement.  The implementation phase of this contract isbeing accounted for as deferred cost, and all revenue from the implementationwill be recognized over the period of outsourcing operations.  As a result, the Company expects to receiveapproximately $7 million of cash which is being accounted for as a customeradvance prior to earning revenue on the contract, and the Company’s deferredcosts on the balance sheet are increasing accordingly.  Management estimates that the implementationwill be completed in May 2008.  As ofJune 29, 2007, the Company had deferred $5.3 million of costs and $3.4 millionof customer advances under this contract.

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## **Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

THE FOLLOWINGMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THEPRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.  SUCH FORWARD-LOOKING STATEMENTS INVOLVE RISKSAND UNCERTAINTIES, INCLUDING THOSE SET FORTH IN ITEM 1A OF PART II OF THISREPORT UNDER THE CAPTION “RISK FACTORS,” AND OTHER REPORTS WE FILE WITH THESECURITIES AND EXCHANGE COMMISSION.  OURACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESEFORWARD-LOOKING STATEMENTS.

**Overview**

We provideservices primarily to providers, payors, government agencies, pharmaceutical,biogenetic, and other healthcare organizations in North America, Europe, andAsia.  We generate substantially all ofour revenues from fees for information technology outsourcing services andprofessional services.

We typicallybill for our services on an hourly or fixed-fee basis as specified by theagreement with a particular client.  Inour consulting and systems integration (“CSI”) businesses, we often bill ourservices on an hourly basis, by multiplying the amount of time expended on eachassignment by the project hourly rate for the staff members assigned to theengagement.  Fixed fees, includingoutsourcing fees, are established on a per-assignment or monthly basis and arebased on several factors such as the size, scope, complexity and duration of anassignment, the number of our employees required to complete the assignment,and the volume of transactions or interactions. Revenues are generally recognized based on the level of servicesperformed, the amount of cost incurred on the assignment versus the estimatedtotal cost to complete the assignment, or on a straight-line basis over theperiod of performance of service. Additionally, we have been licensing a gradually increasing amount ofour software products, generally in conjunction with the customization andimplementation of such software products. Revenues from our software licensing and maintenance were approximately4.5% and 4.3% of our net revenues during the first six months of 2007 and 2006,respectively.  We expect our softwarelicensing and related implementation revenues to continue to grow incrementallyin the near future.

Provisions aremade for estimated uncollectible amounts based on our historicalexperience.  We may obtain payment inadvance of providing services.  Theseadvances are recorded as customer advances and reflected as a liability on ourbalance sheet until services are provided. Provisions for estimated losses on individual contracts are made in theperiod in which the loss first becomes known.

Out-of-pocketexpenses billed and reimbursed by clients are included in total revenues, andthen deducted to determine revenues before reimbursements (“net revenues”).  For purposes of analysis, all percentages ofrevenues in this discussion are stated as a percentage of net revenues, sincewe believe that this is the more relevant measure of our business.

Cost of servicesprimarily consists of the salaries, bonuses, and related benefits ofclient-serving staff, subcontractor expenses, and infrastructure costs relatedto services provided to clients and in our offshore shared service center.  Selling expenses primarily consist of thesalaries, benefits, travel, and other costs of our sales force, as well asmarketing and market research expenses. General and administrative expenses primarily consist of costs tosupport our business such as non-billable travel, internal information systemsand infrastructure, salaries and expenses for executive management, financialaccounting and administrative personnel, and legal and other professionalservices.  As staff related costs arerelatively fixed in the short term, variations in our revenues and operatingresults in our

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CSI business can occur asa result of variations in billing margins and utilization rates of our billableassociates.

Our most significant expenses are our human resourceand related salary and benefit expenses. As of June 29, 2007, approximately 1,562 of our 2,652 employees arebillable consultants and software developers. Another 742 employees are part of our outsourcing business.  The salaries and benefits of such billablestaff and outsourcing related employees are recognized in our cost ofservices.  Most non-billable employeesalaries and benefits are recognized as a component of either selling or generaland administrative expenses.  Approximately13.1% of our workforce, or 348 employees, are classified as non-billable.  Our cost of services as a percentage of netrevenues is directly related to several factors, including, but not limited to:

·                  Our staff utilization, which is theratio of total billable hours to available work hours in a given period;

·                  The amount and timing of costs incurred;

·                  Our ability to control costs on ouroutsourcing projects;

·                  The billed rate on time and materialcontracts; and

·                  The estimated cost to complete ournon-outsourcing fixed price contracts.

In our outsourcing contracts, a significant portion ofour revenues are fixed and allocated over the contract on a straight-linebasis, as we are required to provide a specified level of ongoingservices.  Also, certain revenues mayfluctuate under the contracts based on the volume of transactions we process orother measurements of service provided. If we incur higher costs to provide the required services or receiveless revenue due to reduced transaction volumes or penalties associated withservice level failures, our gross profit can be negatively impacted.

In our CSIbusiness, we manage staff utilization by monitoring assignment requirements andtimetables, available and required skills, and available staff hours per weekand per month.   Differences in personnelutilization rates can result from variations in the amount of non-billed time,which has historically consisted of training time, vacation time, time lost toillness and inclement weather, and unassigned time.  Non-billed time also includes time devoted toother necessary and productive activities such as sales support andinterviewing prospective employees. Unassigned time results from differences in the timing of the completionof an existing assignment and the beginning of a new assignment.  In order to reduce and limit unassigned time,we actively manage personnel utilization by monitoring and projecting estimatedengagement start and completion dates and matching staff availability withcurrent and projected client requirements. The number of people staffed on an assignment will vary according to thesize, complexity, duration, and demands of the assignment.  Assignment terminations, completions,inclement weather, and scheduling delays may result in periods in which staffmembers are not optimally utilized.  Anunanticipated termination of a significant assignment or an overall lengtheningof the sales cycle could result in a higher than expected number of unassignedstaff members and could cause us to experience lower margins.  In addition, entry into new market areas andthe hiring of staff in advance of client assignments have resulted and maycontinue to result in periods of lower staff utilization.

In response tocompetition and continued pricing and rate pressures, we have implemented aglobal sourcing strategy into our business operations, which includes thedeployment of offshore resources as well as resources that perform servicesremote from the client site.  We alsoincorporate larger numbers of variable cost or per diem staff in some of ourprojects.  We expect these strategies tocontinue to reduce cost of services through a combination of lower costattributable to offshore resources and higher leverage of resources thatperform services offsite or on a variable cost basis.  To the extent we pass through reduced coststo our clients related to offshore resources, the global sourcing strategy mayresult in lower revenues on a per engagement basis. However, we expect tooffset this potential revenue impact with improved competitive positioning inour markets, which could result in an increased number

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of engagements to offsetthe potential revenue impact.  Several ofour competitors employ both global sourcing and variable staffing strategies toprovide software development and other information technology services to theirclients, while at the same time reducing their cost structure and improving thequality of services they provide.  If weare unable to realize the perceived cost benefits of our strategies or if weare unable to deliver quality services, our business may be adversely impactedand we may not be able to compete effectively.

**Resultsof Operations for the Three Months Ended June 29, 2007 and June 30, 2006**

*Revenues. *Our net revenues were $67.3 million for thequarter ended June 29, 2007, an increase of 2.6% from $65.5 million for thequarter ended June 30, 2006.  Our totalrevenues were $70.7 million for the quarter ended June 29, 2007, an increase of2.5% from $69.0 million for the quarter ended June 30, 2006.  The increase in revenues was primarily due toincreases in Health Delivery Outsourcing and Life Sciences offset by a decreasein Software Services.  Health DeliveryOutsourcing revenues grew by $1.6 million, or 5.8%, compared to the quarterended June 30, 2006, while Life Sciences revenue grew by $1.2 million, or14.9%.  The increase in Health DeliveryOutsourcing revenues was due to slightly higher revenues at several of ourlarger existing clients, while Life Sciences revenues increased due to moreextensive implementation work being performed for our FirstDoc® softwareclients.  Software Services revenuesdecreased by $804,000, or 11.9%, as several of our larger clients have been acquiredby other entities or reduced their scope of operations utilizing our servicesover the past year.

One of our existing major outsourcing contracts, University ofPennsylvania Health System (UPHS), expired on March 31, 2007, and UPHS informedus in April 2007 that the contract would not be renewed.  Under the terms of the contract, theengagement automatically converted to a six-month period of post-expirationtransition services.  We have beenworking with UPHS on a transition plan. The expiring contract accounted for $26.7 million of our revenuesin fiscal year 2006 and $8.3 million of our revenues in the second quarter of2007, of which $5.3 million and $1.1 million, respectively, were zero-margin,pass-through revenue to a major infrastructure subcontractor.  The impact of the expiration of that contracton our revenues is uncertain at this time, and is dependent upon the futurelevel of continuing services, if any, that UPHS decides to purchase fromus.  In any event, we expect lowerrevenues in our Health Delivery Outsourcing business unit starting in thefourth quarter of 2007, as many of the services we are performing on anoutsourced basis transition back to the client.

Revenues in our other business units are not expected to changesignificantly from current levels in the near future, with some modest growthexpected in Life Sciences and Health Plans. Growth in Health Delivery Services and in Health Delivery Outsourcing(exclusive of the UPHS contract) is highly dependent on capturing market sharethrough our restructured sales model and acceptance by the health deliverymarket of our global delivery model and clinical advisory services.  We also expect to continue to experienceweakness in Software Services revenues similar to what we have experienced sofar in this fiscal year.  The market forour services in this business segment is extremely competitive and we areseeking new clients and new markets (i.e., direct selling for our offshorecenters into other countries) to attempt to replace lost revenues.

*Cost of Services. *Cost of services before reimbursable expenseswas $49.3 million for the quarter ended June 29, 2007, an increase of 4.7% from$47.1 million for the quarter ended June 30, 2006.  The increase was primarily due to a $1.6million increase in costs in the Health Delivery Outsourcing segment directlyrelated to the respective increase in revenues in that segment, and a $490,000increase in Software Services, where labor costs increased due to the loss ofhigher margin projects and their replacement with lower margin projects whichrequire more resources to achieve the same revenues. “Other” cost of servicesgrew due to lower absorption of shared service center costs.  This was due in part to approximately$500,000 of unusual costs during the quarter in our India offshore developmentcenter including costs related to a delay in obtaining a subtenant for avacated facility, and costs for software

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purchases.  Additionally, due to currency appreciation ofover 10% of the Indian rupee versus the United States dollar, costs incurred inIndia have increased this year when translated to dollars.  If this appreciation trend continues, thecost and competitiveness of our Indian offshore development center could benegatively affected.

*Gross Profit. *Gross profit was $17.9 million, or 26.7% ofnet revenues, for the quarter ended June 29, 2007, a decrease of 2.7% from$18.4 million, or 28.1% of net revenues, for the quarter ended June 30,2006.  This decrease was primarily due to$1.3 million of reduced gross profit in the Software Services segment due tothe lower level of revenues and lower margins on the remaining projects, theincreased costs in our Indian offshore development center, and slightly lowerlevels of gross profit in several other business units.  These decreases were in large part offset by$1.9 million of higher gross profit in Life Sciences due to higher revenues andhigher project margins.

We expect to see lower gross profit in Health Delivery Outsourcing inthe fourth quarter of this year when the UPHS services transition back to theclient, as described above.  Operatingmargin (including project work) for this client has been approximately 10% ofrevenues for the first and second quarters of 2007.

*Selling Expenses. *Selling expenses were $4.3 million for thequarter ended June 29, 2007, an increase of 5.7% from $4.0 million for thequarter ended June 30, 2006.  Thisincrease was primarily due to higher market research and strategy consulting costs.  Also, we have now increased our sales staffcosts back to the level of one year ago, as we seek to increase our revenues,which have not grown overall recently. Selling expenses as a percentage of net revenues increased slightly to6.4% for the quarter ended June 29, 2007 from 6.2% for the quarter ended June30, 2006.

*General and Administrative Expenses. *General andadministrative expenses were $10.3 million for the quarter ended June 29, 2007,compared to $9.3 million for the quarter ended June 30, 2006.  This is primarily due to a $1.6 millioncharge for acquired in-process research and development expense related to theZorch acquisition (See Note 4 of Notes to Consolidated FinancialStatements).  Excluding this item,general and administration expenses would have decreased 5.6% to $8.8 millionfor the quarter ended June 29, 2007 from $9.3 million for the quarter endedJune 30, 2006.  This decrease isprimarily due to a $350,000 reversal of bad debt expense during the quarterended June 29, 2007 resulting from the collection of a single previouslyreserved client account in the Software Services segment.  General and administrative expenses as apercentage of net revenues were 15.4% of revenues for the quarter ended June30, 2007, but would have decreased to 13.0% for the quarter ended June 29, 2007from 14.2% for the quarter ended June 30, 2006, exclusive of the acquiredin-process research and development charge from the Zorch acquisition.

*Interest Income, Net.** ***Interest income, net of interest expense, was$946,000 for the quarter ended June 29, 2007, an increase of 122.6% from$425,000 for the quarter ended June 30, 2006, primarily due to higher interestrates earned on higher cash and investments balances.  Interest income, net of interest expense, asa percentage of net revenues increased to 1.4% for the quarter ended June 29,2007 from 0.6% for the quarter ended June 30, 2006.

*Other Income (Expense), Net*.  Other income (expense) wasnegligible for the quarters ended June 29, 2007 and June 30, 2006.

*Income Taxes. *We recorded a $1.1 million tax provision forthe quarter ended June 29, 2007, compared to a $389,000 tax provision for thequarter ended June 30, 2006.  The 7% taxprovision for the quarter ended June 30, 2006 was only for current taxespayable for U.S. federal alternative minimum tax and certain state and foreignincome taxes, as our net operating loss carryforwards, which were fullyreserved, offset most of the federal and certain state tax liabilities.

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Our estimated tax rate infiscal year 2007 of 26% has increased significantly from the rate experiencedin fiscal year 2006 as we expect to exhaust this year our remaining losscarryforwards.  We expect that our taxprovision in 2008 and thereafter will return to levels consistent withstatutory federal and state tax rates. During this 2007 transition, when our loss carryforwards are coveringonly a part of our expected pretax income, our estimated full year tax rate maybe more volatile than typical, as changes in our estimated level of pretaxincome will significantly impact the tax rate.

**Resultsof Operations for the Six Months Ended June 29, 2007 and June 30, 2006**

*Revenues. *Our net revenues were $134.2 million for thesix months ended June 29, 2007, an increase of 1.5% from $132.2 million for thesix months ended June 30, 2006.  Ourtotal revenues were $141.0 million for the six months ended June 29, 2007, anincrease of 1.1% from $139.5 million for the six months ended June 30,2006.  The increases in net revenues werein Health Delivery Outsourcing, Life Services, and Health Plans, offset by decreasesin Health Delivery Services and Software Services.  Health Delivery Outsourcing revenues grew by$2.4 million, or 4.4% compared to the six months ended June 30, 2006, due toslightly higher revenues at existing accounts. Life Sciences net revenues increased by $2.2 million, or 13.6% due tomore extensive implementation work being performed for our FirstDoc® softwareclients.  Health Plans revenues increasedby $1.8 million, or 12.5%, due to increased market acceptance of our globaldelivery model by mid-size and large health plans.

The net revenues in the Health Delivery Services segment decreased $1.8million, or 5.7%, due to lower revenues from our consulting and implementationservices in the first quarter of this year compared to the first quarter of theprior year; however, such revenues did increase slightly during the secondquarter of this year.  Software Servicesrevenues decreased by $818,000, or 6.1%, as several of our larger clients havebeen acquired by other entities or reduced their scope of operations utilizingour services over the past year.

*Cost of Services. *Cost of services before reimbursable expenseswas $98.9 million for the six months ended June 29, 2007, an increase of 3.4%from $95.7 million for the six months ended June 30, 2006.  The increase was primarily due to a $2.7million increase in costs in the Health Delivery Outsourcing segment and a $1.7million increase in costs in the Health Plans segment, both directly related tothe respective increases in revenues in those segments described above.  Additionally, Software Services cost ofservices increased by $1.2 million, because labor costs increased due to theloss of higher margin projects and their replacement with lower margin projectswhich require more resources to achieve the same revenues.  These increases are partially offset by a$1.6 million decrease in Life Sciences labor and other costs due to improvedefficiency in performing Life Sciences implementation projects.

*GrossProfit. *Gross profitwas $35.3 million, or 26.3% of net revenues, for the six months ended June 29,2007, a decrease of 3.5% from $36.5 million, or 27.6% of net revenues, for thesix months ended June 30, 2006.  Thisdecrease was primarily due to a $2.0 million decrease in gross profit relatedto the revenue decline and cost of services increase in the Software Servicessegment, both described above, a $1.5 million decrease in gross profit relatedto the revenue decline in Health Delivery Services described above, and$500,000 of unusual costs in our Indiaoffshore development center during the second quarter of 2007 including costsrelated to a delay in obtaining a subtenant for a vacated facility, and costsfor software purchases, all largely offset by a $3.8 million increase ingross profit in Life Sciences due to the increased revenues and decreased costsdescribed above.

*Selling Expenses. *Selling expenses were $8.3 million for thesix months ended June 29, 2007, a slight decrease of 1.5% from $8.4 million forthe six months ended June 30, 2006. Selling expenses as a

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percentageof net revenues also decreased to 6.2% for the six months ended June 29, 2007from 6.4% for the six months ended June 30, 2006.

*General and Administrative Expenses. *General andadministrative expenses were $19.5 million compared to $18.4 million for thesix months ended June 30, 2006.  This isprimarily due to a $1.6 million charge in the second quarter for acquiredin-process research and development expense related to the Zorch acquisition(See Note 4 of Notes to Consolidated Financial Statements).  Excluding this item, general andadministration expenses would have decreased 2.8% to $17.9 million for the sixmonths ended June 29, 2007 from $18.4 million for the six months ended June 30,2006, due to lower bad debt costs. General and administrative expenses as a percentage of net revenues were14.5% of revenues for the six months ended June 29, 2007, but would havedecreased to 13.4% for the six months ended June 29, 2007 from 14.0% for thesix months ended June 30, 2006, exclusive of the in-process research anddevelopment charge from the Zorch acquisition.

*Interest Income, Net.** ***Interest income, net of interest expense, was$1.8 million for the six months ended June 29, 2007, an increase of 135.1% from$763,000 for the six months ended June 30, 2006, due to higher interest ratesearned on higher cash and investments balances. Interest income, net of interest expense, as a percentage of netrevenues increased to 1.3% for the six months ended June 29, 2007 from 0.6% forthe six months ended June 30, 2006.

*Other Expense, Net*.  Other expense was negligiblefor the six months ended June 29, 2007 and June 30, 2006.

*Income Taxes. *We recorded a $2.4 million tax provision forthe six months ended June 29, 2007, compared to a $729,000 tax provision forthe six months ended June 30, 2006.  The7% tax provision for the six months ended June 30, 2006 was only for currenttaxes payable for U.S. federal alternative minimum tax and certain state andforeign income taxes, as our net operating loss carryforwards, which were fullyreserved, offset most of the federal and certain state tax liabilities.

Our estimated tax rate infiscal year 2007 of 26% has increased significantly from the rate experiencedin fiscal year 2006 as we expect to exhaust this year our remaining losscarryforwards.  We expect that our taxprovision in 2008 and thereafter will return to levels consistent withstatutory federal and state tax rates. During this 2007 transition, when our loss carryforwards are coveringonly a part of our expected pretax income, our estimated full year tax rate maybe more volatile than typical, as changes in our estimated level of pretaxincome will significantly impact the tax rate.

**Liquidity and Capital Resources**

At June 29, 2007, we had cash and investmentsavailable for sale of $79.5 million compared to $63.5 million at December 29,2006.  During the six months ended June29, 2007, we generated cash flow from operations of $15.6 million which primarilyconsisted of $6.8 million of net income. Additionally, our cash flow benefited from $3.6 million of stock optionexercises, and from increases in certain current liabilities.

Our days sales outstanding (DSO) of accountsreceivable (including unbilled receivables and customer advances) decreased to27 days for the second quarter of 2007 from 28 days for the fourth quarter of2006.  We expect our DSO to increase inthe fourth quarter of this year when the UPHS contract winds down (see Resultsof Operations – Revenues), since that contract comprises over 10% of revenues,but very little accounts receivable.  Wedo not currently anticipate any other significant changes in DSO.  We also do not currently expect any significantcash flow changes related to the other elements of the working capital cyclesuch as accounts payable and accrued liabilities; however, we are susceptibleto ongoing routine fluctuations in these areas.

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We used $1.4 million of cash during the six monthsended June 29, 2007 to purchase property and equipment, primarily informationtechnology and related equipment, while incurring approximately $3.1 million ofdepreciation and amortization.

We used $2.0 million of cash in June 2007 for thepurchase of Zorch (see Note 4 of Notes to Consolidated FinancialStatements).  Additionally, up to $2.0million of additional payments may become payable to the previous shareholdersof Zorch over the next year based on the achievement of certain revenue targetsrelated to the acquired business, and additional amounts may become payable infuture years if operating income from the acquired business exceeds 14% ofrevenues during an earnout period that commences in the second half of 2008 andends in the first quarter of 2011.

Our cash flow in fiscal year 2007 is highly dependenton our ability to continue to be profitable. Generally, we expect any net profitability in fiscal year 2007 tocontribute positively to cash flow. Approximately $12 million of pretax income from the beginning of fiscalyear 2007 is shielded by tax loss carryforwards and for the most part will notrequire a tax provision in the income statement.  We expect that both our effective tax rateand cash tax payment in fiscal year 2007 will increase significantly from the7.5% of pretax income level experienced in fiscal year 2006 as we exhaust thesecarryforwards, and that our long-term tax provision will return to levelsconsistent with full federal and state tax rates.

As of June 29, 2007, thefollowing table summarizes our contractual commitments (in thousands):
| ** **                          | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligation**     | ** ** | **Less than 1  Year**           | ** ** | **1 - 3  Years** | ** ** | **3 - 5  Years** | ** ** | **More than  5 Years** | ** ** | **Total** | ** ** |
| Operating  leases, net of subleases |       | $                                         | 3,550      |   | $ | 3,922 |   | $ | 2,606 |   | $ | 2 | ** ** | **$** | **10,080** | ** ** |
| Purchase obligations                |       | 329                                       |       | 165 |   | — |   | — | ** ** | **494** | ** ** |
| Total                               |       | $                                         | 3,879      |   | $ | 4,087 |   | $ | 2,606 |   | $ | 2 | ** ** | **$** | **10,574** | ** ** |

 

Additionally, asof June 29, 2007, we had $1.9 million of current liabilities in theconsolidated balance sheet for unrecognized tax positions.  However, the periods of cash settlement withthe respective tax authorities cannot be reasonably estimated.

Management believes that our existing cash and cashequivalents, together with funds generated from operations, will be sufficientto meet operating requirements for at least the next twelve months.  Our cash and cash equivalents are availablefor capital expenditures (which are projected at approximately $5 million for2007), upfront setup costs and deferred fees on new contracts, strategicinvestments, mergers and acquisitions (including the additional paymentsrelated to the Zorch acquisition), and other potential large-scale cash needsthat may arise.  In addition, we mayconsider incurring indebtedness or issuing debt or equity securities in thefuture to fund potential acquisitions or investments, or for general corporatepurposes.

**Off-Balance Sheet Arrangements**

None.

**Critical Accounting Policies andEstimates**

The foregoingdiscussion and analysis of our financial condition and results of operations isbased upon our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the UnitedStates.  The preparation of thesefinancial statements requires

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us to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenuesand expenses, and related disclosure of contingent assets and liabilities.  On an ongoing basis, we evaluate ourestimates, including those related to revenue recognition, cost to completeclient engagements, valuation of goodwill and long-lived and intangible assets,accrued liabilities, income taxes, restructuring costs, idle facilities,litigation and disputes, and the allowance for doubtful accounts.  We base our estimates on historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying value of assets and liabilities that are notreadily apparent from other sources.  Ouractual results may differ from our estimates and we do not assume anyobligation to update any forward-looking information.

Webelieve the following critical accounting policies reflect our more significantassumptions and estimates used in the preparation of our consolidated financialstatements.

***RevenueRecognition, Accounts Receivable, and Unbilled Receivables***

Revenues arederived primarily from information technology outsourcing services, consulting,and systems integration.  Revenues arerecognized on a time-and-materials, level-of-effort, percentage-of-completion,or straight-line basis.  Before revenuesare recognized, the following four criteria must be met: (a) persuasiveevidence of an arrangement exists; (b) delivery has occurred or servicesrendered; (c) the fee is fixed and determinable; and (d) collectability isreasonably assured.  We determine if thefee is fixed and determinable and collectability is reasonably assured based onour judgments regarding the nature of the fee charged for services rendered andproducts delivered.  Arrangements vary inlength from less than one year to seven years. The longer-term arrangements are generally level-of-effort or fixedprice arrangements.

Revenues fromtime-and-materials arrangements are generally recognized based upon contractedhourly billing rates as the work progresses. Revenues from level-of-effort arrangements are recognized based upon afixed price for the level of resources provided.  Revenues from fixed fee arrangements forconsulting and systems integration work are generally recognized on a rate perhour or percentage-of-completion basis. We maintain, for each of our fixed fee contracts, estimates of totalrevenue and cost over the contract term. For purposes of periodic financialreporting on the fixed price consulting and system integration contracts, weaccumulate total actual costs incurred to date under the contract. The ratio ofthose actual costs to our then-current estimate of total costs for the life ofthe contract is then applied to our then-current estimate of total revenues forthe life of the contract to determine the portion of total estimated revenuesthat should be recognized.  We followthis method because reasonably dependable estimates of the revenues and costsapplicable to various stages of a contract can be made.

Revenuesrecognized on fixed price consulting and system integration contracts aresubject to revisions as the contract progresses to completion.  If we do not accurately estimate theresources required or the scope of the work to be performed, do not completeour projects within the planned periods of time, or do not satisfy ourobligations under the contracts, then profit may be significantly andnegatively affected.  Revisions in our contractestimates are reflected in the period in which the determination is made thatfacts and circumstances dictate a change of estimate. Favorable changes inestimates result in additional revenues recognized, and unfavorable changes inestimates result in a reduction of recognized revenues. Provisions forestimated losses on individual contracts are made in the period in which theloss first becomes known.  At June 29,2007, we did not identify any contracts that required an accrual for losses.  Some contracts include incentives forachieving either schedule targets, cost targets, or other defined goals.  Revenues from incentive type arrangements arerecognized when it is probable they will be earned.

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We account forcertain of our outsourcing contracts using EITF 00-21, “Accounting for RevenueArrangements with Multiple Deliverables,” which addresses how to account forarrangements that involve the delivery or performance of multiple products,services, and/or rights to use assets. Revenue arrangements with multiple deliverables are divided intoseparate units of accounting if the deliverables in the arrangement meet thefollowing criteria: (1) the delivered item has value to the customer on astandalone basis; (2) there is objective and reliable evidence of the fairvalue of undelivered items; and (3) delivery of any undelivered item isprobable.  Arrangement consideration isallocated among the separate units of accounting based on their relative fairvalues, with the amount allocated to the delivered item being limited to theamount that is not contingent on the delivery of additional items or meetingother specified performance conditions.

In our outsourcingcontracts, a significant portion of our revenues are fixed and allocated overthe contract on a straight-line basis, as we are required to provide aspecified level of services subject to certain performance measurements.  Also, certain revenues may fluctuate underthe contracts based on the volume of transactions we process or othermeasurements of service provided.  If weincur higher costs to provide the required services or receive lower revenuesdue to reduced transaction volumes or penalties associated with service levelfailures, our gross profit can be negatively impacted.

On certaincontracts, or elements of contracts, costs are incurred subsequent to thesigning of the contract, but prior to the rendering of service and associatedrecognition of revenue.  Where such costsare incurred and realization of those costs is either paid for upfront orguaranteed by the contract, those costs are deferred and later expensed overthe period of recognition of the related revenue.  At June 29, 2007 and December 29, 2006, wehad deferred $8.5 million and $5.6 million, respectively, of unamortized costswhich are included in non-current assets.

In April 2006, webegan a $12 million outsourcing contract in the Health Plans segment.  This contract requires us to complete asystem implementation prior to beginning the operations phase of the contract.  Since the fair value of the operations phaseis difficult to objectively verify in order to separately account for it underEITF 00-21, we are accounting for the arrangement as a single outsourcingservice arrangement.  The implementationphase of this contract is being accounted for as deferred cost, and all revenuefrom the implementation will be recognized over the period of outsourcingoperations.  As a result, we expect toreceive approximately $7 million of cash which is being accounted for as acustomer advance prior to earning revenue on the contract, and our deferredcosts on the balance sheet are increasing accordingly.  We estimate that the implementation will becompleted in May 2008.  As of June 29,2007, we had deferred $5.3 million of costs and $3.4 million of customeradvances under this contract.

As part of ourongoing operations to provide services to our customers, incidental expenses,which are generally reimbursable under the terms of the contracts, are billedto customers. These expenses are recorded as both revenues and direct cost ofservices in accordance with the provisions of EITF 01-14, “Income StatementCharacterization of Reimbursements Received for ‘Out-of-Pocket’ ExpensesIncurred” and include expenses such as airfare, mileage, hotel stays,out-of-town meals, and telecommunication charges.

Software licenseand maintenance revenues comprised 4.5% of our net revenues for the six monthsended June 29, 2007.  Additionally, werealized additional revenues from the implementation of our software.  We recognize software revenues in accordancewith the provisions of the American Institute of Certified Public AccountantsStatement of Position (“SOP”) 97-2, “Software Revenue Recognition”, as amendedby SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, WithRespect to Certain Transactions”, and in accordance with the Securities andExchange Commission Staff Accounting Bulletin (“SAB”) No. 104, “RevenueRecognition”. We license software under non-cancelable license agreements andprovide related professional services, including consulting, training, andimplementation services, as well as ongoing customer support andmaintenance.  Most of our softwarelicense fee revenues are from arrangements which include implementationservices that are

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essential to thefunctionality of our software products, and are recognized using contractaccounting, including the percentage-of-completion methodology, over the periodof the implementation.

In those morelimited cases where our software arrangements do not include services essentialto the functionality of the product, license fee revenues are recognized whenthe software product has been shipped, provided a non-cancelable licenseagreement has been signed, there are no uncertainties surrounding productacceptance, the fees are fixed or determinable and collection of the relatedreceivable is considered probable. We do not generally offer rights of returnor acceptance clauses to our customers. In situations where we do providerights of return or acceptance clauses, revenue is deferred until the clauseexpires. Typically, our software license fees are due within a twelve-monthperiod from the date of shipment. If the fee due from the customer is not fixedor determinable, including payment terms greater than twelve months fromshipment, revenue is recognized as payments become due and all other conditionsfor revenue recognition have been satisfied. In software arrangements thatinclude rights to multiple software products, specified upgrades, maintenanceor services, we allocate the total arrangement fee among the deliverables usingthe fair value of each of the deliverables determined using vendor-specificobjective evidence. Vendor-specific objective evidence of fair value isdetermined using the price charged when that element is sold separately. Insoftware arrangements in which we have fair value of all undelivered elementsbut not of a delivered element, we use the residual method to record revenue.Under the residual method, the fair value of the undelivered elements isdeferred and the remaining portion of the arrangement fee is allocated to thedelivered element(s) and is recognized as revenue. In software arrangements inwhich we do not have vendor-specific objective evidence of fair value of allundelivered elements, revenue is deferred until fair value is determined or allelements have been delivered, or is spread over the term of an arrangement as asubscription.

Revenues fromtraining and consulting services are recognized as services are provided tocustomers. Revenues from maintenance contracts are deferred and recognizedratably over the term of the maintenance agreements. Revenues for customersupport and maintenance that are bundled with the initial license fee aredeferred based on the fair value of the bundled support services and recognizedratably over the term of the agreement; fair value is based on the renewal ratefor continued support arrangements.

At June 29, 2007and December 29, 2006, we had unbilled receivables of $15.8 million and $12.3million, respectively, which represent revenues recognized for servicesperformed that were not billed at the balance sheet date.  The majority of these amounts are billed inthe subsequent month; however, certain unbillable amounts arising fromcontracts occur when revenues recognized exceed allowable billings inaccordance with the contractual agreements. Such unbillable amounts most often become billable upon reaching certainproject milestones stipulated per the contract, or in accordance with thepercentage of completion methodology.  Asof June 29, 2007, we had unbillable amounts of approximately $3.3 million,which were generally expected to be billed within one year.

We had long-termaccounts receivable at June 29, 2007 and December 29, 2006 of $2.3 million and$2.4 million.  Of the long-term accountreceivable of $2.3 million at June 29, 2007, $1.3 million was created in August2005 through the deferral until 2009 of the first month of fees of a newoutsourcing contract.  In January 2006,an additional amount of approximately $800,000 related to this contract wasdeferred until 2009.  Both deferrals werein accordance with the terms of the contract executed with this client in July2005.  Imputed interest income at a rateof 7.0% of $79,000 was accrued during the first six months of 2007 on thisreceivable.  Unamortized discount of$438,000 remained at June 29, 2007.

Customer advancesare comprised of payments from customers for which services have not yet beenperformed or prepayments against work in process. These unearned revenues aredeferred and recognized as future contract costs are incurred and as contractservices are rendered.

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***Allowance forDoubtful Accounts***

We maintain an allowance for doubtful accounts forestimated losses resulting from the inability of our clients to make requiredpayments. This allowance is based on the amount and aging of our accountsreceivable, creditworthiness of our clients, historical collection experience,current economic trends, and changes in client payment patterns.  If the financial condition of our clients wasto deteriorate, resulting in an impairment of their ability to make payments,additional allowances would be required. Our bad debt losses have generally been moderate due to the size andquality of our customers; however, we have recently incurred some bad debtlosses in our growing Software Services segment due to the lower credit qualityof our clients in that segment.  Shouldone of our larger clients unexpectedly become unable to pay us, our allowancewould have to increase significantly. Our allowance for doubtful accounts at June 29, 2007 and December 29,2006 included specific reserves of approximately $599,000 and $899,000,respectively for identified customer balances that are uncertain of collection,primarily two accounts in our Software Services segment, and a general reserveof approximately $750,000 for unknown losses.

***Deferred Income Taxes***

We account for income taxes in accordance with SFAS109, “Accounting for Income Taxes,” which requires recognition of deferred taxassets and liabilities for the expected future tax consequences of events thathave been included in the financial statements which differ from our taxreturns.  We use significant estimates indetermining what portion of our deferred tax asset is more likely than not tobe realized.  Prior to fiscal year 2003,our net deferred tax assets had historically consisted primarily of the taxbenefit related to restructuring costs for facility closures, supplementalexecutive retirement plan contributions, and certain accrued liabilities suchas accrued vacation pay, which are not deductible for tax purposes untilpaid.  We have also recorded a provisionfor uncertain tax positions in accordance with FIN 48, “Accounting forUncertainty in Income Taxes,” based on management’s estimate of potential taxliabilities for open tax years.

During fiscal year 2003, we generated additionaldeferred tax assets for net operating loss carryforwards which were created byour pretax losses, combined with the fact that we were outside the periodallowable to carry back losses, and recorded a valuation allowance of $5.8million in the fourth quarter of that year. During the fourth quarter of fiscal year 2004, we re-evaluated our requirementfor a valuation allowance after having completed a full year in which werecorded taxable income in each six months, and reversed $3.0 million of thevaluation allowance taken in fiscal year 2003.

During the first six months of 2005, we incurred apretax loss from continuing operations of $2.3 million.  Based on such performance, we increased ourdeferred tax asset valuation allowance during the second six months of 2005 by$6.0 million.  Additionally, in the fourthquarter of 2005, after having incurred losses in each six months of the fiscalyear, we increased our valuation allowance by another $8.2 million such that wenow have a full valuation allowance against all of our tax assets.

This valuation allowance does not, in any way, limitour ability to use our deferred tax assets, primarily loss carryforwards, tooffset taxable income in the future.  Wewere not subject to federal taxation, other than the Alternative Minimum Tax,during 2006, due to the use of net operating loss carryforwards.  Approximately $12 million of pretax income fromthe beginning of fiscal year 2007 will also be shielded by loss carryforwardsand not require a significant tax provision in the income statement.  Additionally, if at some point in the future,the realization of any of our other deferred tax assets is considered morelikely than not based on successive years of generating taxable income andother factors, we will reverse all or a portion of any existing valuationallowance at that time.  As we have nowexperienced six consecutive quarters of profitability, we may soon considerreleasing some of our valuation allowance of approximately $12 million.  Our valuation allowance for deferred incometaxes has been a particularly volatile estimate over the past several years, asour level of income and loss has fluctuated, requiring us to reassess thelikelihood of realization of our tax assets.

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Our estimated tax rate in fiscal year 2007 of 26% hasincreased significantly from the rate experienced in fiscal year 2006 as weexpect to exhaust this year our remaining loss carryforwards.  We expect that our tax provision in 2008 andthereafter will return to levels consistent with statutory federal and statetax rates.  During this 2007 transition,when our loss carryforwards are covering only a part of our expected pretaxincome, our estimated full year tax rate may be more volatile than typical, aschanges in our estimated level of pretax income will significantly impact thetax rate.

***Goodwill and Intangible Assets***

Under SFAS 142, wecomplete an annual impairment testing which is performed during the fourthquarter of each year.  We believe that the accounting assumptions andestimates related to the annual goodwill impairment testing are criticalbecause these can change from period to period.  Various assumptions, suchas discount rates, and comparable company analysis are used in performing thesevaluations.  The impairment test requiresus to forecast our future cash flows, which involves significantjudgment.   Accordingly, if our expectations of future operatingresults change, or if there are changes to other assumptions, our estimate ofthe fair value of our reporting units could change significantly resulting in agoodwill impairment charge, which could have a significant impact on ourconsolidated financial statements.  We performed an impairment test oneach of our components of goodwill as of the fourth quarter of fiscal year 2006and determined that none of our goodwill was impaired.  As of June 29, 2007, we have $18.0 million ofgoodwill and $324,000 of amortizable intangible assets recorded on our balancesheet (see Note 5 of the Notes to Consolidated Financial Statements included inthis report).

***Recent Accounting Pronouncements***

InSeptember 2006 and February 2007, respectively, the FASB issued SFASNo. 157, “Fair Value Measurements” and SFAS No. 159, “The Fair ValueOption of Financial Assets and Financial Liabilities (see Recent AccountingPronouncements in Note 1 of the financial statements in Item 1 of this report).

In June 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes” (see Recent Accounting Pronouncements in Note 1 of the financialstatements in Item 1 of this report).

## **Item 3. Quantitative and Qualitative Disclosures about Market Risk**

Our financial instrumentsinclude cash and cash equivalents, short-term and long-term investments,accounts receivable, unbilled receivables, and accounts payable.  Only the cash and cash equivalents, andshort-term and long-term investments which totaled $79.5 million at June 29,2007 present us with market risk exposure resulting primarily from changes ininterest rates.  Based on this balance, a change of one percent in theinterest rate would cause a change in interest income for the annual period ofapproximately $795,000.  Our objective in maintaining these investments isthe flexibility obtained in having cash available for payment of accruedliabilities and acquisitions.

## **Item 4. Controls and Procedures**

We maintaindisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in our Exchange Act reports is recorded, processed,summarized, and reported within the time periods specified in the Securitiesand Exchange Commission’s rules and forms, and that such information is accumulatedand communicated to our management, including our Chief Executive Officer andChief Financial Officer, as appropriate, to allow for timely decisionsregarding required

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disclosure. In designingand evaluating the disclosure controls and procedures, management is requiredto apply its judgment in evaluating the cost-benefit relationship of possiblecontrols and procedures.  Our disclosurecontrols and procedures are designed to provide a reasonable level of assuranceof reaching our desired disclosure control objectives.

As required by SEC Rule13a-15(b), we carried out an evaluation, under the supervision and with theparticipation of our management, including our Chief Executive Officer and ourChief Financial Officer, of the effectiveness of the design and operation ofour disclosure controls and procedures as of December 29, 2006.  Based on the foregoing, our Chief ExecutiveOfficer and Chief Financial Officer concluded that, except as indicated in theparagraph below, our disclosure controls and procedures were effective, andwere operating at the reasonable assurance level.

As previouslydisclosed in Item 9A to our Annual Report on Form 10-K for the fiscal yearended December 30, 2005, our Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were noteffective as of the end of that year because we did not maintain effectivecontrols over the determination and reporting of our provision for incometaxes, and we had a “material weakness” in internal controls as defined inAudit Standard No. 2 adopted by the Public Company Accounting OversightBoard.  In August 2006, we hired a newtax director with experience in calculating deferred tax assets, and in applyingSFAS 109, “Accounting for Income Taxes.”  The new tax director has improved the process and review controls overthe calculation of our tax provision since her arrival.  Because the tax provision is an annualcalculation, and the new process and review controls were implemented duringthe course of fiscal year 2006, there has been insufficient time to validatethat such controls and procedures are operating at a level to have remediatedthe previous material weakness, and that it therefore still existed as ofDecember 29, 2006 and June 29, 2007.

Other than as describedabove, there has been no change in our internal controls over financialreporting during our most recent fiscal six months that has materiallyaffected, or is reasonably likely to materially affect, our internal controlsover financial reporting.

# **Part II.  Other Information**

## **Item 1. Legal Proceedings**

From time to time,we may be involved in claims or litigation that arise in the normal course ofbusiness. We are not currently a party to any legal proceedings, which, ifdecided adversely to us, would have a material adverse effect on our business,financial condition, or results of operations.

## **Item 1A. Risk Factors**

There have been nomaterial changes from risk factors as previously disclosed in response to Item1A in Part I of our Annual Report on Form 10-K for the fiscal year endedDecember 29, 2006.

## **Item 2. Unregistered Sales of Equity Securities and Use of Proceeds**

Repurchase of Securities

None.

## **Item 3. Defaults Upon Senior Securities**

None.

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

We held our 2007 Annual Meeting of Stockholders on June 7,2007.  The stockholders approved the re-election of Douglas Bergeron,Larry Ferguson and Robert Funari to serve as directors by the votes indicatedbelow.  With the approval of the amendment to our Certificate ofIncorporation to provide for the annual election of directors, each of Messrs.Bergeron, Ferguson and Funari will serve as directors until the 2008 AnnualMeeting of Stockholders, or until their successors are duly elected andqualified.
| Nominee              | ** ** | **Votes in  Favor** | ** ** | **Votes  Against** | ** ** | **Abstentions** | ** ** |
|----------------------|------------|--------------------------|------------|--------------------|------------|-----------------|------------|
| Douglas G.  Bergeron |       | 24,361,369               |       | 562,983            |       | 0               |       |
| Larry F.  Ferguson   |       | 24,709,126               |       | 215,226            |       | 0               |       |
| Robert G. Funari     |       | 24,404,713               |       | 519,639            |       | 0               |       |

 

As indicated above, the stockholders also approved an amendment to ourCertificate of Incorporation to provide for annual election of directors. The proposal was approved with 24,709,013 votes cast in favor, 109,353 votescast against and 105,985 votes abstaining from the proposal.

The stockholders also approved the FCG 2007 Equity IncentivePlan.   The plan was approved with 17,682,605 votes cast in favor,2,570,906 votes cast against and 1,167,980 votes abstaining from the proposal.

Lastly, the stockholders ratified our selection of Grant Thornton LLPas our independent auditors for the year ending December 28, 2007, with24,686,573 votes cast in favor, 99,742 votes cast against and 138,035 votesabstaining from the proposal.

## **Item 5. Other Information**

None.

## **Item 6. Exhibits**

| Item   | ** ** | **Description** |
|--------|------------|-----------------|
|   | 3.1 (1)    |            | Certificate of Incorporation of the Company |
|   | 3.1.1      |            | Certificate of Amendment to Certificate of  Incorporation of the Company effective June 12, 2007 |
|   | 3.2 (2)    |            | Certificate of Designation of Series A Junior  Participating Preferred Stock |
|   | 3.3 (3)    |            | Bylaws of the Company |
|   | 3.3.1      |            | Amendment to the Bylaws of the Company effective  June 12, 2007 |
|   | 4.1 (4)    |            | Specimen Common Stock Certificate |
|   | 10.26      |            | First Consulting Group, Inc. 2007 Equity Incentive Plan |
|   | 11.1 (5)   |            | Statement of computation of per share earnings |
|   | 31.1       |            | Rule 13a-14(a)/Rule 15d-14(a) Certification of the  Chief Executive Officer |
|   | 31.2       |            | Rule 13a-14(a)/Rule 15d-14(a) Certification of the  Chief Financial Officer |
|   | 32.1       |            | Section 1350 Certification of the Chief Executive  Officer |
|   | 32.2       |            | Section 1350 Certification of the Chief Financial  Officer |

 

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(1)          Incorporatedby reference to Exhibit 3.1 to FCG’s Form S-1 Registration Statement (No.333-41121) originally filed on November 26, 1997 (the “Form S-1”).

(2)          Incorporatedby reference to Exhibit 99.1 to FCG’s Current Report on Form 8-K dated December9, 1999.

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(3)          Incorporatedby reference to Exhibit 3.3 to FCG’s Form S-1.

(4)          Incorporatedby reference to Exhibit 4.1 to FCG’s Form S-1.

(5)          SeeNote 1 of Notes to Consolidated Financial Statements, “Basic and Diluted NetIncome Per Share.”

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# **Signatures**

Pursuant to therequirements of the Securities and Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                                  | FIRST CONSULTING GROUP, INC.       |
|----------------------------------|------------------------------------|
|                             |                               |
|                             |                               |
| Date:  August  8, 2007 | /s/LARRY R. FERGUSON               |   |
|                             | Larry R.  Ferguson                 |
|                             | Chief Executive  Officer           |
|                             |                               |
|                             |                               |
| Date:  August  8, 2007 | /s/THOMAS A WATFORD                |   |
|                             | Thomas A. Watford                  |
|                             | Chief Operating  Officer and Chief |
|                             | Financial  Officer                 |

 

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# **Exhibit Index**

| Item     | ** ** | **Description**                                                                                  |
|----------|------------|--------------------------------------------------------------------------------------------------|
| 3.1 (1)  |       | Certificate of Incorporation of the Company                                                      |
| 3.1.1    |       | Certificate of Amendment to Certificate of  Incorporation of the Company effective June 12, 2007 |
| 3.2 (2)  |       | Certificate of Designation of Series A Junior  Participating Preferred Stock                     |
| 3.3 (3)  |       | Bylaws of the Company                                                                            |
| 3.3.1    |       | Amendment to the Bylaws of the Company effective  June 12, 2007                                  |
| 4.1 (4)  |       | Specimen Common Stock Certificate                                                                |
| 10.26    |       | First Consulting Group, Inc. 2007 Equity Incentive Plan                                          |
| 11.1 (5) |       | Statement of computation of per share earnings                                                   |
| 31.1     |       | Rule 13a-14(a)/Rule 15d-14(a) Certification of the  Chief Executive Officer                      |
| 31.2     |       | Rule 13a-14(a)/Rule 15d-14(a) Certification of the  Chief Financial Officer                      |
| 32.1     |       | Section 1350 Certification of the Chief Executive  Officer                                       |
| 32.2     |       | Section 1350 Certification of the Chief Financial  Officer                                       |

 

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(1)          Incorporatedby reference to Exhibit 3.1 to FCG’s Form S-1 Registration Statement (No.333-41121) originally filed on November 26, 1997 (the “Form S-1”).

(2)          Incorporatedby reference to Exhibit 99.1 to FCG’s Current Report on Form 8-K dated December9, 1999.

(3)          Incorporatedby reference to Exhibit 3.3 to FCG’s Form S-1.

(4)          Incorporatedby reference to Exhibit 4.1 to FCG’s Form S-1.

(5)          SeeNote 1 of Notes to Consolidated Financial Statements, “Basic and Diluted NetIncome Per Share.”

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