**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC  20549**

 

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** **

**FORM 10-Q**

**(Mark One)**

 

ý                                  **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June27, 2003**

 

**OR**

 

o                                  **TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THESECURITIES 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  incorporation or organization) | (I.R.S.  Employer  Identification No.) |
|                                                             |
| **111 W.  Ocean Blvd., 4th Floor, Long Beach, CA  90802**   |
| (Address  of principal executive offices including zip code)     |
|                                                             |
| **(562)  624-5200**                                              |
| (Registrant’s  telephone number, including area code)       |

 

 

(Formername, former address and former fiscal year, if changed since last 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 such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes  ý   No  o

 

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

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 

| **Common  Stock, $.001 par value** |   | **24,957,244**                  |
|------------------------------------|--------|---------------------------------|
| (Class)                            |   | (Outstanding  at July 25, 2003) |

 

 

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**First ConsultingGroup, Inc.**

**Table of Contents**

 

 
| COVER PAGE                                                                                           |
|------------------------------------------------------------------------------------------------------|
|                                                                                                 |
| TABLE OF  CONTENTS                                                                                   |
|                                                                                                 |   |
| PART I.                                                                                              | FINANCIAL INFORMATION |
|                                                                                                 |
| ITEM 1.  FINANCIAL STATEMENTS AND NOTES (UNAUDITED)                                                  |
|                                                                                                 |   |
|                                                                                                 | Consolidated Balance Sheets as of June 27, 2003 and December 27, 2002 |
|                                                                                                 |   |
|                                                                                                 | Consolidated Statements of Operations for  the three month and six month periods ended June 27, 2003 and June 28, 2002 |
|                                                                                                 |   |
|                                                                                                 | Condensed Consolidated Statements of Cash  Flows for the six months ended June 27, 2003 and June 28, 2002 |
|                                                                                                 |   |
|                                                                                                 | 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 RISKS                                 |
|                                                                                                 |   |   |
| ITEM 4. CONTROLS AND PROCEDURES                                                                      |
|                                                                                                 |
| PART II.                                                                                             | OTHER INFORMATION |   |
|                                                                                                 |   |
| ITEM 1. LEGAL PROCEEDINGS.                                                                           |
|                                                                                                 |   |   |
| ITEM 2. CHANGES IN SECURITIES                                                                        |
|                                                                                                 |   |   |
| ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                              |
|                                                                                                 |   |   |
| ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF  SECURITY HOLDERS                                         |
|                                                                                                 |   |   |
| ITEM 5. OTHER INFORMATION                                                                            |
|                                                                                                 |   |   |
| ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                             |
|                                                                                                 |   |   |
| SIGNATURES                                                                                           |
|                                                                                                 |
| CERTIFICATIONS                                                                                       |
|                                                                                                 |
| EXHIBIT  INDEX                                                                                       |
|                                                                                                      |  |  |  |

 

2

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#  

# **PART I**.  FINANCIAL INFORMATION

 

## **Item 1**.Financial Statements and Notes (Unaudited)

 

**First Consulting Group, Inc. andSubsidiaries**

 

### **ConsolidatedBalance Sheets**

**(in thousands, except share and pershare data)**

 
|                                                                                                                             |   | **June 27,  2003** |       | **December  27,  2002** |       |
|----------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|-------------------------|------------|
|                                                                                                                             |   | **(unaudited)**    |       |                    |       |
| **ASSETS**                                                                                                                       |   |               |       |                    |       |
| Current assets:                                                                                                                  |   |               | ** ** |                    | ** ** |
| Cash and cash equivalents                                                                                                        |   | $                  | 23,511     |                    | $          | 27,550 |   |
| Short-term investments                                                                                                           |   | 35,681             |       | 38,796                  |       |
| Accounts receivable, less  allowance of $1,551 and $1,899 in the periodsended June 27, 2003 and December 27, 2002,  respectively |   | 26,926             |       | 36,889                  |       |
| Unbilled receivables                                                                                                             |   | 14,100             |       | 13,264                  |       |
| Deferred income taxes                                                                                                            |   | 6,198              |       | 6,198                   |       |
| Prepaid expenses and other  current assets                                                                                       |   | 2,842              |       | 2,110                   |       |
| Total current assets                                                                                                             |   | 109,258            |       | 124,807                 |       |
|                                                                                                                             |   |               |       |                    |       |
| Notes receivable – stockholders                                                                                             |   | 623                |       | 657                     |       |
| Long-term investments                                                                                                            |   | 2,200              |       | 2,200                   |       |
| Property and equipment:                                                                                                          |   |               |       |                    |       |
| Furniture, equipment, and  leasehold improvements                                                                                |   | 5,784              |       | 7,505                   |       |
| Information systems  equipment                                                                                                   |   | 22,154             |       | 21,123                  |       |
|                                                                                                                             |   | 27,938             |       | 28,628                  |       |
| Less accumulated  depreciation and amortization                                                                                  |   | 18,728             |       | 20,104                  |       |
|                                                                                                                             |   | 9,210              |       | 8,524                   |       |
|                                                                                                                             |   |               |       |                    |       |
| Other assets:                                                                                                                    |   |               |       |                    |       |
| Executive benefit trust                                                                                                          |   | 5,926              |       | 6,059                   |       |
| Long-term account  receivable                                                                                                    |   | 6,605              |       | 8,059                   |       |
| Deferred income taxes                                                                                                            |   | 6,512              |       | 3,147                   |       |
| Goodwill, net                                                                                                                    |   | 14,167             |       | 3,282                   |       |
| Intangibles, net                                                                                                                 |   | 1,298              |       | 214                     |       |
| Other                                                                                                                            |   | 1,162              |       | 360                     |       |
|                                                                                                                             |   | 35,670             |       | 21,121                  |       |
| Total assets                                                                                                                     |   | $                  | 156,961    |                    | $          | 157,309 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

3

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**First Consulting Group, Inc. andSubsidiaries**

 

### **Consolidated Balance Sheets (continued)**

**First Consulting Group, Inc. andSubsidiaries**

**(in thousands, except share and pershare data)**

 
|                                                                                                                                                                                              |   | **June 27,  2003** |       | **December  27,  2002** |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|-------------------------|------------|
|                                                                                                                                                                                              |   | **(unaudited)**    |       |                    |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                     |   |               |       |                    |       |
| Current liabilities:                                                                                                                                                                              |   |               | ** ** |                    | ** ** |
| Accounts payable                                                                                                                                                                                  |   | $                  | 3,123      |                    | $          | 1,652 |   |
| Accrued liabilities                                                                                                                                                                               |   | 13,820             |       | 14,660                  |       |
| Accrued restructuring                                                                                                                                                                             |   | 7,848              |       | 7,578                   |       |
| Accrued vacation                                                                                                                                                                                  |   | 7,812              |       | 6,868                   |       |
| Accrued incentive  compensation                                                                                                                                                                   |   | 2,173              |       | 2,328                   |       |
| Customer advances                                                                                                                                                                                 |   | 8,078              |       | 7,877                   |       |
| Total current liabilities                                                                                                                                                                         |   | 42,854             |       | 40,963                  |       |
| Non-current liabilities:                                                                                                                                                                          |   |               |       |                    |       |
| Supplemental executive  retirement plan                                                                                                                                                           |   | 6,123              |       | 6,351                   |       |
| Minority interest                                                                                                                                                                                 |   | 861                |       | 2,023                   |       |
| Total non-current  liabilities                                                                                                                                                                    |   | 6,984              |       | 8,374                   |       |
| 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  shared issued and outstanding                                                                     |   | —             |       | —                  |       |
| Common Stock, $.001 par  value; 50,000,000 shares authorized,   24,807,648 shares issued and outstanding at June 27, 2003 and  24,073,089 shares issued and outstanding at December 27, 2002 |   | 25                 |       | 24                      |       |
| Additional paid-in capital                                                                                                                                                                        |   | 96,504             |       | 92,461                  |       |
| Retained earnings                                                                                                                                                                                 |   | 12,407             |       | 17,853                  |       |
| Deferred  compensation-stock incentive agreements                                                                                                                                                 |   | (499               | )          | (621                    | )          |
| Notes  receivable-stockholders                                                                                                                                                                    |   | (786               | )          | (1,076                  | )          |
| Accumulated other  comprehensive loss                                                                                                                                                             |   | (528               | )          | (669                    | )          |
| Total stockholders’ equity                                                                                                                                                                   |   | 107,123            |       | 107,972                 |       |
| Total liabilities and  stockholders’ equity                                                                                                                                                  |   | $                  | 156,961    |                    | $          | 157,309 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

4

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**First Consulting Group, Inc. andSubsidiaries**

 

### **ConsolidatedStatements of Operations**

**(in thousands, exceptshare and per share data)**

 
|                                                                                          |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|-----------------------------------------------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                                                                                          |   | **(unaudited)**         |   | **(unaudited)**       |   |
|                                                                                          |   | **June 27,  2003**      |   | **June 28,  2002**    |   | **June 27,  2003** |   | **June 28,  2002** |   |
|                                                                                          |   |                    |   |                  |   |   |   |   |   |
| Revenues before  reimbursements                                                               |   | $                       | 71,310 |                  | $      | 66,198 |   | $ | 141,440 |   | $ | 129,475 |   |
| Reimbursements                                                                                |   | 4,052                   |   | 3,937                 |   | 7,665 |   | 7,814 |   |
| Total revenues                                                                                |   | 75,362                  |   | 70,135                |   | 149,105 |   | 137,289 |   |
|                                                                                          |   |                    |   |                  |   |   |   |   |   |
| Cost of services before  reimbursable expenses                                                |   | 48,703                  |   | 41,809                |   | 96,290 |   | 81,882 |   |
| Reimbursable expenses                                                                         |   | 4,052                   |   | 3,937                 |   | 7,665 |   | 7,814 |   |
| Total cost of services                                                                        |   | 52,755                  |   | 45,746                |   | 103,955 |   | 89,696 |   |
|                                                                                          |   |                    |   |                  |   |   |   |   |   |
| Gross profit                                                                                  |   | 22,607                  |   | 24,389                |   | 45,150 |   | 47,593 |   |
|                                                                                          |   |                    |   |                  |   |   |   |   |   |
| Selling expenses                                                                              |   | 7,699                   |   | 6,939                 |   | 14,968 |   | 13,833 |   |
| General and administrative  expenses                                                          |   | 16,598                  |   | 14,769                |   | 31,175 |   | 29,482 |   |
| Restructuring, severance,  and impairment costs                                               |   | 3,914                   |   | 7,818                 |   | 3,914 |   | 7,818 |   |
| Loss from operations                                                                          |   | (5,604                  | )      | (5,137                | )      | (4,907 | ) | (3,540 | ) |
| Other income (expense):                                                                       |   |                    |   |                  |   |   |   |   |   |
| Interest income, net                                                                          |   | 252                     |   | 244                   |   | 528 |   | 452 |   |
| Other expense, net                                                                            |   | (205                    | )      | (50                   | )      | (4 | ) | (107 | ) |
| Loss before income taxes  and cumulative effect of change in accounting principle, net of tax |   | (5,557                  | )      | (4,943                | )      | (4,383 | ) | (3,195 | ) |
| Income tax benefit                                                                            |   | (2,027                  | )      | (2,080                | )      | (1,534 | ) | (1,346 | ) |
| Loss before cumulative  effect of change in accounting principle, net of tax                  |   | (3,530                  | )      | (2,863                | )      | (2,849 | ) | (1,849 | ) |
|                                                                                          |   |                    |   |                  |   |   |   |   |   |
| Cumulative effect of  change in accounting principle,  net of tax                             |   | —                  |   | —                |   | (2,597 | ) | — |   |
| Net loss                                                                                      |   | $                       | (3,530 | )                     | $      | (2,863 | ) | $ | (5,446 | ) | $ | (1,849 | ) |
|                                                                                          |   |                    |   |                  |   |   |   |   |   |
| Basic & diluted loss  per share                                                           |   |                    |   |                  |   |   |   |   |   |
| Loss before cumulative  effect of change in  accounting principle, net of tax                 |   | $                       | (0.14  | )                     | $      | (0.12 | ) | $ | (0.11 | ) | $ | (0.08 | ) |
| Cumulative effect of  change in accounting principle,  net of tax                             |   | —                  |   | —                |   | (0.11 | ) | — |   |
| Net loss                                                                                      |   | $                       | (0.14  | )                     | $      | (0.12 | ) | $ | (0.22 | ) | $ | (0.08 | ) |
| Weighted average shares  used in computing:                                                   |   |                    |   |                  |   |   |   |   |   |
| Basic loss per share                                                                          |   | 24,817                  |   | 23,957                |   | 24,656 |   | 23,927 |   |
| Diluted loss per share                                                                        |   | 24,817                  |   | 23,957                |   | 24,656 |   | 23,927 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

5

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**First Consulting Group, Inc. andSubsidiaries**

 

### **CondensedConsolidated Statements of Cash Flows**

**(in thousands)**

** **
|                                                                             |   | **Six Months  Ended** |   |
|----------------------------------------------------------------------------------|--------|-----------------------|--------|
|                                                                             |   | **(unaudited)**       |   |
|                                                                             |   | **June 27,  2003**    |   | **June 28,  2002** |   |
| Cash flows from operating  activities:                                           |   |                  |   |   |   |
| Net loss:                                                                        |   | $                     | (5,446 | ) | $ | (1,849 | ) |
| Adjustments to reconcile  net loss to net cash provided by operating activities: |   |                  |   |   |   |
| Cumulative effect of change  in accounting principle, net of tax                 |   | 2,597                 |   | — |   |
| Depreciation and  amortization                                                   |   | 2,778                 |   | 2,610 |   |
| Goodwill impairment                                                              |   | —                |   | 2,143 |   |
| Provision for bad debts,  net of adjustments                                     |   | (20                   | )      | (279 | ) |
| Loss (gain) on sale of  assets                                                   |   | 17                    |   | (10 | ) |
| Minority interest in net  income (loss) of subsidiaries                          |   | (50                   | )      | 148 |   |
| Compensation from stock  issuances                                               |   | 71                    |   | 119 |   |
| Interest income on notes  receivable – stockholders                         |   | (61                   | )      | (153 | ) |
| Changes in assets and  liabilities, excluding effect of acquisitions:            |   |                  |   |   |   |
| Accounts receivable                                                              |   | 11,180                |   | 6,174 |   |
| Unbilled receivables                                                             |   | (5,667                | )      | (4,057 | ) |
| Prepaid expenses and other                                                       |   | (709                  | )      | (1,782 | ) |
| Long-term account  receivable                                                    |   | 814                   |   | 1,043 |   |
| Other assets                                                                     |   | (19                   | )      | (15 | ) |
| Accounts payable                                                                 |   | 1,381                 |   | 683 |   |
| Accrued liabilities                                                              |   | 727                   |   | 1,723 |   |
| Accrued restructuring                                                            |   | 270                   |   | 3,540 |   |
| Accrued vacation                                                                 |   | 872                   |   | 1,099 |   |
| Accrued incentive  compensation                                                  |   | (155                  | )      | (2,635 | ) |
| Customer advances                                                                |   | 141                   |   | 1,494 |   |
| Deferred income taxes                                                            |   | (3,365                | )      | (2,256 | ) |
| Supplemental executive  retirement plan                                          |   | (228                  | )      | 332 |   |
| Other                                                                            |   | 273                   |   | 281 |   |
| Net cash provided by  operating activities:                                      |   | 5,401                 |   | 8,353 |   |
| Cash flows from investing  activities:                                           |   |                  |   |   |   |
| Proceeds from sale/maturity  of investments                                      |   | 3,115                 |   | (271 | ) |
| Purchase of property and  equipment                                              |   | (2,672                | )      | (1,368 | ) |
| Acquisition of businesses,  net of cash acquired                                 |   | (11,095               | )      | (2,617 | ) |
| Net cash used in investing  activities                                           |   | (10,652               | )      | (4,256 | ) |
| Cash flows from financing  activities:                                           |   |                  |   |   |   |
| Proceeds from issuance of  capital stock, net                                    |   | 746                   |   | 1,573 |   |
| Proceeds from notes  receivable and tax loan payments                            |   | 466                   |   | 185 |   |
| Net cash provided by  financing activities                                       |   | 1,212                 |   | 1,758 |   |
| Net change in cash and cash  equivalents                                         |   | (4,039                | )      | 5,855 |   |
| Cash and cash equivalents  at beginning of period                                |   | 27,550                |   | 32,499 |   |
| Cash and cash equivalents  at end of period                                      |   | $                     | 23,511 |   | $ | 38,354 |   |
|                                                                             |   |                  |   |   |   |
| Cash paid during the period  for:                                                |   |                  |   |   |   |
| Interest                                                                         |   | $                     | 14     |   | $ | 14 |   |
| Income taxes                                                                     |   | $                     | 664    |   | $ | 189 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

6

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### **Notes toConsolidated Financial Statements**

 

**1.****                                     ****Accounting Policies**

 

*Basis of Presentation*

 

The consolidated balance sheets of First Consulting Group, Inc. (the“Company”) at June 27, 2003 and consolidated statements of operations and condensedconsolidated statements of cash flows for the periods ended June 27, 2003 andJune 28, 2002 are unaudited.  Thesefinancial statements reflect all adjustments, consisting of only normalrecurring adjustments, which, in the opinion of management, are necessary tofairly present the financial position of the Company at June 27, 2003 and theresults of operations and cash flows for the three month and six month periodsended June 27, 2003 and June 28, 2002. The results of operations and cash flows for the six months ended June27, 2003 are not necessarily indicative of the results to be expected for theyear ending December 26, 2003.  For morecomplete financial information, these financial statements should be read inconjunction with the audited financial statements for the year ended December27, 2002 included in the Company’s Annual Report on Form 10-K.

 

*Principles of Consolidation*

 

The consolidated financial statements include the accounts of FirstConsulting Group, Inc. and its subsidiaries. All material intercompany accounts and transactions have beeneliminated.

 

*Use of Estimates*

 

In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, valuation of goodwill and long-lived and intangible assets, accrued liabilities, income taxes including the potential need for a tax asset valuation allowance, restructuring costs, litigation and disputes, and the allowance for doubtful accounts.   The Company uses significant estimates in the calculation of its income tax benefit by estimating that it will have sufficient future taxable income to realize its deferred tax assets in full and does not need to record a valuation allowance at this time. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  The Company’s actual results may differ from its estimates.

 

*Basic and Diluted Net Loss PerShare*

 

Basic net loss per share is based upon theweighted average number of common shares outstanding. Diluted net income pershare is based on the assumption that stock options were converted orexercised. Stock options are not considered when computing net loss per shareas they are considered anti-dilutive. Dilution is computed by applying thetreasury stock method. Under this method, options are assumed to be exercisedat the beginning of the period (or at the time of issuance, if later), and asif funds obtained thereby were used to purchase common stock at the averagemarket price during the period.

 

The following represents a reconciliation of basic and diluted net lossper share for the three month and six month periods ended June 27, 2003 andJune 28, 2002 (in thousands, except per share data):

 

7

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|                                                             |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|------------------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                                                             |   | **June 27,  2003**      |   | **June 28,  2002**    |   | **June 27,  2003** |   | **June 28,  2002** |   |
|                                                             |   |                    |   |                  |   |   |   |   |   |
| Loss before cumulative  effect, net of tax                       |   | $                       | (3,530 | )                     | $      | (2,863 | ) | $ | (2,849 | ) | $ | (1,849 | ) |
| Cumulative effect of  change in accounting principle, net of tax |   | —                  |   | —                |   | (2,597 | ) | — |   |
| Net loss                                                         |   | $                       | (3,530 | )                     | $      | (2,863 | ) | $ | (5,446 | ) | $ | (1,849 | ) |
|                                                             |   |                    |   |                  |   |   |   |   |   |
| Basic & diluted loss  per share:                             |   |                    |   |                  |   |   |   |   |   |
| Loss before cumulative  effect, net of tax                       |   | $                       | (0.14  | )                     | $      | (0.12 | ) | $ | (0.11 | ) | $ | (0.08 | ) |
| Cumulative effect of  change in accounting principle, net of tax |   | —                  |   | —                |   | (0.11 | ) | — |   |
| Net loss per share                                               |   | $                       | (0.14  | )                     | $      | (0.12 | ) | $ | (0.22 | ) | $ | (0.08 | ) |
|                                                             |   |                    |   |                  |   |   |   |   |   |
| Basic weighted number of  shares outstanding                     |   | 24,817                  |   | 23,957                |   | 24,656 |   | 23,927 |   |
| Effect of dilutive options  and warrants                         |   | —                  |   | —                |   | — |   | — |   |
| Diluted weighted number of  shares outstanding                   |   | 24,817                  |   | 23,957                |   | 24,656 |   | 23,927 |   |

 

***Stock***-Based Compensation

 

The Company accounts for stock-based employeecompensation as prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and has adopted thedisclosure provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”**(“SFAS No. 123”), and Statement ofFinancial Accounting Standards No. 148, “Accountingfor Stock-Based Compensation – Transition and Disclosure – an amendment of SFASNo. 123”**(“SFAS No.148”).  SFAS No. 123 requires proforma disclosures of net income (loss) and net income (loss) per share as ifthe fair value based method of accounting for stock-based awards had beenapplied. Under the fair value based method, compensation cost is recorded basedon the value of the award at the grant date and is recognized over the serviceperiod.

 

The following table presents pro forma netloss had compensation costs been determined on the fair value at the date ofgrant for awards under the plan in accordance with SFAS No. 123 (in thousands,except per share data):

 
|                                                                                                                    |        | **Three  Months Ended** |   | **Six Months  Ended** |   |
|-------------------------------------------------------------------------------------------------------------------------|-------------|-------------------------|--------|-----------------------|--------|
|                                                                                                                    |        | **June 27,  2003**      |   | **June 28,  2002**    |   | **June 27,  2003** |   | **June 28,  2002** |   |
| Net loss, as reported                                                                                                   |        | $                       | (3,530 | )                     | $      | (2,863 | ) | $ | (2,849 | ) | $ | (1,849 | ) |
| Deduct: Total stock based  employee compensation expense determined under fair value method for all  awards, net of tax |        | (759                    | )      | (978                  | )      | (1,402 | ) | (1,720 | ) |
| Pro forma net loss                                                                                                      |        | $                       | (4,289 | )                     | $      | (3,841 | ) | $ | (4,251 | ) | $ | (3,569 | ) |
|                                                                                                                    |        |                    |   |                  |   |   |   |   |   |
| Basic & diluted loss  per share                                                                                     | As reported |                    | $      | (0.14                 | )      | $ | (0.12 | ) | $ | (0.11 | ) | $ | (0.08 | ) |
|                                                                                                                    | Pro forma   |                    | $      | (0.17                 | )      | $ | (0.16 | ) | $ | (0.17 | ) | $ | (0.15 | ) |

 

8

----

 

**2.****                                     ****Investments**

 

For purposes of reporting, cash and cash equivalents include cash andinterest-earning deposits or securities with original maturities of threemonths or less.  The Company hasapproximately $35.7 million in short-term investments and $1.0 million oflong-term investments classified as available for sale.  Such investments are currently heldprimarily in commercial paper, money market investments, and tax-exemptgovernment securities.  Net unrealizedgains and losses on investments were not material at June 27, 2003.  Additionally, the Company has $1.2 millionof non-marketable equity investments, valued at the lower of cost or estimatedfair value, which are included in long-term investments.

 

**3.****                                     ****Long-Term Account Receivable**

 

At June 27, 2003, the Company carried a long-term account receivable ofapproximately $6.6 million from a single client.  The receivable relates to a major outsourcing contract and willbe collected over a three and one-half year period.

 

**4.****                                     ****Business Acquisitions**

 

Businesses acquired through June 27, 2003,were accounted for in accordance with SFAS No. 141 (Business Combinations) andare included in the consolidated financial statements from the date ofacquisition.  Pro forma results ofoperations have not been presented because the effects of these acquisitionswere not material on either an individual or aggregate basis.

 

**Paragon Solutions, Inc.**

 

On February 12, 2003, the Company acquired100% of Paragon Solutions, Inc., a U.S. based provider of onshore and offshoresoftware development services which is now part of the life sciences segment.The Company issued 572,870 unregistered shares of common stock and paid cashconsideration of approximately $0.2 million to Paragon shareholders who electedcash payment.  The Company also agreedto reserve an additional 49,540 shares of its common stock for issuance uponthe exercise of options that were initially issued under Paragon’s stock incentiveplans.  Based upon a preliminarypurchase price allocation, goodwill of approximately $9.3 million has beenrecorded.  Due to the recent closingdate, the purchase price allocations are tentative and subject to finalpurchase price valuation analysis.  Inconnection with the acquisition, the Company immediately repaid $7.7 million ofdebt assumed from Paragon. Additionally, the Company acquired approximately $0.4 million of cash aspart of the acquisition.

 

The following table summarizes the estimatedfair values of assets acquired and liabilities assumed as of February 12, 2003in connection with the Paragon acquisition (in thousands):

 

| Accounts receivable              |   | $      | 996    |   |
|----------------------------------|--------|--------|--------|--------|
| Other assets                     |   | 1,212  |   |
| Property and equipment,  net     |   | 1,096  |   |
| Goodwill                         |   | 9,277  |   |
| Accrued liabilities              |   | (1,303 | )      |
| Assumed debt including  interest |   | (7,695 | )      |
| Net assets acquired              |   | 3,583  |   |
| Value of stock issued            |   | 3,297  |   |
| Cash consideration               |   | $      | 286    |   |

 

9

----

 

**Phyve Corporation**

 

On February 20, 2003, the Company acquiredthe information security and connectivity software solution operations of PhyveCorporation for $1.4 million in cash. The following table summarizes the estimated fair values of assets acquiredin connection with this acquisition (in thousands):

 

| Intangible software          |   | $   | 736    |   |
|------------------------------|--------|-----|--------|--------|
| Property and equipment,  net |   | 229 |   |
| Goodwill                     |   | 387 |   |
| Cash consideration           |   | $   | 1,352  |   |

 

**Coactive Systems Corporation**

 

On May 30, 2003, the Company acquired 100% of Coactive SystemsCorporation (Coactive) as an entry into the Business Process Outsourcingmarket.  Coactive provides contactcenter services and builds software customized for hospitals, health plans, andother healthcare organizations.  TheCompany paid $0.6 million in cash to the shareholders of Coactive in themerger.  In connection with theacquisition, the Company immediately repaid $1.5 million of debt assumed fromCoactive.  Based upon apreliminary purchase price allocation, goodwill of approximately $1.4 millionhas been recorded.  Due to the recentclosing date, the purchase price allocations are tentative and subject to finalpurchase price valuation analysis.

 

The following table summarizes the estimatedfair values of assets acquired and liabilities assumed as of May 30, 2003 inconnection with the Coactive acquisition (in thousands):

 

| Accounts receivable, net         |   | $      | 201    |   |
|----------------------------------|--------|--------|--------|--------|
| Other assets                     |   | 659    |   |
| Property and equipment,  net     |   | 106    |   |
| Goodwill                         |   | 1,413  |   |
| Accrued liabilities              |   | (226   | )      |
| Assumed debt including  interest |   | (1,523 | )      |
| Cash consideration               |   | $      | 630    |   |

 

**5.****                                     ****Goodwill and Intangible Assets**

 

In accordance with SFAS No. 142, the Company annually evaluates in the fourth fiscal quarter goodwill and intangible assets for impairment, as well as the related amortization periods for intangibles with definite lives, to determine whether adjustments to these amounts or estimated useful lives are required based on current events and circumstances.  The evaluation is based on the Company’s projection of the future operating cash flows of the underlying assets combined with market valuation approaches. Significant estimates and assumptions were used in assessing the fair value of reporting units.  These estimates and assumptions included future cash flows, growth rates, discount rates, weighted average cost of capital, and estimates of market valuation for each of the reporting units.

 

10

 

The changes in the net carrying amounts of goodwill for the six monthsended June 27, 2003 are as follows (in thousands):

 
|                                     |   | **Healthcare** |   | **Life  Sciences** |    | **Outsourcing** |   | **Total** |   |
|------------------------------------------|--------|----------------|--------|--------------------|---------|-----------------|--------|-----------|--------|
| Balance as of December 27,  2002         |   | $              | 827    |               | $       | 1,468           |   | $         | 987    |   | $ | 3,282 |   |
|                                     |   |           |   |               |    |            |   |      |   |   |   |   |   |
| Acquired                                 |   | —         |   | 10,193             |    | 430             |   | 10,623    |   |
|                                     |   |           |   |               |    |            |   |      |   |
| Currency translation  adjustment         |   | —         |   | (7                 | )       | —          |   | (7        | )      |
|                                     |   |           |   |               |    |            |   |      |   |
| Balance as of March 28,  2003            |   | 827            |   | 11,654             |    | 1,417           |   | 13,898    |   |
|                                     |   |           |   |               |    |            |   |      |   |
| Acquired                                 |   | —         |   | —             |    | 1,370           |   | 1,370     |   |
|                                     |   |           |   |               |    |            |   |      |   |
| Adjustment to purchase  price allocation |   | —         |   | (916               | )  | (200            | )      | (1,116    | )      |
|                                     |   |           |   |               |    |            |   |      |   |
| Currency translation  adjustment         |   | —         |   | 15                 |    | —          |   | 15        |   |
|                                     |   |           |   |               |    |            |   |      |   |
| Balance as of June 27,  2003             |   | $              | 827    |               | $       | 10,753          |   | $         | 2,587  |   | $ | 14,167 |   |

 

As of June 27, 2003, the Company had the following acquired intangibleassets recorded (in thousands):

 
| **Amortized Intangible Assets** |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   | **Net********Carrying  Amount** |   |
|---------------------------------|--------|-----------------------------|--------|-------------------------------|--------|---------------------------------|--------|
| Software                        |   | $                           | 736    |                          | $      | (140                            | )      | $ | 596 |   |
|                            |   |                        |   |                          |   |                            |   |   |   |   |
| Customer based                  |   | 304                         |   | (143                          | )      | 161                             |   |
|                            |   |                        |   |                          |   |                            |   |
| Non-compete agreements          |   | 200                         |   | (72                           | )      | 128                             |   |
|                            |   |                        |   |                          |   |                            |   |
| Software development            |   | 441                         |   | (28                           | )      | 413                             |   |
|                            |   |                        |   |                          |   |                            |   |
| Total                           |   | $                           | 1,681  |                          | $      | (383                            | )      | $ | 1,298 |   |

 

The following table summarizes the estimated amortization expense forthese assets (in thousands):

 

| **Fiscal  Year** |   |   | ** ** |
|------------------|--------|--------|------------|
| 2003             |   | $      | 651        |   |
| 2004             |   | 695    |       |
| 2005             |   | 245    |       |
|             |   | $      | 1,591      |   |

 

**6.****                                     ****Restructuring, severance, and impairment costs**

 

In the second quarter of 2002 in accordancewith EITF 94-3, the Company incurred a restructuring charge of $7.8 millionconsisting of $4.0 million in severance for the reduction of staff and $3.8million in facility costs for facility downsizing.  Of the $4.0 million severance accrual, there is $0.2 million ofemployee-related costs remaining at June 27, 2003 for 10 employees terminatedin the second quarter of 2003, and whose severance will be paid in the thirdquarter of 2003.  Additionally, thereare $5.3 million of accrued liabilities primarily related to vacated leasesremaining from this restructuring.

 

11

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In the second quarter of 2003 in accordancewith SFAS No. 146, the Company incurred a restructuring charge of $3.9 millionconsisting of $0.7 million in severance for the reduction of staff and $3.2million in facility costs and fixed asset write-downs for facilitydownsizing.  The $0.7 million severanceaccrual represents 15 employees terminated as of June 27, 2003 whose severancewill be paid in the third quarter of 2003. The facility costs and fixed asset writedown of $3.2 million includes acharge for newly vacated facilities as well as previously vacatedfacilities.  Due to these facilitiesbeing located in the same premises and the interdependency of subleasing one ormore areas, the separate calculation of what portion of the charge relates tonewly versus previously vacated space is subjective, and therefore notpresented.

** **

Payments on lease obligations are scheduledto continue until 2008.  Marketconditions and the ability to sublease these properties may affect the ultimatecharge related to the lease obligations. Any potential recovery or additional charge may affect amounts reportedin future periods.

** **

**The restructuring liability for the sixmonths ended June 27, 2003 is summarized as follows (in thousands):**

** **
|                                 |   | **Employee  Related Costs** |   | **Facilities/Other  Related Costs** |   | **Total** |   |
|--------------------------------------|--------|-----------------------------|--------|-------------------------------------|--------|-----------|--------|
| Reserve balance at December 27, 2002 |   | $                           | 1,093  |                                | $      | 6,485     |   | $ | 7,578 |   |
| Amounts paid, net                    |   | (939                        | )      | (2,705                              | )      | (3,644    | )      |
| Restructuring charge                 |   | 746                         |   | 3,168                               |   | 3,914     |   |
| Reserve balance at June 27, 2003     |   | $                           | 900    |                                | $      | 6,948     |   | $ | 7,848 |   |

 

**7.****                                     ****Comprehensive Loss**

 

Comprehensive loss, net of taxes, for the three months and six monthsended June 27, 2003 and June 28, 2002 is as follows (in thousands):

 
|                                                  |   | **Three  Months Ended**        |   | **Six Months  Ended** |   |
|-------------------------------------------------------|--------|--------------------------------|--------|-----------------------|--------|
|                                                  |   | **June 27,**** ****2003** |   | **June 28,  2002**    |   | **June 27,  2003** |   | **June 28,**** ****2002** |   |
| Net loss                                              |   | $                              | (3,530 | )                     | $      | (2,863 | ) | $ | (5,446 | ) | $ | (1,849 | ) |
| Foreign currency  translation adjustment,  net of tax |   | 100                            |   | 171                   |   | 105 |   | 10 |   |
| Unrealized gain (loss) on  investments                |   | 46                             |   | (12                   | )      | 36 |   | (25 | ) |
|                                                  |   |                           |   |                  |   |   |   |   |   |
| Comprehensive loss                                    |   | $                              | (3,384 | )                     | $      | (2,704 | ) | $ | (5,305 | ) | $ | (1,864 | ) |

 

**8.****                                     ****Cumulative Effect ofChange in Accounting Principle**

 

Effective December 28, 2002, the Companyadopted Emerging Issues Task Force (EITF) Issue 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

 

12

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should be allocated among the separate units of accounting based ontheir relative fair values, with the amount allocated to the delivered itembeing limited to the amount that is not contingent on the delivery ofadditional items or meeting other specified performance conditions.  The new standard is required to be adoptedfor all new applicable revenue arrangements no later than the third quarter of2003.  Early adoption is permitted andthe Company has elected to adopt the new standard as of the beginning of thefirst quarter of 2003.  In addition, theCompany has elected to apply the new standard to all existing outsourcingarrangements impacted by EITF 00-21 and record to earnings the resultingcumulative effect as a change in accounting principle.  The adoption of EITF Issue 00-21 resulted ina non-cash charge, net of tax, of $2.6 million, or $0.11 per share, in thefirst quarter of 2003.

 

The following table illustrates the effect onnet loss and loss per share as if the change in accounting principle had beenadopted in prior periods (in thousands, except per share data):

 
|                                                            |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|-----------------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                                                            |   | **June 27,  2003**      |   | **June 28,  2002**    |   | **June 27,  2003** |   | **June 28,  2002** |   |
|                                                            |   |                    |   |                  |   |   |   |   |   |
| Loss before cumulative  effect, as reported                     |   | $                       | (3,530 | )                     | $      | (2,863 | ) | $ | (2,849 | ) | $ | (1,849 | ) |
| Pro forma effect of change  in accounting principle, net of tax |   | —                  |   | (433                  | )      | — |   | (1,009 | ) |
| Pro forma net loss                                              |   | $                       | (3,530 | )                     | $      | (3,296 | ) | $ | (2,849 | ) | $ | (2,858 | ) |
|                                                            |   |                    |   |                  |   |   |   |   |   |
| Basic & diluted net  loss per share                         |   |                    |   |                  |   |   |   |   |   |
| Loss before cumulative  effect– as reported                |   | $                       | (0.14  | )                     | $      | (0.12 | ) | $ | (0.11 | ) | $ | (0.08 | ) |
| Pro forma effect of change  in accounting principle, net of tax |   | —                  |   | (0.02                 | )      | — |   | (0.04 | ) |
| Pro forma net loss per  share                                   |   | $                       | (0.14  | )                     | $      | (0.14 | ) | $ | (0.11 | ) | $ | (0.12 | ) |

*** ***

**9.****                                     ****Disclosure of Segment Information**

 

The Company currently has three reportableoperating segments:  healthcare (whichis the delivery of consulting and systems integration (“CSI”) services tohealth delivery, health plan, and government clients), life sciences (which isthe delivery of CSI services to pharmaceutical and other life sciencesclients), and outsourcing (which is the delivery of information technology andbusiness process outsourcing services to clients).  The Company’s segments are managed on an integrated basis inorder to serve clients by assembling multi-disciplinary teams, which providecomprehensive services.  The amount ofrevenues attributed to each segment is accounted for by splitting the revenueson each client engagement based upon the hourly rates charged to the client forthe services of each segment.  Costs arenot transferred across segments.

 

The Company evaluates its segments’performance based on revenues and operating income.  Selling and general and administrative expense (includingcorporate functions, occupancy related costs, depreciation, professional development,recruiting, and marketing), to some extent, are managed at the corporate leveland allocated to each operating segment based on either net revenues, actualusage, or other reasonable allocation methods.

 

13

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The following segment information is for thethree month and six month periods ended June 27, 2003 and June 28, 2002 (in thousands):

 

**For the threemonths ended June 27, 2003:**

 
|                                            |   | **Healthcare** |   | **Life  Sciences** |   | **Outsourcing** |   | **Other** |   | **Totals** |       |
|-------------------------------------------------|--------|----------------|--------|--------------------|--------|-----------------|--------|-----------|--------|------------|------------|
| Revenues  before reimbursements                 |   | $              | 30,188 |               | $      | 15,036          |   | $         | 26,086 |       | $          | — |   | **$** | **71,310** | ** ** |
|                                            |   |           |   |               |   |            |   |      |   |       |       |   |   |   |   |   |
| Reimbursements                                  |   | 3,354          |   | 277                |   | 421             |   | —    |   | **4,052**  | ** ** |
|                                            |   |           |   |               |   |            |   |      |   |       |       |
| Total  revenues                                 |   | 33,542         |   | 15,313             |   | 26,507          |   | —    |   | **75,362** | ** ** |
|                                            |   |           |   |               |   |            |   |      |   |       |       |
| Cost  of services before reimbursable expenses  |   | 17,233         |   | 9,571              |   | 21,899          |   | —    |   | **48,703** | ** ** |
|                                            |   |           |   |               |   |            |   |      |   |       |       |
| Reimbursable  expenses                          |   | 3,354          |   | 277                |   | 421             |   | —    |   | **4,052**  | ** ** |
|                                            |   |           |   |               |   |            |   |      |   |       |       |
| Total  cost of services                         |   | 20,587         |   | 9,848              |   | 22,320          |   | —    |   | **52,755** | ** ** |
|                                            |   |           |   |               |   |            |   |      |   |       |       |
| Gross  profit                                   |   | 12,955         |   | 5,465              |   | 4,187           |   | —    |   | **22,607** | ** ** |
|                                            |   |           |   |               |   |            |   |      |   |       |       |
| Selling  expenses                               |   | 4,315          |   | 2,572              |   | 463             |   | 349       |   | **7,699**  | ** ** |
|                                            |   |           |   |               |   |            |   |      |   |       |       |
| General  & administrative expenses          |   | 6,911          |   | 5,838              |   | 3,063           |   | 786       |   | **16,598** | ** ** |
|                                            |   |           |   |               |   |            |   |      |   |       |       |
| Restructuring,  severance, and impairment costs |   | (35            | )      | 3,983              |   | —          |   | (34       | )      | **3,914**  | ** ** |
|                                            |   |           |   |               |   |            |   |      |   |       |       |
| Income  (loss) from operations                  |   | $              | 1,764  |               | $      | (6,928          | )      | $         | 661    |       | $          | (1,101 | ) | **$** | **(5,604** | **)** |

 

**For the threemonths ended June 28, 2002:**

 
|                                            |   | **Healthcare** |   | **Life  Sciences** |   | **Outsourcing** |   | **Other** |   | **Totals** |       |
|-------------------------------------------------|--------|----------------|--------|--------------------|--------|-----------------|--------|-----------|--------|------------|------------|
| Revenues  before reimbursements                 |   | $              | 29,492 |               | $      | 18,011          |   | $         | 18,695 |       | $          | — |   | **$** | **66,198** | ** ** |
|                                            |   |           |   |               |   |            |   |      |   |       |       |   |   |   |   |   |
| Reimbursements                                  |   | 3,415          |   | 463                |   | 59              |   | —    |   | **3,937**  | ** ** |
|                                            |   |           |   |               |   |            |   |      |   |       |       |
| Total  revenues                                 |   | 32,907         |   | 18,474             |   | 18,754          |   | —    |   | **70,135** | ** ** |
|                                            |   |           |   |               |   |            |   |      |   |       |       |
| Cost  of services before reimbursable expenses  |   | 16,976         |   | 9,905              |   | 14,928          |   | —    |   | **41,809** | ** ** |
|                                            |   |           |   |               |   |            |   |      |   |       |       |
| Reimbursable  expenses                          |   | 3,415          |   | 463                |   | 59              |   | —    |   | **3,937**  | ** ** |
|                                            |   |           |   |               |   |            |   |      |   |       |       |
| Total  cost of services                         |   | 20,391         |   | 10,368             |   | 14,987          |   | —    |   | **45,746** | ** ** |
|                                            |   |           |   |               |   |            |   |      |   |       |       |
| Gross  profit                                   |   | 12,516         |   | 8,106              |   | 3,767           |   | —    |   | **24,389** | ** ** |
|                                            |   |           |   |               |   |            |   |      |   |       |       |
| Selling  expenses                               |   | 3,253          |   | 2,346              |   | 966             |   | 374       |   | **6,939**  | ** ** |
|                                            |   |           |   |               |   |            |   |      |   |       |       |
| General  & administrative expenses          |   | 7,311          |   | 5,101              |   | 2,379           |   | (22       | )      | **14,769** | ** ** |
|                                            |   |           |   |               |   |            |   |      |   |       |       |
| Restructuring,  severance, and impairment costs |   | 1,837          |   | 5,866              |   | —          |   | 115       |   | **7,818**  | ** ** |
|                                            |   |           |   |               |   |            |   |      |   |       |       |
| Income  (loss) from operations                  |   | $              | 115    |               | $      | (5,207          | )      | $         | 422    |       | $          | (467 | ) | **$** | **(5,137** | **)** |

 

14

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**For the sixmonths ended June 27, 2003:**

** **
|                                            |   | **Healthcare** |   | **Life  Sciences** |   | **Outsourcing** |   | **Other** |       | **Totals**  |       |
|-------------------------------------------------|--------|----------------|--------|--------------------|--------|-----------------|--------|-----------|------------|-------------|------------|
| Revenues  before reimbursements                 |   | $              | 57,887 |               | $      | 32,973          |   | $         | 50,580     |        | $          | — | ** ** | **$** | **141,440** | ** ** |
|                                            |   |           |   |               |   |            |   |      |       |        |       |   |   |   |   |   |
| Reimbursements                                  |   | 6,167          |   | 733                |   | 765             |   | —    | ** ** | **7,665**   | ** ** |
|                                            |   |           |   |               |   |            |   |      |       |        |       |
| Total  revenues                                 |   | 64,054         |   | 33,706             |   | 51,345          |   | —    | ** ** | **149,105** | ** ** |
|                                            |   |           |   |               |   |            |   |      |       |        |       |
| Cost  of services before reimbursable expenses  |   | 33,616         |   | 19,205             |   | 43,469          |   | —    | ** ** | **96,290**  | ** ** |
|                                            |   |           |   |               |   |            |   |      |       |        |       |
| Reimbursable  expenses                          |   | 6,167          |   | 733                |   | 765             |   | —    | ** ** | **7,665**   | ** ** |
|                                            |   |           |   |               |   |            |   |      |       |        |       |
| Total  cost of services                         |   | 39,783         |   | 19,938             |   | 44,234          |   | —    | ** ** | **103,955** | ** ** |
|                                            |   |           |   |               |   |            |   |      |       |        |       |
| Gross  profit                                   |   | 24,271         |   | 13,768             |   | 7,111           |   | —    | ** ** | **45,150**  | ** ** |
|                                            |   |           |   |               |   |            |   |      |       |        |       |
| Selling  expenses                               |   | 8,717          |   | 4,588              |   | 1,200           |   | 463       | ** ** | **14,968**  | ** ** |
|                                            |   |           |   |               |   |            |   |      |       |        |       |
| General  & administrative expenses          |   | 12,957         |   | 11,158             |   | 5,997           |   | 1,063     | ** ** | **31,175**  | ** ** |
|                                            |   |           |   |               |   |            |   |      |       |        |       |
| Restructuring,  severance, and impairment costs |   | (35            | )      | 3,983              |   | —          |   | (34       | )          | **3,914**   | ** ** |
|                                            |   |           |   |               |   |            |   |      |       |        |       |
| Income  (loss) from operations                  |   | $              | 2,632  |               | $      | (5,961          | )      | $         | (86        | )           | $          | (1,492 | ) | **$** | **(4,907** | **)** |

 

**For the sixmonths ended June 28, 2002:**

** **
|                                            |   | **Healthcare** |   | **Life  Sciences** |   | **Outsourcing** |   | **Other** |       | **Totals**  |       |
|-------------------------------------------------|--------|----------------|--------|--------------------|--------|-----------------|--------|-----------|------------|-------------|------------|
| Revenues  before reimbursements                 |   | $              | 58,335 |               | $      | 35,532          |   | $         | 35,608     |        | $          | — | ** ** | **$** | **129,475** | ** ** |
|                                            |   |           |   |               |   |            |   |      |       |        |       |   |   |   |   |   |
| Reimbursements                                  |   | 6,708          |   | 998                |   | 108             |   | —    | ** ** | **7,814**   | ** ** |
|                                            |   |           |   |               |   |            |   |      |       |        |       |
| Total  revenues                                 |   | 65,043         |   | 36,530             |   | 35,716          |   | —    | ** ** | **137,289** | ** ** |
|                                            |   |           |   |               |   |            |   |      |       |        |       |
| Cost  of services before reimbursable expenses  |   | 33,374         |   | 20,531             |   | 27,977          |   | —    | ** ** | **81,882**  | ** ** |
|                                            |   |           |   |               |   |            |   |      |       |        |       |
| Reimbursable  expenses                          |   | 6,708          |   | 998                |   | 108             |   | —    | ** ** | **7,814**   | ** ** |
|                                            |   |           |   |               |   |            |   |      |       |        |       |
| Total  cost of services                         |   | 40,082         |   | 21,529             |   | 28,085          |   | —    | ** ** | **89,696**  | ** ** |
|                                            |   |           |   |               |   |            |   |      |       |        |       |
| Gross  profit                                   |   | 24,961         |   | 15,001             |   | 7,631           |   | —    | ** ** | **47,593**  | ** ** |
|                                            |   |           |   |               |   |            |   |      |       |        |       |
| Selling  expenses                               |   | 6,479          |   | 4,572              |   | 2,039           |   | 743       | ** ** | **13,833**  | ** ** |
|                                            |   |           |   |               |   |            |   |      |       |        |       |
| General  & administrative expenses          |   | 13,723         |   | 9,940              |   | 4,650           |   | 1,169     | ** ** | **29,482**  | ** ** |
|                                            |   |           |   |               |   |            |   |      |       |        |       |
| Restructuring,  severance, and impairment costs |   | 1,837          |   | 5,866              |   | —          |   | 115       | ** ** | **7,818**   | ** ** |
|                                            |   |           |   |               |   |            |   |      |       |        |       |
| Income  (loss) from operations                  |   | $              | 2,922  |               | $      | (5,377          | )      | $         | 942        |        | $          | (2,027 | ) | **$** | **(3,540** | **)** |

 

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**Detail of Outsourcing revenues:**

 

Outsourcing revenues before reimbursements include revenues related toa major subcontractor on several projects. The breakdown of revenue in outsourcing is as follows (in thousands):

 
|                            |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|---------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                            |   | **June 27,  2003**      |   | **June 28,  2002**    |   | **June 27,  2003** |   | **June 28,********2002** |   |
| Internally generated revenues   |   | $                       | 20,225 |                  | $      | 15,844 |   | $ | 39,903 |   | $ | 31,112 |   |
| Subcontractor revenues          |   | 5,861                   |   | 2,851                 |   | 10,677 |   | 4,496 |   |
|                            |   |                    |   |                  |   |   |   |   |   |
| Revenues before  reimbursements |   | $                       | 26,086 |                  | $      | 18,695 |   | $ | 50,580 |   | $ | 35,608 |   |

 

**10.          Lineof Credit**

 

                The Companyhas a revolving line of credit, under which it is allowed to borrow up to $7.0million at an interest rate of the prevailing prime rate with an expiration ofMay 1, 2004. There was no outstanding balance under the line of credit at June27, 2003. Due to a net loss at June 27, 2003, the Company is out of compliancewith certain bank covenants contained in the line of credit agreement. However,we received a waiver for the covenant non-compliance and are renegotiating ourline of credit agreement to implement less restrictive covenants.  While we believe the Company can renegotiatethe bank covenants, there is no assurance that this can be accomplished.

 

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**Item 2.****  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

THE FOLLOWING MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINSFORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIESLITIGATION REFORM ACT OF 1995.  SUCHFORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THOSE SETFORTH HEREIN UNDER THE CAPTION “RISKS RELATING TO OUR BUSINESS,” AND OTHERREPORTS WE FILE WITH THE SECURITIES AND EXCHANGE COMMISSION.  OUR ACTUAL RESULTS COULD DIFFER MATERIALLYFROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS.

 

**Overview**

 

We provide services primarily to providers,payors, government agencies, pharmaceutical, biogenetic, and other healthcareorganizations in North America, Europe, and Asia.  We generate substantially all of our revenues from fees forprofessional services and information technology outsourcing services.  We typically bill for our services on anhourly, fixed-fee, or monthly fixed-fee basis as specified by the agreementwith a particular client.  In ourconsulting and systems integration businesses (“CSI”), the healthcare and lifesciences business units, we establish either standard or target hourly ratesfor each level of consultant based on several factors, including industry andassignment-related experience, technical expertise, skills, and knowledge.  For services billed on an hourly basis, feesare determined by multiplying the amount of time expended on each assignment bythe project hourly rate for the consultant(s) assigned to the engagement.  Fixed fees, including outsourcing fees, areestablished on a per-assignment or monthly basis and are based on severalfactors such as the size, scope, complexity and duration of an assignment, thenumber of our employees required to complete the assignment, and the volume oftransactions or interactions.  Actualhourly or fixed fees for an assignment may vary from the standard, target, orhistorical rates that we have charged. Revenues are generally recognized related to the level of servicesperformed based upon the amount of time completed on each assignment versus theprojected number of hours required to complete such assignment, the amount ofcost incurred on the assignment versus the estimated total cost to complete theassignment, or on a straight-line basis over the period of performance ofservice.  Provisions are made forestimated uncollectible amounts based on our historical experience.  We may obtain payment in advance ofproviding services.  These advances arerecorded as customer advances and reflected as a liability on our balancesheet.

 

Out-of-pocket expenses billed and reimbursedby clients are included in total revenues, and then deducted to determine netrevenues.  For purposes of analysis, allpercentages in this discussion are stated as a percentage of net revenues,since we believe that this is the more relevant measure of our business.

 

Cost of services primarily consists of thesalaries, bonuses, and related benefits of client-serving consultants andoutsourcing associates, and subcontractor expenses.  Selling expenses primarily consist of the salaries, benefits,travel, and other costs of our sales force, as well as marketing and marketresearch expenses.  General andadministrative expenses primarily consist of the costs attributable to thesupport of our client-serving professionals, such as: non-billable travel;office space occupancy; information systems; salaries and expenses forexecutive management, financial accounting and administrative personnel;expenses for firm and business unit governance meetings; recruiting fees;professional development and training; and legal and other professionalservices.  As associate related costsare relatively fixed in the short term, variations in our revenues andoperating results in our CSI business can occur as a result of variations inbilling margins and utilization rates of our billable associates.

 

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Our most significant expenses are our human resource and related salaryand benefit expenses.  As of June 27,2003, approximately 1,046 of our employees are billable consultants.  Another 669 employees form our firm’soutsourcing business.  The salaries andbenefits of such billable consultants and outsourcing related employees arerecognized in our cost of services. Most non-billable employee salaries and benefits are recognized as acomponent of either selling or general and administrative expenses.  Approximately 18.2% of our workforce, or 381employees, are classified as non-billable. Our cost of services as a percentage of revenues is directly related toseveral factors, including, but not limited to, our consultant utilization,which is the ratio of total billable hours to available hours in a givenperiod, the amount and timing of cost incurred, our ability to control costs onour outsourcing projects, the billed rate on time and material contracts, andthe estimated cost to complete our non-outsourcing fixed price contracts.  We evaluate our non-outsourcing fixed pricecontracts on a monthly basis by estimating the cost to complete the assignment.  We then recognize revenues to achieve aconstant margin over the remaining term of the engagement.  We have changed our accounting foroutsourcing contracts with the adoption of EITF 00-21 “Accounting for RevenueArrangements with Multiple Deliverables,” in the first quarter of fiscal year2003.  Under our outsourcing contracts,a significant portion of our revenues are fixed and allocated over the contracton a straight-line basis, as we are required to provide a specified level ofservices subject to certain performance measurements.  Also, certain revenues may fluctuate under the contracts based onthe volume of transactions we process or other measurements of serviceprovided.  If we incur higher costs toprovide the required services or receive less revenue due to reducedtransaction volumes, our gross margin can be negatively impacted.

 

In our CSI business, we manage consultantutilization by monitoring assignment requirements and timetables, available andrequired skills, and available consultant hours per week and per month.   Differences in personnel utilization ratescan result from variations in the amount of non-billed time, which hashistorically consisted of training time, vacation time, time lost to illnessand inclement weather, and unassigned time. Non-billed time also includes time devoted to other necessary andproductive activities such as sales support and interviewing prospectiveemployees.  Unassigned time results fromdifferences in the timing of the completion of an existing assignment and thebeginning of a new assignment.  In orderto reduce and limit unassigned time, we actively manage personnel utilizationby monitoring and projecting estimated engagement start and completion datesand matching consultant availability with current and projected clientrequirements.  The number of consultantsstaffed on an assignment will vary according to the size, complexity, duration,and demands of the assignment. Assignment terminations, completions, inclement weather, and schedulingdelays may result in periods in which consultants are not optimallyutilized.  An unanticipated terminationof a significant assignment or an overall lengthening of the sales cycle couldresult in a higher than expected number of unassigned consultants and couldcause us to experience lower margins. In addition, expansion into new markets and the hiring of consultants inadvance of client assignments have resulted and may continue to result inperiods of lower consultant utilization.

 

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**Results of Operations for the ThreeMonths Ended June 27, 2003 and June 28, 2002**

 

*Revenues. *Our net revenues increased to $71.3 million for the quarter ended June27, 2003, an increase of 7.7% from $66.2 million for the quarter ended June 28,2002.  Our total revenues increased to$75.4 million for the quarter ended June 27, 2003, an increase of 7.5% from$70.1 million for the quarter ended June 28, 2002.  The increases were primarily due to revenue from our acquisitionsand two outsourcing engagements that began in mid-2002.  These increases were partially offset by asignificant decline in life sciences revenues (exclusive of acquisitions),where we rolled off a significant client engagement in March 2003 and wereunable to replace that work with new contracts.  If we do not obtain new engagements and/or follow-up work fromthis or other clients, we could see a further decline in revenues in the lifesciences business unit.  Additionally,we have several contracts in the health plan sector of our healthcare businesswhich will be concluding over the remainder of 2003.  If we are unable to replace these contracts with new or follow-onengagements, we could see a decline in revenues in healthcare as well.

 

*Cost ofServices. *Cost of services before reimbursable expensesincreased to $48.7 million for the quarter ended June 27, 2003, an increase of16.5% from $41.8 million for the quarter ended June 28, 2002.  The increase is primarily due to the costsof services of the outsourcing engagements that began in mid-2002 and costs ofservices from the recent acquisitions, partially offset by a reduction in staffin our life sciences business unit.

 

*Gross Profit. *Gross profit decreased to $22.6 millionfor the quarter ended June 27, 2003, a decrease of 7.3% from $24.4 million forthe quarter ended June 28, 2002 primarily due to the change in our revenue mixfrom life science and healthcare revenues to outsourcing revenues, which aregenerally at a lower margin. Additionally, life sciences’ margin declined as we did not reduce costsas quickly as the decline in our revenue. Gross profit as a percentage of net revenues decreased from 36.8% forthe quarter ended June 28, 2002 to 31.7% for the quarter ended June 27, 2003,due to the factors discussed above, and due to lower margin percentages on ouroutsourcing contracts compared to the prior year related to the high proportionof subcontractors in our more recent contracts.

 

*SellingExpenses. *Selling expenses increased to $7.7 millionfor the quarter ended June 27, 2003, an increase of 11.0% from $6.9 million forthe quarter ended June 28, 2002, primarily due to selling costs added by theacquisition of Paragon and an increase in salespeople for our healthcarebusiness unit.  Selling expenses as apercentage of net revenue increased from 10.5% for the quarter ended June 28,2002 to 10.8% for the quarter ended June 27, 2003.

 

*Generaland Administrative Expenses. *General and administrative expenses increasedto $16.6 million for the quarter ended June 27, 2003, an increase of 12.4% from$14.8 million for the quarter ended June 28, 2002.  The increase was primarily due to general and administrativeexpenses from  acquired companies and aminor increase in other miscellaneous costs for the existing businessunits.  General and administrativeexpenses as a percentage of net revenues increased from 22.3% for the quarterended June 28, 2002 to 23.3% for the quarter ended June 27, 2003.  While we are planning to continue oursignificant cost reduction efforts, our general and administrative expenses arenot expected to decline to last year’s level in the next several quarters dueto investments we are making in software product development in life sciencesand in the Patient Safety Institute and related technologies.

 

*Restructuring, Severance, and ImpairmentCosts. *Restructuring,severance, and impairment costs were $3.9 million for the three months endedJune 27, 2003 compared to $7.8 million for the three months ended June 28,2002.  Restructuring, severance, andimpairment costs for the three months ended June 27, 2003 includedapproximately $0.7 million of severance costs related to staff reductions and

 

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approximately $3.2 million for facilitydownsizing and fixed asset write-downs. Restructuring, severance, and impairment costs for the three monthsended June 28, 2002 included approximately $4.0 million of severance costsrelated to staff reductions and approximately $3.8 million for facilitydownsizing.  We expect to incuradditional restructuring severance costs in the third quarter and possiblyfourth quarter of fiscal year 2003 as we reduce additional staff and generaland administrative expense from our life sciences business.

 

*InterestIncome, Net. *Interest income, net of interest expenses,increased to $0.3 million for the quarter ended June 27, 2003 from $0.2 millionfor the quarter ended June 28, 2002. Interest income net of interest expenses as a percentage of net revenuesremained at 0.4% for the quarter ended June 27, 2003 as in the quarter endedJune 28, 2002.

 

*OtherExpenses, Net*.  Other expense increased to $0.2 million forthe quarter ended June 27, 2003 compared to expenses of $0.1 million for thequarter ended June 28, 2002.  Theexpenses in the current quarter are due to the 19.9% minority interest in theincome generated in the second quarter by the subsidiary which contains themajority of FCG’s outsourcing business.

 

*IncomeTaxes. *The benefit for income taxes was 36.5% forthe quarter ended June 27, 2003, compared to a provision rate of 42% in thequarter ended June 28, 2002 which was based on expected full year profit infiscal 2002.  The benefit rate is lowerthan the previous provision rate due to the existence of certain non-deductibleexpenses.

 

**Resultsof Operations for the Six Months Ended June 27, 2003 and June 28, 2002**

 

*Revenues*.  Our net revenues increased to $141.4 millionfor the six months ended June 27, 2003, an increase of 9.2% from $129.5 millionfor the six months ended June 28, 2002.  Total revenues increased to $149.1 million for the six months ended June27, 2003, an increase of 8.6% from $137.3 million for the six months ended June28, 2002.  The increases were primarilydue to revenues from our acquisitions and the outsourcing contracts that beganmid-2002.  These increases were partially offset by a significant decline in lifesciences revenues (exclusive of acquisitions), where we rolled off asignificant client engagement in March 2003 and were unable to replace thatwork with new contracts.  If we do notobtain new engagements and/or follow-up work from this or other clients, wecould see a further decline in revenues in the life sciences business unit.  Additionally, we have several contracts in thehealth plan sector of our healthcare business which will be concluding over theremainder of 2003.  If we are unable toreplace these contracts with new or follow-on engagements, we could see adecline in revenues in healthcare as well.

 

*Cost ofServices. *Cost of services before reimbursable expensesincreased to $96.3 million for the six months ended June 27, 2003, an increaseof 17.6% from $81.9 million for the six months ended June 28, 2002.  The increase is primarily due to the costsof services of the outsourcing engagements that began in mid-2002 and costs ofservices from the recent acquisitions, partially offset by a reduction in staffin our life sciences business unit.

 

*Gross Profit*.  Gross profit decreased to $45.1 million forthe six months ended June 27, 2003, a decrease of 5.1% from $47.6 million forthe six months ended June 28, 2002 primarily due to the change in our revenuemix from life science and healthcare revenues to outsourcing revenues, whichare generally at a lower margin.  Additionally,life sciences margin declined as we did not reduce costs as quickly as thedecline in our revenue. Gross profit as a percentage of net revenue decreasedto 31.9% for the six months ended June 27, 2003 from 36.8% for the six monthsended June 28, 2002, due to the factors discussed above and lower marginpercentages on our outsourcing contracts compared to the prior year.  This lower margin percentage in outsourcingis related to the higher proportion of subcontractors in our

 

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more recent contracts, and costoverruns on certain outsourcing contracts in the first quarter of fiscal year2003.

* *

*Selling Expenses.* Selling expenses increased to $15.0 millionfor the six months ended June 27, 2003, an increase of 8.2% from $13.8 millionfor the six months ended June 28, 2002, primarilydue to selling costs added by the acquisition of Paragon and an increase insalespeople for our healthcare business unit.   Selling expenses as apercentage of net revenues decreased from 10.7% for the six months ended June28, 2002 to 10.5% for the six months ended June 27, 2003 due to the increase inrevenue.

 

*General and Administrative Expenses.* General and administrative expenses increasedto $31.2 million for the six months ended June 27, 2003, an increase of 5.7%from $29.5 million for the six months ended June 28, 2002 primarily due to costs from our acquiredcompanies.  General andadministrative expenses as a percentage of net revenues decreased from 22.8%for the six months ended June 28, 2002 to 22.0% for the six months ended June27, 2003.  While we are planning tocontinue our significant cost reduction efforts, our general and administrativeexpenses are not expected to decline to last year's level in the next severalquarters due to investments we are making in software product development inlife sciences and in the Patient Safety Institute and related technologies.

 

*Restructuring, Severance, and ImpairmentCosts. *Restructuring,severance, and impairment costs were $3.9 million for the six months ended June27, 2003 compared to $7.8 million for the six months ended June 28, 2002.  Restructuring, severance and impairmentcosts for the six months ended June 27, 2003 included approximately $0.7million of severance costs related to staff reductions and approximately $3.2million for facility downsizing and fixed asset write-downs.  Restructuring, severance and impairmentcosts for the six months ended June 28, 2002 included approximately $4.0million of severance costs related to staff reductions and approximately $3.8million for facility downsizing.  Weexpect to incur additional restructuring severance costs in the third quarterand possibly fourth quarter of fiscal year 2003 as we reduce additional staffand general and administrative expense from our life sciences business.

 

*Interest Income, Net.*  Interest income, net of interest expenses,remained the same at $0.5 million for the six months ended June 27, 2003 andJune 28, 2002.  Interest income net ofinterest expenses as a percentage of net revenues increased to 0.4% for the sixmonths ended June 27, 2003 from 0.3% for the six months ended June 28, 2002 .

 

*Other Expenses, Net.* Other expense decreased to $0.0 million forthe six months ended June 27, 2003 from $0.1 million for the six months endedJune 28, 2002 primarily due to a reduction in minority interest expense due tohaving earned less income in our 80.1% owned outsourcing entity.

 

*Income Taxes.* The provision rate for income taxes was 42%for the six months ended June 28, 2002 compared to a benefit of 35.0% for thesix months ended June 27, 2003.  Theprovision rate was based on expected full year profit in fiscal 2002.  The benefit rate is lower than the provisionrate due to the existence of certain non-deductible expenses.

 

*Cumulative Effect of Change in Accounting Principle*.  InNovember 2002, the Emerging Issues Task Force (EITF) reached a consensus onIssue 00-21, titled “Accounting for Revenue Arrangements with MultipleDeliverables,”  which addresses how toaccount for arrangements that involve the delivery or performance of multipleproducts, services, and/or rights to use assets.  The new standard is required to be adopted for all new applicablerevenue arrangements no later than the third quarter of 2003.  Early adoption is permitted and weadopted the new standard as of the beginning of 2003.  In addition, we  electedto apply the new standard to all existing outsourcing arrangements impactedby EITF 00-21 and recorded to earnings in the first quarter of 2003 theresulting cumulative effect as a change in accounting principle.  We recorded a non-cash charge, net of tax,of $2.6 million, or $0.11 per share, in the first quarter of 2003.

** **

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**Liquidity and Capital Resources**

 

During the six months ended June 27, 2003, we generated cash flow fromoperations of $5.4 million.  During thesix months ended June 27, 2003, we used approximately $11.1 million to acquirethree companies (see Note 4 of the Notes to Consolidated Financial Statements)and $2.7 million of cash to purchase property and equipment, including computerand related equipment, and office furniture. At June 27, 2003, we had cash and investments available for sale of$60.2 million compared to $67.3 million at December 27, 2002.

 

We have a revolving line of credit, under which we are allowed toborrow up to $7.0 million at an interest rate of the prevailing prime rate withan expiration of May 1, 2004.  There wasno outstanding balance under the line of credit at June 27, 2003.   Due to a net loss at June 27, 2003, we areout of compliance with certain bank covenants contained in the line of creditagreement.  However, we received awaiver for the covenant non-compliance and are renegotiating our line of creditagreement to implement less restrictive covenants. While we believe we canrenegotiate the bank convenants, there is no assurance that this can beaccomplished.  

 

Managementbelieves that our existing cash and investments, together with funds generatedfrom operations, will be sufficient to meet operating requirements for at leastthe next twelve months.  Our cash andinvestments are available for capital expenditures (which are projected atapproximately $7 million for 2003, $2.7 million of which was spent during thesix months ended June 27, 2003), strategic investments, mergers andacquisitions, and other potential large-scale cash needs that may arise, including$2.4 million in cash that will be spent on or about January 2004 to purchasethe remaining 47.65% minority interest in FCG Infrastructure Services (formerlyCodigent Solutions Group, Inc.) that we do not already own.

 

## **Critical Accounting Policies and Estimates**

 

The foregoing discussion and analysis of ourfinancial condition and results of operations is based upon our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States.  The preparation of these financial statements requires us to makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities.  On an on-going basis,we evaluate our estimates, including those related to revenue recognition, costto complete client engagements, valuation of goodwill and long-lived andintangible assets, accrued liabilities, income taxes, restructuring costs, idlefacilities, 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 not readilyapparent from other sources.  Our actualresults may differ from our estimates and we do not assume any obligation toupdate any forward-looking information.

 

We believe the following critical accountingpolicies reflect our more significant assumptions and estimates used in thepreparation of our consolidated financial statements.

 

***RevenueRecognition and Unbilled Receivables***

 

Revenues are derived primarily fromconsulting, systems integration, and information technology outsourcingservices.  Revenues are recognized on atime-and-materials, level-of-effort, percentage-of-completion, or straight-linebasis.  Before revenues are recognized,the following four criteria must be met: (a) persuasive evidence of an arrangementexists; (b) delivery has occurred or services rendered; (c) the fee is fixedand determinable; and (d) collectibility is reasonably assured.  We determine if the fee is

 

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fixed and determinable and collectibility is reasonably assured basedon our judgments regarding the nature of the fee charged for services renderedand products delivered and the collectibility of those fees.  Arrangements range in length from less thanone year to seven years.  Thelonger-term arrangements are generally level-of-effort or fixed pricearrangements.

 

Revenues from time-and-materials arrangementsare generally recognized based upon contracted hourly billing rates as the workprogresses.  Revenues fromlevel-of-effort arrangements are recognized based upon a fixed price for thelevel or resources provided.  Revenuesfrom fixed fee arrangements for consulting and systems integration work aregenerally recognized on a percentage-of-completion basis.  We maintain, for each of our fixed feecontracts, estimates of total revenue and cost over the contract term. Forpurposes of periodic financial reporting on the fixed price consulting andsystem integration contracts, we accumulate total actual costs incurred to dateunder the contract. The ratio of those actual costs to our then-currentestimate of total costs for the life of the contract is then applied to ourthen-current estimate of total revenues for the life of the contract todetermine the portion of total estimated revenues that should be recognized. Wefollow this method because reasonably dependable estimates of the revenues andcosts applicable to various stages of a contract can be made.

 

Revenues recognized on fixed price consultingand system integration contracts are subject to revisions as the contractprogresses to completion.  If we do notaccurately estimate the resources required or the scope of the work to beperformed, do not complete our projects within the planned periods of time, ordo not satisfy our obligations under the contracts, then profit may besignificantly and negatively affected or losses may need to be recognized.  Revisions in our contract estimates arereflected in the period in which the determination is made that facts andcircumstances dictate a change of estimate. Favorable changes in estimatesresult in additional revenues recognized, and unfavorable changes in estimatesresult in a reduction of recognized revenues. Provisions for estimated losseson individual contracts are made in the period in which the loss first becomesknown.  Some contracts includeincentives for achieving either schedule targets, cost targets, or otherdefined goals.  Revenues from incentivetype arrangements are recognized when it is probable they will be earned.

 

As of the beginning offiscal year 2003, we adopted EITF Issue 00-21, titled “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 astand-alone basis; (2) there is objective and reliable evidence of the fairvalue of undelivered items; and (3) delivery of any undelivered item isprobable.  Arrangement considerationshould be allocated among the separate units of accounting based on theirrelative fair values, with the amount allocated to the delivered item beinglimited to the amount that is not contingent on the delivery of additionalitems or meeting other specified performance conditions.  We have created separate units ofaccounting on our existing outsourcing contracts based on the above criteriaand will do so on our future contracts. Generally, we have separated certain elements of our initial contractstages, where processes are reengineered into a new operating environment, fromthe ongoing operations of the contract. The primary impact of the adoption of this new standard will be that ourongoing contract operations, which constitute the vast majority of the revenuesfrom outsourcing contracts, will be recorded on a straight-line basis over thelife of the contract instead of on a percentage-of-completion basis inproportion to costs incurred.  Ingeneral, we will report lower margins on existing contracts in the early yearsof a contract and anticipate reporting increased margins in the later years ofa contract; however, no assurances can be made in that regard.  The new method will no longer be based on aconsistent margin over the life of a contract. We will likely experience greater volatility of outsourcing earnings ascontract revenues remain level and contract costs move up or down, or shiftfrom one quarter to another.

 

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

 

Unbilled receivables represent revenuesrecognized for services performed that were not billed at the balance sheet date.  The majority of these amounts are billed inthe subsequent month. Unbillable amounts arising from contracts occur whenrevenues recognized exceed allowable billings in accordance with thecontractual agreements.  As of June 27,2003, we had unbillable revenues included in current unbilled receivables ofapproximately $0.7 million, which were generally expected to be billed in thefollowing quarter.  In addition, we hadlong-term unbilled receivables at June 27, 2003, and June 28, 2002 of $6.6million and $9.2 million, respectively, on a single major outsourcing contractwith a term of seven years.  Thelong-term receivable will be billed and collected over the remaining three andone-half years of the contract through contractual billings that will exceedthe amounts to be earned as revenues.

 

Customer advances comprise payments fromcustomers for which services have not yet been performed or prepayments againstwork in process. These unearned revenues are deferred and recognized as futurecontract costs are incurred and as contract services are rendered.

 

***Allowancefor Doubtful Accounts***

 

We maintain an allowance for doubtfulaccounts for estimated losses resulting from the inability of our clients tomake required payments. If the financial condition of our clients were todeteriorate, resulting in an impairment of their ability to make payments,additional allowances may be required.  Management analyzes account receivables and historical bad debt,customer concentrations, credit worthiness, past collection experience, currenteconomic trends, and changes in our customer payment terms when evaluating theadequacy of doubtful accounts.

 

***Deferred Income Taxes***

 

We account forincome taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,”which requires recognition of deferred tax assets and liabilities for theexpected future tax consequences of events that have been included in thefinancial statements or tax returns. Our net deferred tax assets have historically consisted primarily of thetax benefit related to restructuring costs for facility closures, supplementalexecutive retirement plan contributions, and other accrued liabilities such asaccrued vacation pay, which are not deductible for tax purposes until paid.  During fiscal year 2003, we have generatedadditional deferred tax assets for net operating loss carryforwards resultingfrom the losses we are incurring, caused in part by the cumulative effect ofour change in revenue recognition method on our outsourcing contracts.  Based on our belief that it is more likelythan not that future taxable income will be sufficient to realize the deferredtax assets, we have not recorded a valuation allowance against our deferred taxasset.  We will evaluate the potentialneed for a valuation allowance on an ongoing basis.

 

***Goodwill and Intangible Assets***

 

Under SFAS No 142, we no longer amortize our goodwill and are requiredto complete an annual impairment test. We believe that the accounting assumptions and estimates related to theannual goodwill impairment testing are critical because these can change fromperiod to period.  The impairment testrequires us to forecast our future cash flows, which requires significantjudgment.  Our operating results

 

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havebeen negatively impacted by the worldwide economic conditions.   Accordingly, if our expectations of futureoperating results change, or if there are changes to other assumptions, ourestimate of the fair value of our reporting units could change significantlyresulting in a goodwill impairment charge, which could have a significantimpact on our consolidated financial statements.  As of June 27, 2003, we have $14.2 million of goodwill and$1.3 million of intangible assets recorded on our balance sheet (see Note5 of the Notes to Consolidated Financial Statements).

 

***Recent AccountingPronouncements***

 

In June 2002, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 146, “Accounting for Costs Associatedwith Exit or Disposal Activities.”  SFASNo. 146 addresses accounting and reporting costs associated with exit ordisposal activities and nullifies EITF Issue 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit anActivity.”  SFAS No. 146 requires that aliability for a cost associated with an exit or disposal activity shall berecognized and measured initially at its fair value in the period that theliability is incurred.  SFAS No. 146 iseffective for exit or disposal activities that are initiated after December 31,2002.  SFAS No. 146 affected ourrestructuring charge in the second quarter of fiscal year 2003, as we accruedonly severance related to employees terminated during the quarter, and not anyseverance related to planned future actions. As a result, the Company will record additional severance costs asincurred over the balance of the year.

 

In November2002, the EITF reached a consensus on Issue 00-21, titled “Accounting forRevenue Arrangements with Multiple Deliverables,” which addresses how toaccount for arrangements that involve the delivery or performance of multipleproducts, 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 is probable.  Arrangement consideration should beallocated 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. The new standard is required to be adopted for all new applicablerevenue arrangements no later than the third quarter of 2003.  Early adoption is permitted and we adoptedthe new standard as of the beginning of 2003. In addition, we elected to apply the new standard to all existingoutsourcing arrangements impacted by EITF 00-21 and recorded to earnings theresulting cumulative effect as a change in accounting principle.  We recorded a non-cash charge, net of tax,of $2.6 million, or $0.11 per share, in the first quarter of 2003.

 

In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others.” FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued.  It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while the provisions of the disclosure requirements are effective for financial statements of interim or annual reports ending after December 15, 2002.  At June 27, 2003, we had no guarantees outstanding.

 

In December 2002, the FASB issued SFASNo. 148, “Accounting for Stock-Based Compensation-Transition andDisclosure.” SFAS No. 148 amends SFAS No. 123, “Stock-Based Compensation,”to provide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation. Inaddition, SFAS No. 148 amends the

 

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disclosure requirements of SFAS No. 123 to require prominentdisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results.  Thedisclosure provisions of SFAS No. 148 are effective for fiscal years endingafter December 15, 2002.  At this time,we intend to continue to account for stock-based compensation to our associatesusing the methods prescribed by Accounting Principles Bulletin (APB) OpinionNo. 25, and related interpretations.  Wehave made certain disclosures required by SFAS No. 148 in our Notes toConsolidated Financial Statements.

 

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”) which changes the criteria by which one company includes another entity in its consolidated financial statements. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003, and apply in the first fiscal period beginning after June 15, 2003, for variable interest entities created prior to February 1, 2003.  We have not entered into any transactions or other arrangements which we believe would be considered variable interest entities.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”  SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity.  It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances).  Many of these instruments were previously classified as equity.  The guidance in SFAS No. 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.  We do not believe that the adoption of SFAS No. 150 will have a material impact on our consolidated financial statements.

 

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**Risks Relating to Our Business**

 

Before deciding to invest in us or tomaintain or increase your investment, you should carefully consider the risksdescribed below, in addition to the other information contained in thisreport.  The risks and uncertaintiesdescribed below are not the only ones facing our company.  Additional risks and uncertainties notpresently known to us or that we currently deem immaterial may also affect ourbusiness operations.  If any of theserisks are realized, our business, financial condition or results of operationscould be seriously harmed.  In thatevent, the market price for our common stock could decline and you may lose allor part of your investment.

 

*Many factors may causeour net revenues, operating results and cash flows to fluctuate and possiblydecline.*

 

Our net revenues, operating results, and cashflows may fluctuate significantly because of a number of factors, many of whichare outside of our control.  These factorsmay include:

 

•                  Theloss of one or more significant clients in any of our business segments;

•                  The roll-off or completion ofsignificant projects in any of our business segments;

•                  Fluctuations in market demand for ourservices, consultant hiring, and utilization;

•                  Delays or increased expenses insecuring and completing client engagements;

•                  Timing and collection of fees andpayments;

•                  Timing of new client engagements inany of our business segments;

•                  Increased competition and pricingpressures;

•                  The loss of key personnel and otheremployees;

•                  Changes in our, and our competitor’s,business strategy, pricing and billing policies;

•                  The timing of certain general andadministrative expenses;

•                  Completing acquisitions and the costsof integrating acquired operations;

•                  Variability in the number of billabledays in each quarter;

•                  The write-off of client billings;

•                  Return of fees for work deemedunsatisfactory by a client or claims or litigation resulting from the same;

•                  Entry into fixed price engagementsand engagements where some fees are contingent upon the client realizing acertain return on investment for a project;

•                  Availability of foreign net operatinglosses and other credits against our earnings;

•                  International currency fluctuations;

•                  Ability to sublease vacant officespace included in previous restructuring charges; and

•                  The fixed nature of a substantialportion of our expenses, particularly personnel and related costs,depreciation, office rent, and occupancy costs.

 

One or more of the foregoing factors may cause our operating expensesto be unexpectedly high during any given period.  In addition, we bill certain of our services on a fixed-pricebasis, and any assignment delays or expenditures of time beyond that projectedfor the assignment could result in write-offs of client receivables (bothunbilled and billed).  Significantwrite-offs could materially adversely affect our business, financial condition,and results of operations.  Our businessalso has significant collection risks. If we are unable to collect our receivables in a timely manner, ourbusiness and financial condition could also suffer.  If these or any other variables or unknowns were to cause ashortfall in revenues or earnings or otherwise cause a failure to meet public marketexpectations, our business could be adversely affected.

 

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Further, we adopted Emerging Issues TaskForce Issue 00-21, “EITF 00-21” in the first quarter of 2003, which affects theway we recognize revenue on long-term outsourcing agreements. The adoption ofEITF 00-21 results in separating our outsourcing contracts into multipleelements and separately accounting for each element, rather than accounting forall elements together as a group.  As aresult, we now recognize revenue from certain service elements of ouroutsourcing agreements on a straight-line basis over the life of the contract,rather than on a percentage of completion basis.  Since we typically incur greater costs and expenses during theearly phase of the service elements (which will now have straight-line revenue)than we do in the later years of those elements, we believe our net income willbe less during the early stages of our outsourcing engagements.  In addition, if we are unable to managecosts as planned in the later stages of an outsourcing engagement, our netincome will likewise be negatively impacted. In general, income from our outsourcing contracts will be less stable inthe future, since it will be more susceptible to changes in the mix of newerversus older contracts, and to the impact of cost fluctuations from quarter toquarter without a compensating change in revenue.  If we fail to meet our public market expectations or otherwiseexperience a shortfall in our net income due to these fluctuations, ourbusiness could be adversely affected and the price of our stock may decline.

 

Finally, we reported net losses for thesecond quarter of 2003, and we cannot assure you that we will achieve positiveearnings in the future.  If we areunable to achieve profitability on a quarterly or annual basis, the marketprice of our common stock could be adversely affected and our financialcondition would suffer.

 

*Our outsourcing engagements comprise asignificant part of our revenues.*

 

Our outsourcing agreements require that weinvest significant amounts of time and resources in order to win theengagement, transition the client’s information technology department to ourmanagement, and complete the initial transformation of our client’s informationtechnology functioning to provide improved service at a lower cost and meetagreed-upon service levels.  Often, werecover this investment through payments over the life of the outsourcingagreement.  If we are unable to achieveagreed-upon service levels or otherwise breach the terms of our outsourcingagreements, the clients may have rights to terminate our agreements for causeand we may be unable to recover our investments.  Any failure by us to recover these investments may have a materialadverse effect on our financial condition, results of operations, and price ofour common stock.

 

Currently, we have six active outsourcingrelationships. Net revenues from such outsourcing relationships, as of thequarter ended June 27, 2003, represented approximately 35% of our consolidatednet revenues.  The substantial majorityof these revenues are received from four large outsourcing accounts that havesigned long term agreements with us. However, the loss of any of our outsourcing relationships would have amaterial impact on our business and results of operations.  In each of these engagements, the clientshave fully outsourced their information technology staff and functions to us.  In all of our outsourcingrelationships, we generally enter into additional agreements, includingdetailed service level agreements, which establish performance levels andstandards for our services.  If we failto meet these performance levels or standards, our clients may receive monetaryservice level credits from us or, if we experience persistent failures, ourclients may have a right to terminate the outsourcing contract for cause andhave no obligation to pay us any termination fees.  Our anticipated revenues from our outsourcing engagements couldbe significantly reduced if we are unable to satisfy our performance levels orstandards.  Additionally, ouroutsourcing contracts can be terminated at the convenience of our clients uponthe payment of a termination fee.

 

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Our outsourcing engagements typically requirethat we hire part or all of a client’s information technology personnel.  We cannot assure you that we will be able toretain these individuals, and effectively hire additional personnel as neededto meet the obligations of our contract. Any failure by us to retain these individuals or otherwise satisfy ourcontractual obligations could have a material adverse effect on theprofitability of our outsourcing business and our reputation as an informationtechnology services outsourcing provider.

 

Finally, we have publicly announced our intentions to expand ouroutsourcing business and perform our information technology outsourcingservices for other potential clients. We anticipate expanding our outsourcing business to perform discreteinformation technology services for clients. The amount of time and resources required to win client engagements forour outsourcing business is significant, and we may not win the number or typeof client engagements that we anticipate. If we fail to meet our objective to secure new outsourcing engagements,or fail to secure new outsourcing engagements on acceptable commercial terms,we will not experience the growth in this business unit that we haveanticipated.

 

In May 2003, we completed the acquisition of a company that providesinbound and outbound call center services to the hospital and payermarkets.  The acquisition represents ourentry into the business process outsourcing market (BPO).  If we are unable to successfully  integrate and leverage this acquisition inthe BPO, we may not be able to successfully execute our strategy in thismarket.  Further, all acquisitionsinvolve risks that could materially and adversely affect our business andoperating results.  Consequently, we mayfail to meet public market expectations and the price of our common stock maydecline.

 

*The length of time required to engage aclient and to complete an assignment may be unpredictable and could negativelyimpact our net revenues and operating results.*

 

The timing of securing our client engagementsand service fulfillment is difficult to predict with any degree ofaccuracy.  Prior engagement cycles arenot necessarily an indication of the timing of future client engagements orrevenues.  The length of time requiredto secure a new client engagement or complete an assignment often depends onfactors outside our control, including:

 

•                  Existing information systems at theclient site;

•                  Changes or the anticipation ofchanges in the regulatory environment affecting healthcare and pharmaceuticalorganizations;

•                  Changes in the management orownership of the client;

•                  Budgetary cycles and constraints;

•                  Changes in the anticipated scope ofengagements;

•                  Availability of personnel and otherresources; and

•                  Consolidation in the healthcare andpharmaceutical industries.

 

Prior to client engagements, we typicallyspend a substantial amount of time and resources (1) identifying strategic orbusiness issues facing the client, (2) defining engagement objectives, (3)gathering information, (4) preparing proposals, and (5) negotiatingcontracts.  Our failure to procure anengagement after spending such time and resources could materially adverselyaffect our business, financial condition, and results of operations.  We may also be required to hire newconsultants before securing a client engagement.  If clients defer committing to new assignments for any length oftime or for any reason we could be required to maintain a significant number ofunder-utilized consultants which could adversely affect our operating resultsand financial condition during any given period.  Further, our outsourcing

 

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business has very long sales and contract lead times, requiring us tospend a substantial amount of time and resources in attempting to secure eachoutsourcing engagement.  We cannotpredict whether the investment of time and resources will result in a newoutsourcing engagement or, if the engagement is secured, that the engagementwill be on terms favorable to us.

 

*We could be negatively impacted if we fail tosuccessfully integrate the businesses we acquire.*

 

We intend to grow, in part, by acquiringcomplementary businesses that could enhance our capability to serve thehealthcare and pharmaceutical industries. For example, in May 2002, we acquired a majority interest in CodigentSolutions Group, Inc. (now known as FCG Infrastructure Services, Inc.) andduring the first half of 2003, we acquired Paragon Solutions, Inc., CoactiveSystems Corporation,  and certain assetsof Phyve Corporation. All acquisitions involve risks that could materially andadversely affect our business and operating results.  These risks include:

 

•                  Distracting management from ourbusiness;

•                  Losingkey personnel and other employees;

•                  Losingclients;

•                  Costs,delays, and inefficiencies associated with integrating acquired operations andpersonnel;

•                  Theimpairment of acquired assets and goodwill; and

•                  Acquiringthe contingent and other liabilities of the businesses we acquire

 

In addition, acquired businesses may notenhance our services, provide us with increased client opportunities, or resultin the growth that we anticipate. Furthermore, integrating acquired operations is a complex, time-consuming,and expensive process.  Combiningacquired operations with us may result in lower overall operating margins,greater stock price volatility, and quarterly earnings fluctuations.  Cultural incompatibilities, careeruncertainties, and other factors associated with such acquisitions may alsoresult in the loss of employees and clients. Failing to acquire and successfully integrate complementary practices,or failing to achieve the business synergies that we anticipate, couldmaterially adversely affect our business and results of operations.

 

*We may be negativelyimpacted if investments in products and emerging service lines areunsuccessful.*

 

We have publicly announced our strategy toincrease our investment in product development, particularly in our lifesciences business unit, in addition to continuing our investments in emergingservice lines.  We typically do notcapitalize the cost of our product development activities and do not anticipatecapitalizing expected investments.  As aresult, our financial results may be adversely impacted by such increasedinvestment in the short term.  If suchproduct development activities or investment in our emerging service lines donot result in relevant offerings, we will not achieve desired levels of returnon these investments.  As a result, ourbusiness and results of operations could be adversely affected.

 

*If we are unable togenerate additional revenue from our existing clients, our business may benegatively affected.*

 

Our success depends, to a significant extent,on obtaining additional engagements from our existing clients.  A substantial portion of our revenues isderived from additional services provided to our existing clients.  The loss of a small number of clients mayresult in a material decline in revenues and cause us to fail to meet publicmarket expectations of our financial performance and operating results.  If we fail to generate additional revenuesfrom our existing clients it may materially adversely affect our business andfinancial condition.

 

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*If we fail to meet client expectations in theperformance of our services, our business could suffer.*

 

Our services often involve assessing and/orimplementing complex information systems and software, which are critical toour clients’ operations.  Our failure tomeet client expectations in the performance of our services, including thequality, cost and timeliness of our services, may damage our reputation in thehealthcare and pharmaceutical industries and adversely affect our ability toattract and retain clients.  If a clientis not satisfied with our services, we will generally spend additional humanand other resources at our own expense to ensure client satisfaction.  Such expenditures will typically result in alower margin on such engagements and could materially adversely affect ourbusiness, financial condition, and results of operations.

 

Further, in the course of providing ourservices, we will often recommend the use of software and hardwareproducts.  These products may notperform as expected or contain defects. If this occurs, our reputation could be damaged and we could be subjectto liability.  We attempt contractuallyto limit our exposure to potential liability claims; however, such limitationsmay not be effective.  A successfulliability claim brought against us may adversely affect our reputation in thehealthcare and pharmaceutical industries and could have a material adverse effecton our business or financial condition. Although we maintain professional liability insurance, such insurancemay not provide adequate coverage for successful claims against us.

 

*We may be unable to attract and retain asufficient number of qualified employees.*

 

Our business is labor-intensive and requireshighly skilled employees.  Most of ourconsultants possess extensive expertise in the healthcare, insurance,pharmaceutical, information technology and consulting fields.  To serve a growing client base, we mustcontinue to recruit and retain qualified personnel with expertise in each ofthese areas.  Competition for suchpersonnel is intense and we compete for such personnel with managementconsulting firms, healthcare and pharmaceutical organizations, software firms,and other businesses.  Many of theseentities have substantially greater financial and other resources than we do,or can offer more attractive compensation packages to candidates, includingsalary, bonuses, stock, and stock options. If we are unable to recruit and retain a sufficient number of qualifiedpersonnel to serve existing and new clients, our ability to expand our clientbase or services could be impaired and our business would suffer.

 

*The loss of our key client service employeesand executive officers could negatively affect us*

 

Our performance depends on the continuedservice of our executive officers, senior managers, and key employees.  In particular, we depend on such persons tosecure new clients and engagements and to manage our business and affairs.  The loss of such persons could result in thedisruption of our business and could have a material adverse effect on ourbusiness and results of operations.  Wehave not entered into long-term employment contracts with any of our employeesand do not maintain key employee life insurance.

 

*Continued or increased employee turnovercould negatively affect our business.*

 

We have experienced employee turnover as aresult of:

 

•                  Dependenceon lateral hiring of consultants;

•                  Traveldemands imposed on our consultants;

•                  Lossof employees to competitors and clients; and

•                  Reductionsin force in our business units as certain areas of our business have seen lessdemand.

 

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Continued or increased employee turnovercould materially adversely affect our business and results of operations.  In addition, many of our consultants developstrong business relationships with our clients.  We depend on these relationships to generate additionalassignments and engagements.  The lossof a substantial number of consultants could erode our client base and decreaseour revenues.

 

*If we are unable to manage shifts in marketdemand or growth in our business, our business may be negatively impacted.*

 

Our business has historically grown rapidly,and though our overall revenues have remained flat for the past several years,we have experienced growth and increased demand in certain areas of ourbusiness.  In response to shifts inmarket demand and in an effort to better align our business with our markets,we restructured our business units and hired persons with appropriate skills,including salespersons, and reduced our workforce in practice areasexperiencing less demand.  These marketconditions and restructuring efforts have placed new and increased demands onour management personnel.  It has alsoplaced significant and increasing demands on our financial, technical andoperational resources, and on our information systems.  If we are unable to manage growtheffectively or if we experience business disruptions due to shifts in marketdemand, or growth or restructuring, our operating results will suffer.  To manage any future growth, we must extendour financial reporting and information management systems to our multiple andinternational office locations and traveling employees, and develop andimplement new procedures and controls to accommodate new operations, servicesand clients.  Increasing operational andadministrative demands may make it difficult for our senior managers to engagein business development activities and their other day-to-dayresponsibilities.  Further, the additionof new employees and offices to offset any increasing demands may impair ourability to maintain our service delivery standards and corporate culture.  In addition, we have in the past changed,and may in the future change, our organizational structure and businessstrategy.  Such changes may result inoperational inefficiencies and delays in delivering our services.  Such changes could also cause a disruptionin our business and could cause a material adverse effect on our financialcondition and results of operations.

 

*Changes in the healthcare and pharmaceuticalindustries could negatively impact our revenues.*

 

We derive a substantial portion of our revenuesfrom clients in the healthcare industry. As a result, our business and results of operations are influenced byconditions affecting this industry, particularly current trends towardsconsolidation among healthcare and pharmaceutical organizations.  Such consolidation may reduce the number ofexisting and potential clients for our services.  In addition, the resulting organizations could have greaterbargaining power, which could erode the current pricing structure for ourservices.  The reduction in the size ofour target market or our failure to maintain our pricing goals could have amaterial adverse effect on our business and financial condition.  Finally, each of the markets we serve ishighly dependent upon the health of the overall economy.  Our clients in each of these markets haveexperienced significant cost increases and pressures in recent years.  Our services are targeted at relieving thesecost pressures; however, any continuation or acceleration of current marketconditions could greatly impact our ability to secure or retain engagements,the loss of which could have a material adverse effect on our business andfinancial condition.

 

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A substantial portion of our revenues hasalso come from companies in the pharmaceutical industry.  Our revenues are, in part, linked to thepharmaceutical industry’s research and development expenditures.  Should any of the following events occur inthe pharmaceutical industry, our business could be negatively affected in amaterial way:

 

•                  Continuedadverse changes to the industry’s general economic environment;

•                  Continuedconsolidation of companies; or

•                  Adecrease in research and development expenditures or pharmaceutical companies’technology expenditures.

 

A trend in the pharmaceutical industry is forcompanies to “outsource” either large information technology-dependent projectsor their information systems staffing requirements.  We benefit when pharmaceutical companies outsource to us, but maylose significant future business when pharmaceutical companies outsource to ourcompetitors.  If this outsourcing trendslows down or stops, or if pharmaceutical companies direct their business awayfrom us, our financial condition and results of operations could be impacted ina materially adverse way.

 

*Our international operations createspecialized risks that can negatively affect us.*

 

We are subject to many risks as a result ofthe services we provide to our international clients or services we may providethrough subcontractors or employees that are located outside of the U.S.  Further, in February 2003, we acquiredParagon Solutions, Inc., a U.S. based company with offshore softwaredevelopment centers in India and Vietnam. As a result of this acquisition, we currently have business operationsand employees located in India and Vietnam, as well as our existing employeesthroughout Europe and in Japan.  If wefail to recruit and retain a sufficient number of qualified employees in eachcountry where we conduct business, our ability to expand internationally orperform our existing services may be impaired and our business could beadversely affected.  Our internationaloperations are also subject to a variety of risks, including:

 

•                  Difficultiesin creating international market demand for our services;

•                  Difficultiesand costs of tailoring our services to each individual country’s healthcare andpharmaceutical market needs;

•                  Unfavorablepricing and price competition;

•                  Currencyfluctuations;

•                  Recruitingand hiring employees, and other employment issues unique to internationaloperations, including ability to secure work visas for foreign employees in theU.S.;

•                  Longerpayment cycles in some countries and difficulties in collecting internationalaccounts receivable;

•                  Terroristattacks;

•                  Difficultiesin enforcing contractual obligations and intellectual property rights;

•                  Adversetax consequences;

•                  Increasedcosts associated with maintaining international marketing efforts and offices;

•                  Governmentregulations and restrictions;

•                  Adversechanges in regulatory requirements; and

•                  Economicor political instability.

 

We have been performing services in Europefor international clients for several years. We ceased performing healthcareconsulting services for European clients in 2000, but continue to provide ourservices in Europe to pharmaceutical clients. We cannot assure you that we will be able to maintain profitability inour European pharmaceutical services, which may materially adversely affect ourfinancial condition, results of operations, and price for our common stock.

 

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We established our first life sciences branchoffice in Japan in January 2003.  Wecannot assure you that our newly established office in Japan will growsuccessfully, if at all.  If we cannotgrow our practice, we may not be able to recoup or realize a return on ourinitial investments in that market and our financial condition and results ofoperations may be adversely affected.

 

Our acquisition of Paragon Solutions, Inc. provided us a means toimplement our global sourcing strategy to provide software development andother information technology services to our clients.  If we are unable to realize perceived cost benefits of such astrategy or if we are unable to receive high quality services from foreignemployees or subcontractors, our business may be adversely impacted. Further,our recently acquired international operations in Vietnam and India subject ourbusiness to a variety of risks and uncertainties unique to operating businessesin these countries, including the risk factors discussed above.

 

Any one or all of these factors may cause increased operating costs,lower than anticipated financial performance, and may materially adverselyaffect our business, financial condition, and results of operations.

 

*If we do not compete effectively in thehealthcare and pharmaceutical information services industries, our businesswill be negatively impacted.*

 

The market for healthcare and pharmaceuticalinformation technology consulting is very competitive.  We have competitors that provide some or allof the services we provide.  Forexample, in strategic consulting services, we compete with international,regional, and specialty consulting firms such as Bearing Point (formerly KPMGConsulting), Cap Gemini Ernst & Young, IBM Global Consulting Services,Wipro Technologies, and Accenture.

 

In integration and co-management services, wecompete with:

 

•                  Informationsystem vendors such as McKesson, Siemens Medical Solutions, and IBM GlobalSystems,

•                  Servicegroups of computer equipment companies,

•                  Systemsintegration companies such as Electronic Data Systems Corporation, PerotSystems Corporation, SAIC, Cap Gemini Ernst & Young, and Computer SciencesCorporation,

•                  Clients’internal information management departments,

•                  Otherhealthcare consulting firms, and

•                  Otherpharmaceutical consulting firms such as Accenture, Cap Gemini Ernst &Young, and Computer Sciences Corporation’s consulting division.

 

In e-health and e-commerce related services,we compete with the traditional competitors outlined above, as well as newerinternet product and service companies. We also compete with companies that provide software development,information technology consulting, and other integration and maintenanceservices, such as Wipro Technologies, Cognizant Technology SolutionsCorporation, and Tata Technologies Limited.

 

Several of our competitors employ a globalsourcing strategy to provide software development and other informationtechnology services to their clients, while at the same time reducing theircost structure and improving the quality of services they provide.  If we are unable to realize the perceivedcost benefits of our recently implemented global sourcing strategy or if we areunable to receive high quality services from foreign employees orsubcontractors, our business may be adversely impacted and we may not be ableto compete effectively.

 

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Many of our competitors have significantlygreater financial, human, and marketing resources than us.  As a result, such competitors may be able torespond more quickly to new or emerging technologies and changes in customerdemands, or to devote greater resources to the development, promotion, sale,and support of their products and services than we do.  In addition, as healthcare organizationsbecome larger and more complex, our larger competitors may be better able to servethe needs of such organizations.  If wedo not compete effectively with current and future competitors, we may beunable to secure new and renewed client engagements, or we may be required toreduce our rates in order to compete effectively.  This could result in a reduction in our revenues, resulting inlower earnings or operating losses, and otherwise materially adverselyaffecting our business, financial condition, and results of operations.

 

*If we fail to establish and maintainrelationships with vendors of software and hardware products, it could have anegative effect on our ability to secure engagements.*

 

We have a number of relationships withsoftware and hardware vendors.  Webelieve that our relationship with vendors are important to our sales,marketing, and support activities.  We oftenare engaged by vendors or their customers to implement or integrate vendorproducts based on our relationship with a particular vendor.  If we fail to maintain our relationshipswith these vendors, or fail to establish additional new relationships, ourbusiness could be materially adversely affected.

 

*Our relationships with vendors of softwareand hardware products could have a negative impact on our ability to secureconsulting engagements.*

 

Our growing number of relationships withsoftware and hardware vendors could result in clients perceiving that we arenot independent from those software and hardware vendors.  Our ability to secure assessment and otherconsulting engagements is often dependent, in part, on our being independent ofsoftware and hardware solutions that we may review, analyze or recommend toclients.  If clients believe that we arenot independent of those software and hardware vendors, clients may not engageus for certain consulting engagements relating to those vendors, which couldreduce our revenues and materially adversely affect our business.

 

*Our business is highly dependent on theavailability of business travel.*

 

Our consultants and service providers oftenreside or work in cities or other locations that require them to travel to aclient’s site to perform and execute the client’s project.  As a result of the September 11, 2001terrorist attacks, air travel has become more time-consuming to businesstravelers due to increased security, flight delays, reduced flight schedules, andother variables.  In addition, thefinancial health and viability of major U.S. carriers has recently become veryquestionable.  If efficient and costeffective air travel becomes unavailable to our consultants and otheremployees, or if domestic or international air travel is significantly reducedor halted, we may be unable to satisfactorily perform our client engagements ona timely basis, which could have a materially adverse impact on ourbusiness.  Further, if our consultantsor other employees refuse to utilize air travel to perform their job functionsfor any reason, our business and reputation would be negatively affected.

 

*If we fail to keep pace with regulatory andtechnological changes, our business could be materially adversely affected.*

 

The healthcare and pharmaceutical industriesare subject to regulatory and technological changes that may affect theprocurement practices and operations of healthcare and pharmaceuticalorganizations.  During the past severalyears, the healthcare and pharmaceutical industries have been subject to anincrease in governmental regulation and reform proposals.  These reforms could increase governmental 

 

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involvement inthe healthcare and pharmaceutical industries, lower reimbursement rates orotherwise change the operating environment of our clients.  Also, certain reforms that create potentialwork for us could be delayed or cancelled. Healthcare and pharmaceutical organizations may react to thesesituations by curtailing or deferring investments, including those for ourservices.  In addition, if we are unableto maintain our skill and expertise in light of regulatory or technologicalchanges, our services may not be marketable to our clients and we could loseexisting clients or future engagements. Finally, government regulations, particularly HIPAA, may require ourclients to impose additional contractual responsibilities on us, which may makeit more costly to perform certain of our engagements and subject us toincreased risk in the performance of these engagements, including immediatetermination of an engagement.

 

Technological change in the network andapplication markets has created high demand for consulting, implementation, andintegration services.  If the pace oftechnological change were to diminish, we could experience a decrease in demandfor our services.  Any material decreasein demand would materially adversely affect our business, financial condition,and results of operations.

 

*We may be unable to effectively protect ourproprietary information and procedures.*

 

We must protect our proprietary information,including our proprietary methodologies, research, tools, software code, andother information.  To do this, we relyon a combination of copyright and trade secret laws and confidentialityprocedures to protect our intellectual property.  These steps may not protect our proprietary information.  In addition, the laws of certain countriesdo not protect or enforce proprietary rights to the same extent, as do the lawsof the United States.  We are currentlyproviding our services to clients in international markets and have businessoperations in Europe, Japan, India and Vietnam.  Our proprietary information may not be protected to the same extentas provided under the laws of the United States, if at all.  The unauthorized use of our intellectualproperty could have a material adverse effect on our business, financialcondition, or results of operations.

 

*We may infringe the intellectual propertyrights of third parties.*

 

Our success depends, in part, on notinfringing patents, copyrights, and other intellectual property rights held byothers.  We do not know whether patentsheld or patent applications filed by third parties may force us to alter ourmethods of business and operation or require us to obtain licenses from thirdparties.  If we attempt to obtain suchlicenses, we do not know whether we will be granted licenses or whether theterms of those licenses will be fair or acceptable to us.  Third parties may assert infringement claimsagainst us in the future.  Such claimsmay result in protracted and costly litigation, penalties, and fines that couldadversely affect our business regardless of the merits of such claims.

 

*Our management may be able to exercisecontrol over matters requiring stockholder approval.*

 

Our current officers, directors, and otheraffiliates beneficially own approximately 35% of our outstanding shares ofcommon stock and approximately 46% on a fully diluted basis.  As a result, our existing management, ifacting together, may be able to exercise control over or significantlyinfluence matters requiring stockholder approval, including the election ofdirectors, mergers, consolidations, sales of all or substantially all of ourassets, issuance of additional shares of stock, and approval of new stock andoption plans.

 

*The price of our common stock may beadversely affected by market volatility.*

 

The trading price of our common stockfluctuates significantly.  Since our commonstock began trading publicly in February 1998, the reported sale price of ourcommon stock on the Nasdaq National 

 

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Market has been as high as $29.13 and as low as $3.63 per share.  This price may be influenced by manyfactors, including:

 

•                  Ourperformance and prospects;

•                  Thedepth and liquidity of the market for our common stock;

•                  Anincrease in the number of outstanding shares of our common stock due toissuances in connection with our recent acquisitions;

•                  Investorperception of us and the industries in which we operate;

•                  Changesin earnings estimates or buy/sell recommendations by analysts;

•                  Generalfinancial and other market conditions; and

•                  Domesticand international economic conditions.

 

In addition, public stock markets haveexperienced extreme price and trading volume volatility.  This volatility has significantly affectedthe market prices of securities of many companies for reasons frequently unrelatedto or disproportionately impacted by the operating performance of thesecompanies.  These broad marketfluctuations may adversely affect the market price of our common stock.  As a result, we may be unable to raisecapital or use our stock to acquire businesses on attractive terms and investorsmay be unable to resell their shares of our common stock at or above theirpurchase price.  Further, if researchanalysts stop covering our company or reduce their expectations of us, ourstock price could decline or the liquidity of our common stock may be adverselyimpacted, which could create difficulty for investors to resell their shares ofour common stock.

 

*If our stock price is volatile, we may becomesubject to securities litigation, which is expensive and could result in adiversion of resources.*

 

If our stock price experiences periods ofvolatility, our security holders may initiate securities class actionlitigation against us.  If we becomeinvolved in this type of litigation it could be very expensive and divert ourmanagement’s attention and resources, which could materially and adverselyaffect our business and financial condition.

 

*Our charter documents, Delaware law andstockholders rights plan will make it more difficult to acquire us and maydiscourage take-over attempts and thus depress the market price of our commonstock.*

 

Our board of directors has the authority toissue up to 9,500,000 shares of undesignated preferred stock, to determine thepowers, preferences, and rights and the qualifications, limitations, orrestrictions granted to or imposed upon any unissued series of undesignatedpreferred stock and to fix the number of shares constituting any series and thedesignation of such series, without any further vote or action by ourstockholders.  The preferred stock couldbe issued with voting, liquidation, dividend, and other rights superior to therights of our common stock. Furthermore, any preferred stock may have other rights, includingeconomic rights, senior to our common stock, and as a result, the issuance ofany preferred stock could depress the market price of our common stock.

 

In addition, our certificate of incorporationeliminates the right of stockholders to act without a meeting and does notprovide cumulative voting for the election of directors.  Our certificate of incorporation alsoprovides for a classified board of directors. The ability of our board of directors to issue preferred stock and theseother provisions of our certificate of incorporation and bylaws may have theeffect of deterring hostile takeovers or delaying changes in control ormanagement.

 

We are also subject to the provisions ofSection 203 of the Delaware General Corporation Law, which could delay orprevent a change in control of us, impede a merger, consolidation, or otherbusiness combination involving us or discourage a potential acquirer frommaking a tender offer or otherwise 

 

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attempting to obtain control. Any of these provisions, which may have the effect of delaying or preventinga change in control, could adversely affect the market value of our commonstock.

 

In 1999, our board of directors adopted ashare purchase rights plan that is intended to protect our stockholders’interests in the event we are confronted with coercive takeover tactics.  Pursuant to the stockholders rights plan, wedistributed “rights” to purchase up to 500,000 shares of our Series A JuniorParticipating Preferred Stock.  Undersome circumstances, these rights become the rights to purchase shares of ourcommon stock or securities of an acquiring entity at one-half the marketvalue.  The rights are not intended toprevent our takeover, rather they are designed to deal with the possibility ofunilateral actions by hostile acquirers that could deprive our board ofdirectors and stockholders of their ability to determine our destiny and obtainthe highest price for our common stock.

 

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

 

Our financial instruments include cash andcash equivalents (i.e., short-term and long-term cash investments), accountsreceivable, unbilled receivables, accounts payable, and a revolving line ofcredit.  Only the cash and cashequivalents and short-term investments which totaled $60.2 million at June 27,2003 present us with market risk exposure resulting primarily from changes ininterest rates.  Based on this balance,a change of one percent in the interest rate would cause a change in interestincome for the annual period of approximately $0.6 million.  Our objective in maintaining theseinvestments is the flexibility obtained in having cash available for payment ofaccrued liabilities and acquisitions.

 

Our borrowings are primarily dependent uponthe prevailing prime rate.  As of June27, 2003, we had no borrowings under our revolving line of credit and anavailable borrowing capacity of $7.0 million. See “Item 2. Management’s Discussion and Analysis of Financial Conditionand Results of Operations- Liquidity and Capital Resources.”  The estimated fair value of borrowings underthe revolving line is expected to approximate its carrying value.

 

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

 

We maintain disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in the Company's Exchange Act reports is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms, and that such information is accumulatedand communicated to the Company's management, including its Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow for timelydecisions regarding required disclosure. In designing and evaluating thedisclosure controls and procedures, management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement is required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

 

As required by SEC Rule 13a-15(b), theCompany carried out an evaluation, under the supervision and with theparticipation of the Company's management, including the Company's ChiefExecutive Officer and the Company's Chief Financial Officer, of theeffectiveness of the design and operation of the Company's disclosure controlsand procedures as of the end of the quarter covered by this report. Based onthe foregoing, the Company's Chief Executive Officer and Chief FinancialOfficer concluded that the Company's disclosure controls and procedures wereeffective at the reasonable assurance level.

 

                There hasbeen no change in the Company's internal controls over financial reportingduring the Company's most recent fiscal quarter that has materially affected,or is reasonably likely to materially affect, the Company's internal controlsover financial reporting.

 

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# **Part II.  Other Information**

 

## **Item 1.  Legal Proceedings.**

 

None.

 

## **Item 2.  Changes in Securities.**

 

None.

 

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

 

None.

 

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

 

Weheld our 2002 Annual Meeting of Stockholders on June 3, 2003. The stockholderselected the Board’s nominees as directors to serve three-year terms expiring atthe 2006 Annual Meeting of Stockholders by the votes indicated:

 
| **Nominee**          |   | **Votes in  Favor** |   | **Votes  Against** |   | **Abstentions** |   |
|----------------------|--------|---------------------|--------|--------------------|--------|-----------------|--------|
| Stanley R. Nelson    |   | 17,487,869          |   | 522,332            |   | 0               |   |
| Luther J. Nussbaum   |   | 16,925,055          |   | 1,085,146          |   | 0               |   |
| Jack O. Vance, Ph.D. |   | 17,011,658          |   | 998,543            |   | 0               |   |

 

Thestockholders approved an amendment of FCG’s 2000 Associate Stock Purchase Planto increase the number of shares of FCG stock reserved for issuance under thanplan by 1,250,000 shares, from 1,000,000 shares to 2,250,000 shares. Theproposal to amend the plan was approved with 15,265,169 votes cast in favor,687,852 votes cast against and 2,057,180 votes abstaining from the proposal.

 

Thestockholders also ratified our selection of Grant Thornton LLP as our independentauditors for the year ending December 26, 2003, with 17,875,996 votes cast infavor, 121,261 votes cast against and 12,944 votes abstaining from theproposal.

 

**Item 5. Other Information.**

 

None.

 

**Item6.  Exhibits and Reports on Form 8-K.**

 

(a)          Exhibits

 
| **Item**  |   | **Description**                                                              |
|-----------|--------|------------------------------------------------------------------------------|
| 3.1  (1)  |   | Certificate  of Incorporation of the Company                                 |
| 3.2  (2)  |   | Certificate  of Designation of Series A Junior Participating Preferred Stock |
| 3.3  (3)  |   | Bylaws  of the Company                                                       |
| 4.1  (4)  |   | Specimen  Common Stock Certificate                                           |
| 11.1  (5) |   | Statement  of computation of per share earnings                              |
| 31.1      |   | Certification  of Chief Executive Officer                                    |
| 31.2      |   | Certification  of Chief Financial Officer                                    |
| 32.1      |   | Certifications  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    |

 

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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 to Consolidated Financial Statements, “Accounting Policies – Basic andDiluted Net Loss Per Share.”

 

 

(b)         Reports on Form 8-K

 

(1)          Form 8-K filed on April 9, 2003 and amendedApril 10, 2003, furnishing a press release announcing our expected financialresults for the first quarter of 2003 (Items 7 and 9).

 

(2)          Form 8-K filed on April 22, 2003 furnishing apress release announcing our financial results for the first quarter of 2003(Items 7 and 9).

 

(3)          Form 8-K filed on May 1, 2003 furnishing apress release announcing three investor events in which we were going toparticipate in May 2003 (Item 9).

 

(4)          Form8-K filed on June 3, 2003 reporting the completion of our acquisition ofCoactive Systems Corporation (Items 5 and 7).

 

(5)          Form8-K filed on June 24, 2003 furnishing a press release announcing our expectedfinancial results for the second quarter of 2003 (Items 7 and 9).

 

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# **SIGNATURES**

 

Pursuant to the requirements of theSecurities and Exchange Act of 1934, the registrant has duly caused this reportto be signed in its behalf by the undersigned thereunto duly authorized.

 
|                        | FIRST CONSULTING GROUP, INC.         |
|-----------------------------|--------------------------------------|
|                        |                                 |
|                        |                                 |
| Date:  August 11, 2003 | /s/LUTHER J. NUSSBAUM                |   |
|                        | Luther J. Nussbaum                   |
|                        | Chairman and Chief Executive Officer |
|                        |                                 |
|                        |                                 |
| Date:  August 11, 2003 | /s/MICHAEL J. PUNTORIERO             |   |
|                        | Michael J. Puntoriero                |
|                        | Executive Vice President and Chief   |
|                        | Financial Officer                    |
|                        | (Principal Financial Officer)        |
|                             |                                      |  |  |

 

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# **Exhibit Index**

** **
| **Item**  |   | **Description**                                                              |
|-----------|--------|------------------------------------------------------------------------------|
| 3.1  (1)  |   | Certificate  of Incorporation of the Company                                 |
| 3.2  (2)  |   | Certificate  of Designation of Series A Junior Participating Preferred Stock |
| 3.3  (3)  |   | Bylaws  of the Company                                                       |
| 4.1  (4)  |   | Specimen  Common Stock Certificate                                           |
| 11.1  (5) |   | Statement  of computation of per share earnings                              |
| 31.1      |   | Certification  of Chief Executive Officer                                    |
| 31.2      |   | Certification  of Chief Financial Officer                                    |
| 32.1      |   | Certifications  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    |

 

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(1)          Incorporated byreference 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)          Incorporated byreference to Exhibit 99.1 to FCG’s Current Report on Form 8-K dated December 9,1999.

 

(3)          Incorporated byreference to Exhibit 3.3 to FCG’s Form S-1.

 

(4)          Incorporated byreference to Exhibit 4.1 to FCG’s Form S-1.

 

(5)          See Note 1 toConsolidated Financial Statements, “Accounting Policies – Basic and Diluted NetLoss Per Share.”

 

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