**UNITEDSTATES**

**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 THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                  |       |                                                                                                    |
| **For the quarterly period ended  July 1, 2005** |
|                                                  |       |                                                                                                    |
| **OR**                                                |
|                                                  |       |                                                                                                    |
| **  ****o**                                 | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from              to              **

 

**Commission File Number 0-23651**

 

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**First Consulting Group, Inc.**

(Exact name of registrant as specified in itscharter)

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

 

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

(Address of principal executive officesincluding zip code)

 

**(562) 624-5200**

(Registrant’s telephone number, includingarea code)

 

 

(Former name, former address and formerfiscal year, if changed since last report)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes ý         Noo

 

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

** **

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 
| **Common Stock, $.001 par value** | ** ** | **24,462,798**                       |
|-----------------------------------|------------|--------------------------------------|
| (Class)                           |       | (Outstanding at  July 29, 2005) |

 

 

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**FirstConsulting Group, Inc.**

**Table of Contents**

 
| COVER  PAGE                                                                               |                                                                                                |
|-------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
|                                                                                      |                                                                                                |
| TABLE  OF CONTENTS                                                                        |                                                                                                |
|                                                                                      |                                                                                                |
| PART I.          FINANCIAL  INFORMATION |                                                                                                |
|                                                                                      |                                                                                                |
|                                                                                      | ITEM 1. FINANCIAL STATEMENTS AND NOTES (UNAUDITED)                                                  |   |
|                                                                                      |                                                                                                |
|                                                                                      | Consolidated  Balance Sheets                                                                        |   |
|                                                                                      |                                                                                                |   |
|                                                                                      | Consolidated Statements of Operations                                                               |   |
|                                                                                      |                                                                                                |   |
|                                                                                      | Condensed  Consolidated Statements of Cash Flows                                                    |   |
|                                                                                      |                                                                                                |   |
|                                                                                      | Notes  to Consolidated Financial Statements                                                         |   |
|                                                                                      |                                                                                                |   |
|                                                                                      | ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS |   |
|                                                                                      |                                                                                                |
|                                                                                      | ITEM 3. QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISKS                                |   |
|                                                                                      |                                                                                                |
|                                                                                      | ITEM 4. CONTROLS AND PROCEDURES                                                                     |   |
|                                                                                      |                                                                                                |   |
| PART II.  OTHER INFORMATION                                                          |                                                                                                |
|                                                                                      |                                                                                                |   |
|                                                                                      | ITEM 1. LEGAL PROCEEDINGS                                                                           |   |
|                                                                                      |                                                                                                |   |
|                                                                                      | ITEM 2. UNREGISTERED SALES OF EQUITY  SECURITIES AND USE OF PROCEEDS                                |   |
|                                                                                      |                                                                                                |   |
|                                                                                      | ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                             |   |
|                                                                                      |                                                                                                |   |
|                                                                                      | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF  SECURITY HOLDERS                                        |   |
|                                                                                      |                                                                                                |   |
|                                                                                      | ITEM 5. OTHER INFORMATION                                                                           |   |
|                                                                                      |                                                                                                |   |
|                                                                                      | ITEM 6. EXHIBITS                                                                                    |   |
|                                                                                      |                                                                                                |   |
| SIGNATURES                                                                                |                                                                                                |
|                                                                                      |                                                                                                |   |
| EXHIBIT INDEX                                                                        |                                                                                                |
|                                                                                           |                                                                                                     |  |  |

 

2

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# **PART I.  FINANCIALINFORMATION**

#  

## **Item1. Financial Statements and Notes (Unaudited)**

 

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

 

### **ConsolidatedBalance Sheets**

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

 
| ** **                                                                                                                  | ** ** | **July 1,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                  | ** ** | **(unaudited)**        | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                  | ** ** | ** **             | ** ** | ** **                  | ** ** |
| Current  assets:                                                                                                            | ** ** | ** **             | ** ** | ** **                  | ** ** |
| Cash and  cash equivalents                                                                                                  |       | $                      | 13,980     |                        | $          | 15,012 |   |
| Short-term  investments                                                                                                     |       | 21,430                 |       | 25,309                      |       |
| Accounts  receivable, less allowance of $1,317 and $1,401 as of July 1, 2005 and  December 31, 2004, respectively |       | 21,505                 |       | 26,266                      |       |
| Unbilled  receivables                                                                                                       |       | 14,313                 |       | 11,005                      |       |
| Deferred  income taxes                                                                                                      |       | 6,057                  |       | 7,869                       |       |
| Prepaid  expenses and other current assets                                                                                  |       | 4,158                  |       | 2,449                       |       |
| Other  current receivable                                                                                                   |       | 2,895                  |       | —                      |       |
| Current  assets of discontinued operations                                                                                  |       | —                 |       | 561                         |       |
| Total  current assets                                                                                                       |       | 84,338                 |       | 88,471                      |       |
|                                                                                                                        |       |                   |       |                        |       |
| Property and  equipment:                                                                                                    |       |                   |       |                        |       |
| Furniture,  equipment, and leasehold improvements                                                                           |       | 4,628                  |       | 4,144                       |       |
| Information  systems equipment                                                                                              |       | 29,201                 |       | 27,016                      |       |
|                                                                                                                        |       | 33,829                 |       | 31,160                      |       |
| Less  accumulated depreciation and amortization                                                                             |       | 21,939                 |       | 19,331                      |       |
|                                                                                                                        |       | 11,890                 |       | 11,829                      |       |
|                                                                                                                        |       |                   |       |                        |       |
| Other  assets:                                                                                                              |       |                   |       |                        |       |
| Executive  benefit trust                                                                                                    |       | 9,345                  |       | 9,343                       |       |
| Long-term  account receivable                                                                                               |       | —                 |       | 3,806                       |       |
| Deferred  income taxes                                                                                                      |       | —                 |       | 3,220                       |       |
| Goodwill,  net                                                                                                              |       | 18,159                 |       | 17,259                      |       |
| Intangibles,  net                                                                                                           |       | 1,748                  |       | 2,437                       |       |
| Notes  receivable – stockholders                                                                                       |       | 406                    |       | 407                         |       |
| Long-term  investments                                                                                                      |       | 325                    |       | 325                         |       |
| Other                                                                                                                       |       | 3,562                  |       | 3,302                       |       |
|                                                                                                                        |       | 33,545                 |       | 40,099                      |       |
| Total assets                                                                                                                |       | $                      | 129,773    |                        | $          | 140,399 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

3

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

 

**Consolidated Balance Sheets(Continued)**

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

 
| ** **                                                                                                                                                                                          | ** ** | **July 1,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                          | ** ** | **(unaudited)**        | ** ** | ** **                  | ** ** |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                      | ** ** | ** **             | ** ** | ** **                  | ** ** |
| Current  liabilities:                                                                                                                                                                               | ** ** | ** **             | ** ** | ** **                  | ** ** |
| Accounts  payable                                                                                                                                                                                   |       | $                      | 2,715      |                        | $          | 2,892 |   |
| Accrued  liabilities                                                                                                                                                                                |       | 10,601                 |       | 11,104                      |       |
| Accrued  restructuring                                                                                                                                                                              |       | 1,475                  |       | 1,800                       |       |
| Accrued  vacation                                                                                                                                                                                   |       | 7,674                  |       | 6,682                       |       |
| Accrued  incentive compensation                                                                                                                                                                     |       | 1,124                  |       | 1,729                       |       |
| Customer  advances                                                                                                                                                                                  |       | 7,449                  |       | 7,458                       |       |
| Current  liabilities of discontinued operations                                                                                                                                                     |       | 58                     |       | 105                         |       |
| Total  current liabilities                                                                                                                                                                          |       | 31,096                 |       | 31,770                      |       |
| Non-current  liabilities:                                                                                                                                                                           |       |                   |       |                        |       |
| Accrued  restructuring                                                                                                                                                                              |       | 2,481                  |       | 3,220                       |       |
| Supplemental  executive retirement plan                                                                                                                                                             |       | 9,300                  |       | 9,094                       |       |
| Total  non-current liabilities                                                                                                                                                                      |       | 11,781                 |       | 12,314                      |       |
| Commitments  and contingencies                                                                                                                                                                      |       | —                 |       | —                      |       |
| Stockholders’  equity:                                                                                                                                                                         |       |                   |       |                        |       |
| Preferred  Stock, $.001 par value; 9,500,000 shares authorized, no shares issued and  outstanding                                                                                                   |       | —                 |       | —                      |       |
| Series A  Junior Participating Preferred Stock, $.001 par value; 500,000 shares  authorized, no shares issued and outstanding                                                                  |       | —                 |       | —                      |       |
| Common  Stock, $.001 par value; 50,000,000 shares authorized,24,461,258 shares issued  and outstanding at July 1, 2005 and 24,826,547 shares issued and  outstanding at December 31, 2004 |       | 24                     |       | 25                          |       |
| Additional  paid-in capital                                                                                                                                                                         |       | 90,747                 |       | 91,636                      |       |
| Retained  earnings (deficit)                                                                                                                                                                        |       | (3,488                 | )          | 4,727                       |       |
| Deferred  compensation-stock incentive agreements                                                                                                                                                   |       | (69                    | )          | (107                        | )          |
| Notes  receivable-stockholders                                                                                                                                                                      |       | (247                   | )          | (286                        | )          |
| Accumulated  other comprehensive income (loss)                                                                                                                                                      |       | (71                    | )          | 320                         |       |
| Total  stockholders’ equity                                                                                                                                                                    |       | 86,896                 |       | 96,315                      |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                    |       | $                      | 129,773    |                        | $          | 140,399 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

4

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

 

### **Consolidated Statements of Operations**

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

 
| ** **                                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**    | ** ** |
|-----------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                                            | ** ** | **(unaudited)**        | ** ** | **(unaudited)**         | ** ** |
| ** **                                                            | ** ** | **July 1,  2005** | ** ** | **June 25,  2004** | ** ** | **July 1,  2005** | ** ** | **June 25,  2004** | ** ** |
| Revenues  before reimbursements                                       |       | $                      | 67,919     |                    | $          | 67,237 |   | $ | 136,063 |   | $ | 132,590 |   |
| Reimbursements                                                        |       | 3,772                  |       | 4,456                   |       | 7,434 |   | 8,436 |   |
| Total revenues                                                        |       | 71,691                 |       | 71,693                  |       | 143,497 |   | 141,026 |   |
|                                                                  |       |                   |       |                    |       |   |   |   |   |
| Cost of  services before reimbursable expenses                        |       | 47,327                 |       | 44,792                  |       | 95,595 |   | 89,323 |   |
| Reimbursable  expenses                                                |       | 3,772                  |       | 4,456                   |       | 7,434 |   | 8,436 |   |
| Total cost  of services                                               |       | 51,099                 |       | 49,248                  |       | 103,029 |   | 97,759 |   |
|                                                                  |       |                   |       |                    |       |   |   |   |   |
| Gross profit                                                          |       | 20,592                 |       | 22,445                  |       | 40,468 |   | 43,267 |   |
|                                                                  |       |                   |       |                    |       |   |   |   |   |
| Selling  expenses                                                     |       | 7,094                  |       | 7,115                   |       | 13,852 |   | 14,363 |   |
| General and  administrative expenses                                  |       | 14,601                 |       | 13,139                  |       | 29,340 |   | 25,004 |   |
| Income  (loss) from operations                                        |       | (1,103                 | )          | 2,191                   |       | (2,724 | ) | 3,900 |   |
| Other income  (expense):                                              |       |                   |       |                    |       |   |   |   |   |
| Interest  income, net                                                 |       | 210                    |       | 142                     |       | 440 |   | 344 |   |
| Other  expense, net                                                   |       | (33                    | )          | (110                    | )          | (33 | ) | (131 | ) |
| Expense for  premium on repurchase of stock                           |       | —                 |       | —                  |       | — |   | (1,561 | ) |
| Income  (loss) from continuing operations before income tax provision |       | (926                   | )          | 2,223                   |       | (2,317 | ) | 2,552 |   |
| Income tax  provision                                                 |       | 6,000                  |       | 975                     |       | 5,361 |   | 1,810 |   |
| Income  (loss) from continuing operations                             |       | (6,926                 | )          | 1,248                   |       | (7,678 | ) | 742 |   |
| Loss on  discontinued operations, net of tax benefit                  |       | —                 |       | (218                    | )          | (537 | ) | (345 | ) |
| Net income  (loss)                                                    |       | $                      | (6,926     | )                       | $          | 1,030 |   | $ | (8,215 | ) | $ | 397 |   |
|                                                                  |       |                   |       |                    |       |   |   |   |   |
| Basic &  diluted net income (loss) per share:                |       |                   |       |                    |       |   |   |   |   |
| Basic:                                                                |       |                   |       |                    |       |   |   |   |   |
| Income  (loss) from continuing operations                             |       | $                      | (0.28      | )                       | $          | 0.05 |   | $ | (0.32 | ) | $ | 0.03 |   |
| Loss on  discontinued operations, net of tax benefit                  |       | —                 |       | (0.01                   | )          | (0.02 | ) | (0.01 | ) |
| Net income  (loss) per share                                          |       | $                      | (0.28      | )                       | $          | 0.04 |   | $ | (0.34 | ) | $ | 0.02 |   |
| Diluted:                                                              |       |                   |       |                    |       |   |   |   |   |
| Income  (loss) from continuing operations                             |       | $                      | (0.28      | )                       | $          | 0.05 |   | $ | (0.32 | ) | $ | 0.03 |   |
| Loss on  discontinued operations, net of tax benefit                  |       | —                 |       | (0.01                   | )          | (0.02 | ) | (0.01 | ) |
| Net income  (loss) per share                                          |       | $                      | (0.28      | )                       | $          | 0.04 |   | $ | (0.34 | ) | $ | 0.02 |   |
| Weighted  average shares used in computing:                           |       |                   |       |                    |       |   |   |   |   |
| Basic net  income (loss) per share                                    |       | 24,343                 |       | 24,074                  |       | 24,409 |   | 24,748 |   |
| Diluted net  income (loss) per share                                  |       | 24,343                 |       | 24,340                  |       | 24,409 |   | 24,981 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

5

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

 

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

**(in thousands)**

 
| ** **                                                                                | ** ** | **Six Months Ended**   | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                | ** ** | **(unaudited)**        | ** ** |
| ** **                                                                                | ** ** | **July 1,  2005** | ** ** | **June 25,  2004** | ** ** |
| Cash flows  from operating activities:                                                    |       |                   |       |   |   |
| Net income  (loss):                                                                       |       | $                      | (8,215     | ) | $ | 397 |   |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |       |                   |       |   |   |
| Depreciation  and amortization                                                            |       | 3,107                  |       | 2,309 |   |
| Deferred  income tax provision                                                            |       | 5,032                  |       | 1,353 |   |
| Premium on  capital stock repurchase                                                      |       | —                 |       | 1,561 |   |
| Intangibles  amortization                                                                 |       | 689                    |       | 840 |   |
| Writedown of  investment                                                                  |       | —                 |       | 50 |   |
| Provision  for bad debts, net of adjustments                                              |       | —                 |       | 16 |   |
| Loss on sale  of assets                                                                   |       | 2                      |       | 31 |   |
| Minority  interest in net loss of subsidiaries                                            |       | —                 |       | (14 | ) |
| Compensation  from stock issuances                                                        |       | 38                     |       | 56 |   |
| Interest  income on notes receivable – stockholders                                  |       | (39                    | )          | (31 | ) |
| Changes in  assets and liabilities, excluding effect of acquisitions:                     |       |                   |       |   |   |
| Accounts  receivable                                                                      |       | 4,761                  |       | 3,322 |   |
| Unbilled  receivables                                                                     |       | (3,308                 | )          | (2,068 | ) |
| Prepaid  expenses and other                                                               |       | (1,709                 | )          | (1,585 | ) |
| Current assets  of discontinued operations                                                |       | 561                    |       | — |   |
| Other  current receivable                                                                 |       | 458                    |       | — |   |
| Long-term  account receivable                                                             |       | 453                    |       | 1,049 |   |
| Other assets                                                                              |       | (260                   | )          | (1,058 | ) |
| Accounts  payable                                                                         |       | (177                   | )          | 300 |   |
| Accrued  liabilities                                                                      |       | (503                   | )          | 54 |   |
| Current  liabilities of discontinued operations                                           |       | (47                    | )          | — |   |
| Accrued  restructuring                                                                    |       | (1,064                 | )          | (3,049 | ) |
| Accrued  vacation                                                                         |       | 992                    |       | 378 |   |
| Accrued  incentive compensation                                                           |       | (605                   | )          | 294 |   |
| Customer  advances                                                                        |       | (9                     | )          | (1,961 | ) |
| Supplemental  executive retirement plan                                                   |       | 204                    |       | 362 |   |
| Other                                                                                     |       | (144                   | )          | 41 |   |
| Net cash  provided by operating activities:                                               |       | 217                    |       | 2,647 |   |
| Cash flows  from investing activities:                                                    |       |                   |       |   |   |
| Proceeds  from sale/maturity of investments                                               |       | 3,879                  |       | 10,736 |   |
| Purchase of  property and equipment                                                       |       | (3,197                 | )          | (3,878 | ) |
| Acquisition  of businesses, net of cash acquired                                          |       | —                 |       | (2,383 | ) |
| Net cash  provided by investing activities                                                |       | 682                    |       | 4,475 |   |
| Cash flows  from financing activities:                                                    |       |                   |       |   |   |
| Proceeds  from issuance of capital stock, net                                             |       | 807                    |       | 760 |   |
| Proceeds  from notes receivable and tax loan payments                                     |       | 12                     |       | 50 |   |
| Capital  stock repurchase                                                                 |       | (2,530                 | )          | (14,773 | ) |
| Net cash  used in financing activities                                                    |       | (1,711                 | )          | (13,963 | ) |
| Effect of  exchange rate changes on cash and cash equivalents                             |       | (220                   | )          | 66 |   |
| Net change  in cash and cash equivalents                                                  |       | (1,032                 | )          | (6,775 | ) |
| Cash and  cash equivalents at beginning of period                                         |       | 15,012                 |       | 26,826 |   |
| Cash and  cash equivalents at end of period                                               |       | $                      | 13,980     |   | $ | 20,051 |   |
|                                                                                      |       |                   |       |   |   |
| Cash paid  during the period for:                                                         |       |                   |       |   |   |
| Interest                                                                                  |       | $                      | 51         |   | $ | 11 |   |
| Income taxes                                                                              |       | $                      | 278        |   | $ | 636 |   |

 

The accompanying notes are an integral partof these financial statements.

 

6

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### **Notesto Consolidated Financial Statements**

### ** **

**Note 1****                                                            ****Accounting Policies**

 

*Basis of Presentation*

 

The accompanyingconsolidated balance sheet of First Consulting Group, Inc. (the “Company”or “FCG”) at July 1, 2005 and consolidated statements of operations andcondensed consolidated statements of cash flows for the periods ended July 1,2005 and June 25, 2004 are unaudited. These financial statements reflect all adjustments, consisting of onlynormal recurring adjustments, which, in the opinion of management, arenecessary to fairly present the financial position of the Company at July 1,2005 and the results of operations for the three-month and six-month periods endedJuly 1, 2005 and June 25, 2004. The results of operations and cash flows for the six-month period ended July 1,2005 are not necessarily indicative of the results to be expected for the yearending December 30, 2005.  For morecomplete financial information, these financial statements should be read inconjunction with the audited financial statements for the year ended December 31,2004 included in the Company’s Annual Report on Form 10-K.  Certain reclassifications have been made tothe 2004 financial statements to conform to the 2005 presentation.

 

*Principles of Consolidation*

 

The consolidated financialstatements include the accounts of the Company and its subsidiaries.  All material intercompany accounts andtransactions have been eliminated.

 

*Stock-Based Compensation*

 

The Companyaccounts for stock-based employee compensation using the intrinsic value methodas 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-BasedCompensation”**(“SFAS No. 123”),and Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation –Transition and Disclosure – an amendment of SFAS No. 123”**(“SFAS No. 148”).  SFAS No. 123 requires pro formadisclosures of net income (loss) and net income (loss) per share as if the fairvalue method of accounting for stock-based awards had been applied. Under thefair value method, compensation cost is recorded based on the value of theaward at the grant date and is recognized over the service period.

 

The followingtable presents the pro forma net income (loss) had compensation costs beendetermined using the fair value at the date of grant for awards under the planin accordance with SFAS No. 123 (in thousands, except per share data):

 

7

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| ** **                       | ** **                                                                                                     | **Three Months Ended** | ** ** | **Six Months Ended**    | ** ** |
|----------------------------------|----------------------------------------------------------------------------------------------------------------|------------------------|------------|-------------------------|------------|
| ** **                       | ** **                                                                                                     | **July 1,  2005** | ** ** | **June 25,  2004** | ** ** | **July 1,  2005** | ** ** | **June 25,  2004** | ** ** |
|                             |                                                                                                           |                   |       |                    |       |   |   |   |   |
| Net income  (loss), as reported  |                                                                                                           | $                      | (6,926     | )                       | $          | 1,030 |   | $ | (8,215 | ) | $ | 397 |   |
| Deduct:                          | Total stock based employee compensation expense determined under fair  value method for all awards, net of tax |                   | (439       | )                       | (383       | ) | (680 | ) | (836 | ) |
| Add:                             | Amount of such stock-based expense included in net income (loss)                                               |                   | —     |                    | —     |   | — |   | — |   |
| Pro forma  net income (loss)     |                                                                                                           | $                      | (7,365     | )                       | $          | 647 |   | $ | (8,895 | ) | $ | (439 | ) |
|                             |                                                                                                           |                   |       |                    |       |   |   |   |   |
| Basic income  (loss) per share   | As reported                                                                                                    |                   | $          | (0.28                   | )          | $ | 0.04 |   | $ | (0.34 | ) | $ | 0.02 |   |
|                             | Pro forma                                                                                                      |                   | $          | (0.30                   | )          | $ | 0.03 |   | $ | (0.36 | ) | $ | (0.02 | ) |
|                             |                                                                                                           |                   |       |                    |       |   |   |   |   |
| Diluted  income (loss) per share | As reported                                                                                                    |                   | $          | (0.28                   | )          | $ | 0.04 |   | $ | (0.34 | ) | $ | 0.02 |   |
|                             | Pro forma                                                                                                      |                   | $          | (0.30                   | )          | $ | 0.03 |   | $ | (0.36 | ) | $ | (0.02 | ) |
|                                  |                                                                                                                |                        |            |                         |            |  |  |  |  |  |  |  |  |  |  |

 

*Basic and Diluted Net Income (Loss)Per Share*

 

Basic netincome (loss) per share is based upon the weighted average number of commonshares outstanding.  Diluted net incomeper share is based on the assumption that stock options were exercised.  Dilution is computed by applying the treasurystock method. Under this method, options are assumed to be exercised at thebeginning of the period (or at the time of issuance, if later), and as if fundsobtained by the Company from such exercise were used by the Company to purchasecommon stock at the average market price during the period. Stock options arenot considered when computing diluted net loss per share as they are consideredanti-dilutive.

 

The following represents areconciliation of basic and diluted net loss per share for the three months andsix months ended July 1, 2005 and June 25, 2004 (in thousands, exceptper share data):

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**    | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **July 1,  2005** | ** ** | **June 25,  2004** | ** ** | **July 1,  2005** | ** ** | **June 25,  2004** | ** ** |
| Income  (loss) from continuing operations              |       | $                      | (6,926     | )                       | $          | 1,248 |   | $ | (7,678 | ) | $ | 742 |   |
| Loss on  discontinued operations, net of tax benefit   |       | —                 |       | (218                    | )          | (537 | ) | (345 | ) |
| Net income  (loss)                                     |       | $                      | (6,926     | )                       | $          | 1,030 |   | $ | (8,215 | ) | $ | 397 |   |
|                                                   |       |                   |       |                    |       |   |   |   |   |
| Basic  weighted average number of shares outstanding   |       | 24,343                 |       | 24,074                  |       | 24,409 |   | 24,748 |   |
| Effect of  dilutive options and contingent shares      |       | —                 |       | 266                     |       | — |   | 233 |   |
| Diluted  weighted average number of shares outstanding |       | 24,343                 |       | 24,340                  |       | 24,409 |   | 24,981 |   |
|                                                   |       |                   |       |                    |       |   |   |   |   |
| Basic per  share:                                      |       |                   |       |                    |       |   |   |   |   |
| Income  (loss) from continuing operations              |       | $                      | (0.28      | )                       | $          | 0.05 |   | $ | (0.32 | ) | $ | 0.03 |   |
| Loss on  discontinued operations, net of tax benefit   |       | —                 |       | (0.01                   | )          | (0.02 | ) | (0.01 | ) |
| Net income  (loss) per share                           |       | $                      | (0.28      | )                       | $          | 0.04 |   | $ | (0.34 | ) | $ | 0.02 |   |
|                                                   |       |                   |       |                    |       |   |   |   |   |
| Diluted per  share:                                    |       |                   |       |                    |       |   |   |   |   |
| Income  (loss) from continuing operations              |       | $                      | (0.28      | )                       | $          | 0.05 |   | $ | (0.32 | ) | $ | 0.03 |   |
| Loss on  discontinued operations, net of tax benefit   |       | —                 |       | (0.01                   | )          | (0.02 | ) | (0.01 | ) |
| Net income  (loss) per share                           |       | $                      | (0.28      | )                       | $          | 0.04 |   | $ | (0.34 | ) | $ | 0.02 |   |

 

8

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For the three months ended July 1,2005 and June 25, 2004, there were 5,218,823 and 4,417,995 anti-dilutiveoutstanding stock options, respectively, excluded from the calculation ofdiluted loss per share.  For the sixmonths ended July 1, 2005 and June 25, 2004, there were 5,231,175 and4,830,016 anti-dilutive outstanding stock options, respectively, excluded fromthe calculation of diluted loss per share.

 

*Use of Estimates*

 

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, 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 amount of tax asset valuation allowance required, restructuring costs, litigation and disputes, and the allowance for doubtful accounts.

 

The Companybases its estimates on historical experience and on various other assumptionsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources.  The Company’s actual results may differ fromits estimates.

 

One particularsignificant estimate is the amount of realizability of the Company’s deferredtax assets, and the necessary amount of related valuation allowance.  Based on the Company’s recent historicalperformance and in accordance with SFAS 109, the Company has increased itsdeferred tax asset valuation allowance by $6.0 million during the second quarterof fiscal year 2005.  This does not, inany way, limit the Company’s ability to use its deferred tax assets, primarilyloss carryforwards, to offset income earned in the future.  As well as not being subject to taxation, asignificant amount (approximately $20 million) of any future pretax incomewill not require a tax provision in the income statement.

 

Afterapplication of the $6.0 million valuation allowance in the second quarter,the Company has remaining net deferred tax assets at July 1, 2005 ofapproximately $6.0 million, reflecting the benefit of various temporarytax differences, which are replenished every year. To the extent that currentyear activity for these temporary differences results in a taxable loss, theCompany’s net operating loss carryforwards would increase, and additionalvaluation allowance may be required. Realization of the currently recorded deferredtax assets is dependent on generating sufficient taxable income in theforseeable future. Although realization is not assured, management believes itis more likely than not that all of the net deferred tax asset will berealized.

 

*Cash andCash Equivalents*

 

For purposes of reporting,cash and cash equivalents include cash and interest-earning deposits orsecurities with original maturities of three months or less.

 

**Note 2****                                                            ****Investments**

 

At July 1, 2005, theCompany had approximately $21.4 million in short-term investments.  Such investments were held primarily incommercial paper, money market investments, and tax-exempt governmentsecurities.  Net unrealized gains andlosses on investments were immaterial at July 1, 2005.  Additionally, the Company had $325,000 ofnon-marketable equity investments, valued at the lower of cost or estimatedfair value, which were included in long-term investments.

 

**Note 3****                                                            ****Other Current Receivable**

 

At July 1, 2005, theCompany carried an other current receivable of approximately $2.9 million froma single client.  The receivable isrelated to an outsourcing contract and was originally scheduled to be collectedover the next 18 months; however, due to the early termination of the contractfor convenience by the client, it is now scheduled to be received in full by December 31,2005.

 

9

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**Note 4****                                                            ****Business Acquisitions**

 

*FCGInfrastructure Services (FCGIS)*

 

On May 31, 2002, theCompany acquired a controlling interest of 52.35% in Codigent Solutions Group, Inc.,renamed FCG Infrastructure Services, Inc. (FCGIS), a provider of valueadded information technology solutions to hospitals and other healthcaredelivery organizations, for $2.6 million in cash.  On January 30,2004, the Company purchased the remaining 47.65% minority interest in FCGISfrom five remaining individual stockholders for approximately $2.4 million incash.  Additionally, the Company deposited 591,328 shares of FCG commonstock into an escrow account, with one-fourth of such shares to be released tothose same stockholders in four separate increments upon successful fulfillmentby FCGIS of certain revenue and profitability targets for the six-month periodsended June 25, 2004, December 31, 2004, July 1, 2005, and December 30,2005.  If such targets were not fulfilled for any of the six-monthperiods, the shares in escrow for that period would revert to FCG.

 

The acquisition wasaccounted for using the purchase method of accounting and the allocation of the$5.0 million non-contingent purchase price (net of cash acquired of $392,000)is as follows (in thousands):

 

| Accounts  receivable       |   | $     | 784    |   |
|----------------------------|--------|-------|--------|--------|
| Fixed assets  and software |   | 557   |   |
| Intangible  assets         |   | 604   |   |
| Goodwill                   |   | 3,254 |   |
| Accrued  liabilities       |   | (397  | )      |
| Assumed  long-term debt    |   | (194  | )      |
| Net assets  acquired       |   | $     | 4,608  |   |

 

The $3.9 million of excessover book value was allocated between goodwill and intangible assets of $3.3million and $0.6 million, respectively.  Such amounts are non-deductiblefor tax purposes.

 

For the six-month periodsended June 25, 2004 and December 31, 2004, FCGIS met the revenue andprofitability targets, and 295,664 contingent shares were released to theformer FCGIS stockholders, thus adding $1.8 million to goodwill.  In February 2005,the Company negotiated an early conclusion to its escrow agreement related toshares of common stock issued in the purchase of FCGIS, where half of theremaining 295,664 shares in escrow were released and the other half wereforfeited back to the Company.  The shares released further increasedgoodwill by another $900,000 to a total of $6.1 million of goodwill related tothe acquisition.

 

Additionally, on February 23,2005, the Company repurchased most of the stock which had been previously andcurrently released from escrow for its current fair market value.  A totalof 422,018 shares were repurchased for approximately $2.5 million in cash.  The repurchased shares were subsequentlycancelled.

 

**Note 5****                                                            ****Goodwill and Intangible Assets**

 

Goodwill isevaluated for impairment annually, pursuant to SFAS 142, or if an event occursor circumstances change that may reduce the fair value of the reporting unitbelow its book value. The impairment test is conducted at the reporting unitlevel by comparing the fair value of the reporting unit with its carryingvalue. Fair value is determined by using a market approach valuation modelbased on revenue multiples or a discounted cash flow approach.  The Company uses various assumptions in thevaluation, such as discount rates, and comparable company analysis inperforming these valuations.  If the

 

10

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carrying value exceeds the fairvalue, goodwill may be impaired. If this occurs, the fair value of thereporting unit is then allocated to its assets and liabilities in a mannersimilar to a purchase price allocation in order to determine the implied fairvalue of the reporting unit goodwill. This implied fair value is then comparedwith the carrying amount of the reporting unit goodwill, and if it is less, theCompany would then recognize an impairment loss.  In addition, the Company evaluates intangibleassets with definite lives pursuant to SFAS 142, to determine whetheradjustment to these amounts or estimated useful lives are required based oncurrent events and circumstances.

 

In the firstquarter of 2005, the Company reorganized its business segments.  In accordance with SFAS 142, the goodwillformerly attributed to the Meditech Service Center segment was divided betweenthe Health Delivery Services and Health Delivery Outsourcing segments based onthe relative fair values of parts of the previous Meditech Service Center beingreorganized into those business units, and is shown historically on thisrestated basis in the following schedule.

 

The changes in the netcarrying amounts of goodwill for the six months ended July 1, 2005 are asfollows (in thousands):

 
| ** **                            | ** ** | **Health  Delivery  Services** | ** ** | **Health  Delivery  Outsourcing** | ** ** | **Life  Sciences** | ** ** | **Government  & Technology  Services** | ** ** | **Other** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|--------------------|------------|--------------------------------------------|------------|-----------|------------|-----------|------------|
| Balance as  of December 26, 2003 |       | $                              | 1,051      |                              | $          | 3,228              |       | $                                          | 1,477      |      | $          | 8,260     |       | $ | 1,442 |   | $ | 15,458 |   |
|                                  |       |                           |       |                              |       |               |       |                                       |       |      |       |      |       |
| Acquired                              |       | 1,701                          |       | 1,538                             |       | —             |       | —                                     |       | —    |       | 3,239     |       |
|                                  |       |                           |       |                              |       |               |       |                                       |       |      |       |      |       |
| Impaired                              |       | —                         |       | —                            |       | —             |       | —                                     |       | (1,442    | )          | (1,442    | )          |
|                                  |       |                           |       |                              |       |               |       |                                       |       |      |       |      |       |
| Currency  translation adjustment      |       | —                         |       | —                            |       | 4                  |       | —                                     |       | —    |       | 4         |       |
|                                  |       |                           |       |                              |       |               |       |                                       |       |      |       |      |       |
| Balance as  of December 31, 2004 |       | 2,752                          |       | 4,766                             |       | 1,481              |       | 8,260                                      |       | —    |       | 17,259    |       |
|                                  |       |                           |       |                              |       |               |       |                                       |       |      |       |      |       |
| Acquired                              |       | 473                            |       | 427                               |       | —             |       | —                                     |       | —    |       | 900       |       |
|                                  |       |                           |       |                              |       |               |       |                                       |       |      |       |      |       |
| Balance as  of July 1, 2005      |       | $                              | 3,225      |                              | $          | 5,193              |       | $                                          | 1,481      |      | $          | 8,260     |       | $ | — |   | $ | 18,159 |   |

 

The $900,000of additional goodwill in the first quarter of 2005 relates to a final earn outpayment to the previous owners of a business which was the substantial portionof the Meditech Service Center segment (see Note 4 of Notes to Consolidated FinancialStatements).

 

As of July 1, 2005, theCompany had the following acquired intangible assets recorded (in thousands):

 

11

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| ** **                            | ** ** | **Software and  Software  Development** | ** ** | **Customer  Related** | ** ** | **Non-Compete  Agreements** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|-----------------------------------------|------------|-----------------------|------------|-----------------------------|------------|-----------|------------|
| Balance as  of December 26, 2003 |       | $                                       | 763        |                  | $          | 2,858                       |       | $         | 179        |   | $ | 3,800 |   |
|                                  |       |                                    |       |                  |       |                        |       |      |       |
| Acquired                              |       | —                                  |       | 300                   |       | —                      |       | 300       |       |
|                                  |       |                                    |       |                  |       |                        |       |      |       |
| Amortization                          |       | (543                                    | )          | (981                  | )          | (139                        | )          | (1,663    | )          |
|                                  |       |                                    |       |                  |       |                        |       |      |       |
| Balance as  of December 31, 2004 |       | 220                                     |       | 2,177                 |       | 40                          |       | 2,437     |       |
|                                  |       |                                    |       |                  |       |                        |       |      |       |
| Amortization                          |       | (132                                    | )          | (517                  | )          | (40                         | )          | (689      | )          |
|                                  |       |                                    |       |                  |       |                        |       |      |       |
| Balance as  of July 1, 2005      |       | $                                       | 88         |                  | $          | 1,660                       |       | $         | —     |   | $ | 1,748 |   |
|                                  |       |                                    |       |                  |       |                        |       |      |       |
| Amortization  Period in Years         |       | 2 -3                                    |       | 2 -4                  |       | 2 -3                        |       |      |       |

 

The following tablesummarizes the estimated remaining annual pretax amortization expense for theseassets (in thousands):

 

| **Fiscal  Year**          | ** ** | ** ** | ** ** |
|---------------------------|------------|------------|------------|
| 2005  (remainder of year) |       | $          | 520        |   |
| 2006                      |       | 772        |       |
| 2007                      |       | 456        |       |
| Total                     |       | $          | 1,748      |   |

 

**Note 6****                                                            ****Restructuring, Severance, and ImpairmentCosts**

 

**At July 1, 2005, the Company had approximately $4.0 millionin restructuring accrual which related to restructuring, severance, andimpairment costs incurred in the prior years, primarily in the Life Sciencessegment.  The remaining accrual entirelyconsists of costs related to vacated leases, net of estimated subleasepayments.**

** **

**The restructuring liability activity through July 1,2005 is summarized as follows (in thousands):**

** **
| ** **                                 | ** ** | **Facilities/Other  Related Costs** | ** ** |
|--------------------------------------------|------------|-------------------------------------|------------|
| Accrual  balance at December 31, 2004 |       | $                                   | 5,020      |   |
| Cash  payments                             |       | (1,064                              | )          |
| Accrual  balance at July 1, 2005      |       | $                                   | 3,956      |   |

 

12

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**Note 7****                                                            ****Comprehensive Income (Loss)**

 

Comprehensive income (loss),net of taxes, for the three months and six months ended July 1, 2005 and June 25,2004, is as follows (in thousands):

 
| ** **                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**    | ** ** |
|------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                     | ** ** | **July 1,  2005** | ** ** | **June 25,  2004** | ** ** | **July 1,  2005** | ** ** | **June 25,  2004** | ** ** |
| Net income  (loss)                             |       | $                      | (6,926     | )                       | $          | 1,030 |   | $ | (8,215 | ) | $ | 397 |   |
|                                           |       |                   |       |                    |       |   |   |   |   |
| Foreign  currency translation adjustment       |       | (290                   | )          | 29                      |       | (390 | ) | 111 |   |
| Unrealized gain  (loss) on investments         |       | (1                     | )          | (11                     | )          | (1 | ) | (1 | ) |
| Other  comprehensive income (loss), net of tax |       | (291                   | )          | 18                      |       | (391 | ) | 110 |   |
|                                           |       |                   |       |                    |       |   |   |   |   |
| Comprehensive  income (loss)                   |       | $                      | (7,217     | )                       | $          | 1,048 |   | $ | (8,606 | ) | $ | 507 |   |

 

**Note 8****                                                            ****Discontinued Operations**

 

On December 7, 2004, the Company’s Board of Directors approved aplan to sell and exit its clinical and non-clinical Call Center Services (CCS)operation due to recurring losses.  On February 2, 2005, the Companyexecuted a definitive agreement with the MPB Group, LLC, d/b/a The BerylCompanies.  FCG will receive 12 monthly payments totaling $150,000 forselected customer contracts. The disposal plan consisted primarily of thetermination of normal CCS activity, calculation of termination benefits for theexisting CCS employees, termination of a lease agreement, abandonment ofproperty and equipment, collection of accounts receivable, and settlement ofliabilities.

 

In accordance with SFAS 144, “Accounting for the Impairment or Disposalof Long-Lived Assets,” this disposal represents a discontinued operation. Accordingly, the accompanying consolidated financial statements and notesreflect the results of operations and financial position of the CCS division asa discontinued operation for all periods presented.

 

A summary ofresults for CCS for the six months ended July 1, 2005 included revenues of$631,000 and a pre-tax loss of $866,000 which related to the sales, operation,and wind-down of the business.  Thepre-tax loss, net of a 38% tax benefit, resulted in a net loss of $537,000,compared to a loss of $345,000, net of a 38% tax benefit for the six months endedJune 25, 2004.  The fiscal year 2005net loss included $276,000 related to severance costs for the remaining staffof 37 people.  Further, in accordancewith SFAS 146, “Accounting for Costs Associated with Exit or DisposalActivities”, the Company recorded an accrual for the remaining lease paymentson the CCS leased property in the amount of $89,000.

 

**Note 9****                                                            ****Disclosure of Segment Information**

 

In the firstquarter of 2005, the Company reorganized its previous segment reporting inaccordance with SFAS 131 and had the following changes in its reporting:

 

•                  The MeditechService Center segment has been split between Health Delivery Services andHealth Delivery Outsourcing.  Aninsignificant portion of the Meditech Service Center has also been included inthe Software Products segment;

•                  The HealthDelivery Services (previously Health Delivery) and Health Delivery Outsourcingsegments, while still reported separately, are now combined with a common salesgroup, Health Delivery Sales into a total Health Delivery segment;

 

13

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•                  The Governmentand Technology Services (GTS) segment has been created by combining FCGSoftware Services, formerly named Paragon Solutions, Inc. (our softwaredevelopment business) and Technology Staffing Services groups, which used to beincluded within Other Business, with the government healthcare business unit,which used to be part of Health Delivery;

•                  SoftwareProducts (SWP) has been created by adding the Cyberview product that used to bein the Meditech Service Center segment to the existing SWP business line, whichused to be included within Other Business, and primarily involves theFirstGateways product.

 

For fiscalyear 2005, the Company has the following six reportable operating segments:

 

•                  Health DeliveryServices - the delivery of consulting and systems integration services tohealth delivery clients;

•                  Health DeliveryOutsourcing - the delivery of outsourcing services to health delivery clients;

•                  Life Sciences -the delivery of consulting and systems integration services to pharmaceuticaland other life sciences clients;

•                  Health Plan -the delivery of consulting and systems integration services to health planclients;

•                  Government andTechnology Services - the delivery of consulting services to governmentclients, the delivery of blended offshore software development, and thedelivery of technology staff augmentation services; and

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

 

Additionally,the Company has three shared service centers that provide services to multiplebusiness segments.  These shared servicecenters include FCG India, Integration Services, and InfrastructureServices.   The costs of these servicesare internally billed and reported in the individual business segments as costof services at a standard transfer cost.

 

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

 

The followingsegment information is for the three months and six months ended July 1,2005 and June 25, 2004 (in thousands):

 

14

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**For the three months ended July 1, 2005:**

  (in thousands)

 
| ** **                                     | ** ** | **Health  Delivery  Services** | ** ** | **Health  Delivery  Sales** | ** ** | **Health  Delivery  Outsourcing** | *** *** | ***Health  Delivery  Total*** | ** ** | **Life  Sciences** | ** ** | **Health  Plan** | ** ** | **Government  &  Technology  Services** | ** ** | **Software  Products** | ** ** | **Other** | ** ** | **Totals** | ** ** |
|------------------------------------------------|------------|--------------------------------|------------|-----------------------------|------------|-----------------------------------|--------------|-------------------------------|------------|--------------------|------------|------------------|------------|---------------------------------------------|------------|------------------------|------------|-----------|------------|------------|------------|
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** ** | ** ** |
| Revenues before reimbursements                 |       | $                              | 17,097     |                        | $          | —                            |         | $                             | 28,659     | * *           | *$*        | *45,756*         |       | $                                           | 8,844      |                   | $          | 4,121     |       | $          | 8,605      |   | $ | 593 |   | $ | — |   | **$** | **67,919** | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** ** | ** ** |
| Reimbursements                                 |       | 2,532                          |       | —                      |       | 238                               | * *     | *2,770*                       |       | 224                |       | 546              |       | 200                                         |       | 32                     |       | —    |       | **3,772**  | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** ** | ** ** |
| Total revenues                                 |       | 19,629                         |       | —                      |       | 28,897                            | * *     | *48,526*                      |       | 9,068              |       | 4,667            |       | 8,805                                       |       | 625                    |       | —    |       | **71,691** | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** ** | ** ** |
| Cost of services before  reimbursable expenses |       | 10,531                         |       | —                      |       | 24,743                            | * *     | *35,274*                      |       | 4,751              |       | 3,144            |       | 4,742                                       |       | 976                    |       | (1,560    | )          | **47,327** | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** ** | ** ** |
| Reimbursable expenses                          |       | 2,532                          |       | —                      |       | 238                               | * *     | *2,770*                       |       | 224                |       | 546              |       | 200                                         |       | 32                     |       | —    |       | **3,772**  | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** ** | ** ** |
| Total cost of services                         |       | 13,063                         |       | —                      |       | 24,981                            | * *     | *38,044*                      |       | 4,975              |       | 3,690            |       | 4,942                                       |       | 1,008                  |       | (1,560    | )          | **51,099** | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** ** | ** ** |
| Gross profit                                   |       | 6,566                          |       | —                      |       | 3,916                             | * *     | *10,482*                      |       | 4,093              |       | 977              |       | 3,863                                       |       | (383                   | )          | 1,560     |       | **20,592** | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** ** | ** ** |
| Selling expenses                               |       | 1,189                          |       | 1,427                       |       | 516                               | * *     | *3,132*                       |       | 1,879              |       | 606              |       | 858                                         |       | 132                    |       | 487       |       | **7,094**  | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** ** | ** ** |
| General &  administrative expenses    |       | 3,148                          |       | —                      |       | 3,179                             | * *     | *6,327*                       |       | 2,265              |       | 840              |       | 1,740                                       |       | 415                    |       | 3,014     |       | **14,601** | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** ** | ** ** |
| Income (loss) from operations                  |       | $                              | 2,229      |                        | $          | (1,427                            | )            | $                             | 221        | * *           | *$*        | *1,023*          |       | $                                           | (51        | )                      | $          | (469      | )          | $          | 1,265      |   | $ | (930 | ) | $ | (1,941 | ) | **$** | **(1,103** | **)** |

 

**For thethree months ended June 25, 2004:**

  (in thousands)

 
| ** **                                     | ** ** | **Health  Delivery  Services** | ** ** | **Health  Delivery  Sales** | ** ** | **Health  Delivery  Outsourcing** | *** *** | ***Health  Delivery  Total*** | ** ** | **Life  Sciences** | ** ** | **Health  Plan** | ** ** | **Government  &  Technology  Services** | ** ** | **Software  Products** | ** ** | **Other** | ** ** | **Totals** | ** ** |
|------------------------------------------------|------------|--------------------------------|------------|-----------------------------|------------|-----------------------------------|--------------|-------------------------------|------------|--------------------|------------|------------------|------------|---------------------------------------------|------------|------------------------|------------|-----------|------------|------------|------------|
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** ** | ** ** |
| Revenues before reimbursements                 |       | $                              | 18,682     |                        | $          | —                            |         | $                             | 27,580     | * *           | *$*        | *46,262*         |       | $                                           | 9,230      |                   | $          | 3,642     |       | $          | 7,834      |   | $ | 267 |   | $ | 2 |   | **$** | **67,237** | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** ** | ** ** |
| Reimbursements                                 |       | 2,570                          |       | —                      |       | 144                               | * *     | *2,714*                       |       | 260                |       | 692              |       | 172                                         |       | 63                     |       | 555       |       | **4,456**  | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** ** | ** ** |
| Total revenues                                 |       | 21,252                         |       | —                      |       | 27,724                            | * *     | *48,976*                      |       | 9,490              |       | 4,334            |       | 8,006                                       |       | 330                    |       | 557       |       | **71,693** | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** ** | ** ** |
| Cost of services before  reimbursable expenses |       | 9,791                          |       | —                      |       | 22,568                            | * *     | *32,359*                      |       | 5,336              |       | 2,659            |       | 4,576                                       |       | 609                    |       | (747      | )          | **44,792** | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** ** | ** ** |
| Reimbursable expenses                          |       | 2,570                          |       | —                      |       | 144                               | * *     | *2,714*                       |       | 260                |       | 692              |       | 172                                         |       | 63                     |       | 555       |       | **4,456**  | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** ** | ** ** |
| Total cost of services                         |       | 12,361                         |       | —                      |       | 22,712                            | * *     | *35,073*                      |       | 5,596              |       | 3,351            |       | 4,748                                       |       | 672                    |       | (192      | )          | **49,248** | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** ** | ** ** |
| Gross profit                                   |       | 8,891                          |       | —                      |       | 5,012                             | * *     | *13,903*                      |       | 3,894              |       | 983              |       | 3,258                                       |       | (342                   | )          | 749       |       | **22,445** | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** ** | ** ** |
| Selling expenses                               |       | 1,147                          |       | 1,235                       |       | 593                               | * *     | *2,975*                       |       | 2,527              |       | 857              |       | 734                                         |       | 74                     |       | (52       | )          | **7,115**  | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** ** | ** ** |
| General &  administrative expenses    |       | 2,688                          |       | —                      |       | 2,561                             | * *     | *5,249*                       |       | 2,940              |       | 644              |       | 1,652                                       |       | 175                    |       | 2,479     |       | **13,139** | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** ** | ** ** |
| Income (loss) from operations                  |       | $                              | 5,056      |                        | $          | (1,235                            | )            | $                             | 1,858      | * *           | *$*        | *5,679*          |       | $                                           | (1,573     | )                      | $          | (518      | )          | $          | 872        |   | $ | (591 | ) | $ | (1,678 | ) | **$** | **2,191** | ** ** |

 

15

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**For the sixmonths ended July 1, 2005:**

  (in thousands)

 
| ** **                                     | ** ** | **Health  Delivery  Services** | ** ** | **Health  Delivery  Sales** | ** ** | **Health  Delivery  Outsourcing** | *** *** | ***Health  Delivery  Total*** | ** ** | **Life  Sciences** | ** ** | **Health  Plan** | ** ** | **Government  &  Technology  Services** | ** ** | **Software  Products** | ** ** | **Other** | ** ** | **Totals**  | ** ** |
|------------------------------------------------|------------|--------------------------------|------------|-----------------------------|------------|-----------------------------------|--------------|-------------------------------|------------|--------------------|------------|------------------|------------|---------------------------------------------|------------|------------------------|------------|-----------|------------|-------------|------------|
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** **  | ** ** |
| Revenues before reimbursements                 |       | $                              | 33,140     |                        | $          | —                            |         | $                             | 59,421     | * *           | *$*        | *92,561*         |       | $                                           | 17,559     |                   | $          | 8,131     |       | $           | 16,682     |   | $ | 1,130 |   | $ | — |   | **$** | **136,063** | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** **  | ** ** |
| Reimbursements                                 |       | 5,049                          |       | —                      |       | 370                               | * *     | *5,419*                       |       | 421                |       | 1,127            |       | 414                                         |       | 53                     |       | —    |       | **7,434**   | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** **  | ** ** |
| Total revenues                                 |       | 38,189                         |       | —                      |       | 59,791                            | * *     | *97,980*                      |       | 17,980             |       | 9,258            |       | 17,096                                      |       | 1,183                  |       | —    |       | **143,497** | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** **  | ** ** |
| Cost of services before  reimbursable expenses |       | 21,330                         |       | —                      |       | 50,310                            | * *     | *71,640*                      |       | 9,231              |       | 6,403            |       | 9,575                                       |       | 1,860                  |       | (3,114    | )          | **95,595**  | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** **  | ** ** |
| Reimbursable expenses                          |       | 5,049                          |       | —                      |       | 370                               | * *     | *5,419*                       |       | 421                |       | 1,127            |       | 414                                         |       | 53                     |       | —    |       | **7,434**   | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** **  | ** ** |
| Total cost of services                         |       | 26,379                         |       | —                      |       | 50,680                            | * *     | *77,059*                      |       | 9,652              |       | 7,530            |       | 9,989                                       |       | 1,913                  |       | (3,114    | )          | **103,029** | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** **  | ** ** |
| Gross profit                                   |       | 11,810                         |       | —                      |       | 9,111                             | * *     | *20,921*                      |       | 8,328              |       | 1,728            |       | 7,107                                       |       | (730                   | )          | 3,114     |       | **40,468**  | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** **  | ** ** |
| Selling expenses                               |       | 2,316                          |       | 2,751                       |       | 982                               | * *     | *6,049*                       |       | 3,784              |       | 1,142            |       | 1,731                                       |       | 274                    |       | 872       |       | **13,852**  | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** **  | ** ** |
| General &  administrative expenses    |       | 6,328                          |       | —                      |       | 6,393                             | * *     | *12,721*                      |       | 4,845              |       | 1,580            |       | 3,442                                       |       | 776                    |       | 5,976     |       | **29,340**  | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |       | ** **  | ** ** |
| Income (loss) from operations                  |       | $                              | 3,166      |                        | $          | (2,751                            | )            | $                             | 1,736      | * *           | *$*        | *2,151*          |       | $                                           | (301       | )                      | $          | (994      | )          | $           | 1,934      |   | $ | (1,780 | ) | $ | (3,734 | ) | **$** | **(2,724** | **)** |

 

**For the sixmonths ended June 25, 2004:**

  (in thousands)

 
| ** **                                     | ** ** | **Health  Delivery  Services** | ** ** | **Health  Delivery  Sales** | ** ** | **Health  Delivery  Outsourcing** | *** *** | ***Health  Delivery  Total*** | ** ** | **Life  Sciences** | ** ** | **Health  Plan** | ** ** | **Government  &  Technology  Services** | ** ** | **Software  Products** | ** ** | **Other** |   | **Totals**  | ** ** |
|------------------------------------------------|------------|--------------------------------|------------|-----------------------------|------------|-----------------------------------|--------------|-------------------------------|------------|--------------------|------------|------------------|------------|---------------------------------------------|------------|------------------------|------------|-----------|--------|-------------|------------|
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |   | ** **  | ** ** |
| Revenues before reimbursements                 |       | $                              | 36,040     |                        | $          | —                            |         | $                             | 54,699     | * *           | *$*        | *90,739*         |       | $                                           | 18,097     |                   | $          | 7,890     |   | $           | 15,195     |   | $ | 651 |   | $ | 18 |   | **$** | **132,590** | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |   | ** **  | ** ** |
| Reimbursements                                 |       | 4,954                          |       | —                      |       | 244                               | * *     | *5,198*                       |       | 486                |       | 1,272            |       | 317                                         |       | 133                    |       | 1,030     |   | **8,436**   | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |   | ** **  | ** ** |
| Total revenues                                 |       | 40,994                         |       | —                      |       | 54,943                            | * *     | *95,937*                      |       | 18,583             |       | 9,162            |       | 15,512                                      |       | 784                    |       | 1,048     |   | **141,026** | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |   | ** **  | ** ** |
| Cost of services before  reimbursable expenses |       | 19,495                         |       | —                      |       | 45,174                            | * *     | *64,669*                      |       | 10,390             |       | 5,097            |       | 9,322                                       |       | 1,265                  |       | (1,420    | )      | **89,323**  | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |   | ** **  | ** ** |
| Reimbursable expenses                          |       | 4,954                          |       | —                      |       | 244                               | * *     | *5,198*                       |       | 486                |       | 1,272            |       | 317                                         |       | 133                    |       | 1,030     |   | **8,436**   | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |   | ** **  | ** ** |
| Total cost of services                         |       | 24,449                         |       | —                      |       | 45,418                            | * *     | *69,867*                      |       | 10,876             |       | 6,369            |       | 9,639                                       |       | 1,398                  |       | (390      | )      | **97,759**  | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |   | ** **  | ** ** |
| Gross profit                                   |       | 16,545                         |       | —                      |       | 9,525                             | * *     | *26,070*                      |       | 7,707              |       | 2,793            |       | 5,873                                       |       | (614                   | )          | 1,438     |   | **43,267**  | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |   | ** **  | ** ** |
| Selling expenses                               |       | 2,248                          |       | 2,604                       |       | 1,178                             | * *     | *6,030*                       |       | 5,015              |       | 1,733            |       | 1,401                                       |       | 144                    |       | 40        |   | **14,363**  | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |   | ** **  | ** ** |
| General &  administrative expenses    |       | 5,258                          |       | —                      |       | 5,132                             | * *     | *10,390*                      |       | 5,924              |       | 1,288            |       | 3,034                                       |       | 332                    |       | 4,036     |   | **25,004**  | ** ** |
|                                           |       |                           |       |                        |       |                              | * *     | * *                      |       |               |       |             |       |                                        |       |                   |       |      |   | ** **  | ** ** |
| Income (loss) from operations                  |       | $                              | 9,039      |                        | $          | (2,604                            | )            | $                             | 3,215      | * *           | *$*        | *9,650*          |       | $                                           | (3,232     | )                      | $          | (228      | )      | $           | 1,438      |   | $ | (1,090 | ) | $ | (2,638 | ) | **$** | **3,900** | ** ** |

 

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The“Other” column consists of unallocated shared service center and supportcosts.  For the three months and sixmonths ended July 1, 2005 and June 25, 2004, there was a significantnet loss in this column due to under utilization of both the infrastructure andintegration shared service centers.

 

*Detail of Health DeliveryOutsourcing Revenues*

 

Health Delivery Outsourcingrevenues before reimbursements include revenues related to a majorsubcontractor on several projects.  Thebreakdown of revenues in outsourcing is as follows (in thousands):

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**    | ** ** |
|---------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                      | ** ** | **July 1,  2005** | ** ** | **June 25,  2004** | ** ** | **July 1,  2005** | ** ** | **June 25,  2004** | ** ** |
| Internally  generated revenues  |       | $                      | 23,469     |                    | $          | 22,792 |   | $ | 48,588 |   | $ | 44,448 |   |
| Subcontractor  revenues         |       | 5,190                  |       | 4,788                   |       | 10,833 |   | 10,251 |   |
| Revenues  before reimbursements |       | $                      | 28,659     |                    | $          | 27,580 |   | $ | 59,421 |   | $ | 54,699 |   |

 

**Note 10****                                                     ****Line of Credit**

 

The Company has a revolving line of creditexpiring on May 1, 2006, under which it is allowed to borrow up to $7.0 millionat the prevailing prime rate.  There wasno outstanding balance under the line of credit at July 1, 2005.  Due to the Company’s second quarter loss, anamendment was required to certain of the Company’s loan covenants in order tomaintain compliance.  Terms of thisamendment were approved subsequent to July 1, 2005, and the Company is incompliance with such amended terms.

 

**Note 11****                                                      CapitalStock Repurchase**

 

On February 27, 2004, the Company repurchased alloutstanding shares of FCG common stock held by David S. Lipson, one of theCompany’s directors and the former CEO of Integrated Systems Consulting Group, Inc.(ISCG).  The Company acquired ISCG in December 1998.  The Company also purchased any in-the-moneyoptions to purchase FCG common stock held by Mr. Lipson.  The aggregate purchase price for the sharesand options held by Mr. Lipson was $15.1 million.  As a result of the transaction, Mr. Lipsonresigned from the Company’s Board of Directors.

 

The Company’spurchase of Mr. Lipson’s ownership interest included all of the 1,962,400outstanding shares of common stock of FCG held by Mr. Lipson, togetherwith 32,000 in-the-money options to purchase shares of common stock ofFCG.  The aggregate purchase price forthe shares and the options represented a premium of approximately 11% over theclosing price of FCG’s common stock on February 26, 2004.

 

In the firstquarter of 2004, the Company recorded a charge of $1.6 million without any taxbenefit, which charge is based on the premium included in the purchaseconsideration.  From a tax perspective,no amounts of the purchase price are allocable to any of the restrictivecovenants agreed to by Mr. Lipson in the repurchase agreement.

 

Other materialterms of the transaction were as follows:

 

•          The purchaseprice was comprised of cash, a portion of which Mr. Lipson used to repayin full indebtedness owed by Mr. Lipson to the Company of approximately$0.3 million.

•          In the eventthe Company were to enter into negotiations regarding a change in controltransaction prior to February 27, 2005 and subsequently announce publiclya definitive agreement for or consummate a change in control transaction priorto August 27, 2005, the Company would pay to Mr. Lipson, upon theclosing of such change in control of the

 

17

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Company, an amount equal to the differencebetween $7.50 per share and the change in control transaction price per share,if such change in control price per share amount is higher.

•          Mr. Lipsonis subject to a five year non-compete agreement, a mutual non-disparagementagreement, a non-solicitation agreement and a standstill agreement.  The parties agreed that no amounts of thepurchase price would be allocated to these covenants for tax purposes.

•          Mr. Lipsonalso granted to the Board of Directors of the Company an irrevocable proxy forany of the Company’s securities that he owns or acquires after the closing ofthe Company’s purchase in this transaction.

•          The Company andMr. Lipson executed a mutual release of claims.

 

## **Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

## ** **

THE FOLLOWINGMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THEPRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.  SUCH FORWARD-LOOKING STATEMENTS INVOLVE RISKSAND UNCERTAINTIES, INCLUDING THOSE SET FORTH BELOW UNDER THE CAPTION “RISKSRELATING TO OUR BUSINESS,” AND CONTAINED IN OTHER REPORTS WE FILE WITH THESECURITIES AND EXCHANGE COMMISSION.  OURACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESEFORWARD-LOOKING STATEMENTS.

 

**Overview**

 

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

 

We typically bill for our services on anhourly or fixed-fee basis as specified by the agreement with a particularclient.  For services billed on an hourlybasis, in our consulting and systems integration businesses (“CSI”), fees aredetermined by multiplying the amount of time expended on each assignment by theproject 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.  Revenuesare generally recognized related to the level of services performed, the amountof cost incurred on the assignment versus the estimated total cost to completethe assignment, or on a straight-line basis over the period of performance ofservice.  Additionally, we have beenlicensing an increased amount of our software products, generally inconjunction with the customization and implementation of such softwareproducts.  Revenues from our softwarelicensing and maintenance were approximately 4% of our net revenues in the secondquarter of 2005, and we expect our software licensing revenues to continue togrow incrementally during our 2005 fiscal year. We also expect our services revenues associated with the implementationof our software products to continue to become a more significant part of ouroverall services revenues.

 

Provisions aremade for estimated uncollectible amounts based on our historicalexperience.  We may obtain payment inadvance of providing services.  Theseadvances are recorded as customer advances and reflected as a liability on ourbalance sheet.

 

Out-of-pocketexpenses billed and reimbursed by clients are included in total revenues, andthen deducted to determine revenues before reimbursements (“net revenues”).  For purposes of analysis, all

 

18

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percentages in this discussionare stated as a percentage of net revenues, since we believe that this is themore relevant measure of our business.

 

Cost ofservices primarily consists of the salaries, bonuses, and related benefits ofclient-serving consultants and outsourcing associates, and subcontractor expenses.  Selling expenses primarily consist of thesalaries, benefits, travel, and other costs of our sales force, as well asmarketing and market research expenses. General and administrative expenses primarily consist of the costsattributable to the support of our client-serving professionals such asnon-billable travel, office space occupancy, information systems andinfrastructure, salaries and expenses for executive management, financialaccounting and administrative personnel, expenses for firm and business unitgovernance meetings, recruiting fees, professional development and training,and legal and other professional services. As associate related costs are relatively fixed in the short term,variations in our revenues and operating results in our CSI business can occuras a result of variations in billing margins and utilization rates of ourbillable associates.

 

Our most significant expenses are our humanresource and related salary and benefit expenses.  As of July 1, 2005, approximately 1,319of our 2,500 employees are billable consultants.  Another 809 employees are part of ouroutsourcing business.  The salaries andbenefits of such billable consultants and outsourcing related employees arerecognized in our cost of services.  Mostnon-billable employee salaries and benefits are recognized as a component ofeither selling or general and administrative expenses.  Approximately 15% of our workforce, or 372employees, are classified as non-billable. Our cost of services as a percentage of revenues is directly related toseveral factors, including, but not limited to:

 

•                  Ourconsultant utilization, which is the ratio of total billable hours to availablehours in a given period;

•                  Theamount and timing of cost incurred;

•                  Ourability to control costs on our outsourcing projects;

•                  Thebilled rate on time and material contracts; and

•                  Theestimated cost to complete our non-outsourcing fixed price contracts.

 

In our outsourcing contracts, a significantportion of our revenues are fixed and allocated over the contract on astraight-line basis, as we are required to provide a specified level ofservices subject to certain performance measurements.  Also, certain revenues may fluctuate underthe contracts based on the volume of transactions we process or othermeasurements of service provided.  If weincur higher costs to provide the required services or receive less revenuesdue to reduced transaction volumes or penalties associated with service levelfailures, our gross profit can be negatively impacted.  If any of our large outsourcing contracts areterminated by the client, or if we fail to secure renewals of any outsourcingcontracts, our results of operations could be adversely affected.

 

In our CSIbusiness, we manage consultant utilization by monitoring assignmentrequirements and timetables, available and required skills, and availableconsultant hours per week and per month.  Differences in personnel utilization rates can result from variations inthe amount of non-billed time, which has historically consisted of trainingtime, vacation time, time lost to illness and inclement weather, and unassignedtime.  Non-billed time also includes timedevoted to other necessary and productive activities such as sales support andinterviewing prospective employees. Unassigned time results from differences in the timing of the completionof an existing assignment and the beginning of a new assignment.  In order to reduce and limit unassigned time,we actively manage personnel utilization by monitoring and projecting estimatedengagement start and completion dates and matching consultant availability withcurrent and projected client requirements. The number of consultants staffed on an assignment will vary accordingto the size, complexity, duration, and demands of the assignment.  Assignment terminations, completions,inclement weather, and scheduling delays may result in periods in whichconsultants are not optimally utilized. An unanticipated termination of a significant assignment or

 

19

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an overall lengthening of thesales cycle could result in a higher than expected number of unassignedconsultants and could cause us to experience lower margins.  In addition, entry into new market areas andthe hiring of consultants in advance of client assignments have resulted andmay continue to result in periods of lower consultant utilization.

 

In response tocompetition and continued pricing and rate pressures, we have implemented aglobal sourcing strategy into our business operations, which includes thedeployment of offshore resources as well as resources that perform servicesremote from the client site.  We alsoincorporate larger numbers of variable cost or per diem staff in some of ourprojects.  We expect these strategies toresult in improved cost of services through a combination of lower costattributable to offshore resources and higher leverage of resources thatperform services offsite or on a variable cost basis.  To the extent we pass through reduced coststo our clients related to offshore resources, the global sourcing strategy mayresult in lower revenues on a per engagement basis. However, we expect tooffset this potential revenue impact with improved competitive positioning inour markets, which could result in an increased number of engagements to offsetthe potential revenue impact.  Several ofour competitors employ both global sourcing and variable staffing strategies toprovide software development and other information technology services to theirclients, while at the same time reducing their cost structure and improving thequality of services they provide.  If weare unable to realize the perceived cost benefits of our recently implementedstrategies or if we are unable to receive high quality services from foreignemployees, variable staff employees or subcontractors, our business may beadversely impacted and we may not be able to compete effectively.

 

**Results of Operations for theThree Months Ended July 1, 2005 and June 25, 2004**

 

*Revenues.  *Our net revenues increased to $67.9 million for the quarter ended July 1,2005, an increase of 1.0% from $67.2 million for the quarter ended June 25,2004.  Our total revenues remainedconstant at $71.7 million for the quarters ended July 1, 2005 and June 25,2004. The increases in net revenues were in Health Delivery Outsourcing,Government and Technology Services, and Health Plan, offset by decreases inHealth Delivery Services and Life Sciences. The Health Delivery Outsourcingsegment had the most significant increase, $1.1 million or 3.9%, partly due tothe execution of a new outsourcing engagement in late 2004. Government andTechnology Services grew by $0.8 million or 9.8%, primarily due to growth inFCG Software Services (formerly named Paragon Solutions, Inc.), whichprovides offshore software development services to clients.  The most significant offsetting decrease wasin Health Delivery Services, which declined by $1.6 million or 8.5%, due to amarket-based decline in demand for our consulting and implementation servicesin our financial systems practices.

 

Overall, we anticipate thatour revenues in the near future will grow moderately from those of the secondquarter of 2005.  In July 2005, weannounced the signing of a five-year IT outsourcing agreement that commences inAugust 2005, and a three-year agreement with another client.  Revenues in the first twelve months fromthese two clients are expected to be approximately $29 million. Also, in July 2005,we announced the early termination for convenience by The New York and PresbyterianHospital of our approximately $30 million per year outsourcing agreement,effective December 31, 2005 (the contract was executed in November 1999and was originally scheduled to expire in December 2006). The expected netresult of these recent developments in our outsourcing business will be asignificant increase in revenues during the last five months of 2005, with acorrespondingly similar decrease in the beginning of 2006.  Additionally, we have existing outsourcingcontracts in negotiation or up for renewal, the outcome of which could have animpact on our Health Delivery Outsourcing revenues.

 

*Cost of Services. *Cost of services before reimbursable expenses increased to $47.3million for the quarter ended July 1, 2005, an increase of 5.7% from $44.8million for the quarter ended June 25, 2004.  The increase was primarily due to $2.2million of additional costs in the Health Delivery Outsourcing segment associatedwith the increased revenues noted above, and to increased costs at

 

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several outsourcing clients to achieve clientsatisfaction.  Additionally, we increasedcosts in Health Delivery Services over the past year to add staff in theclinical practice areas in order to meet increased demand.  We also increased Health Plan costs due toour investment in developing new business offerings in both informationtechnology and business process outsourcing in that segment.  Life Sciences costs declined as we reduced costsin that area, primarily through staff attrition, to improve profitability.

 

*Gross Profit. *Gross profit decreased to $20.6 million or30.3% of net revenues, for the quarter ended July 1, 2005, a decrease of8.3% from $22.4 million or 33.4% of net revenues, for the quarter ended June 25,2004.  The decrease was primarily due toa reduction in the Health Delivery Services segment gross profit, declining from47.6% of net revenues in the second quarter of 2004 to 38.4% in the secondquarter of 2005.  This decrease was dueto the decline in revenues in Health Delivery Services in the second quarter of2005, while cost of services had increased over the past year. In addition,gross profit decreased in Health Delivery Outsourcing, declining from 18.2% of netrevenues during the second quarter of 2004 to 13.7% in the second quarter of2005.  This decline was due to costsincurred at several clients to achieve client satisfaction.

 

Given our current mix of outsourcing andnon-outsourcing revenues, and assumption of certain previously subcontractedservices, our overall gross profit percentage is currently expected to increasein the near future, although there can be no assurances in that regard.  In March 2005, we extended our agreementwith University Hospitals Health System (UHHS) in Cleveland, Ohio.  This was originally a five-year agreement,with two years remaining, and was extended for an additional three-year periodwhich will expire on July 31, 2010. As part of the extension, the client has required that we replace amajor infrastructure subcontractor.   Asa result, we will begin to earn gross profit on that revenue, while it hadpreviously been a pass-through of costs with no profit.  In addition, we expect that reduced cost ofservices at existing outsourcing clients and our newly signed outsourcingengagements should further contribute to an increased gross profitpercentage.  On all new or expandedoutsourcing contracts, however, the first several quarters’ gross profits arereduced due to higher costs incurred during the transition.

 

We expect outsourcing to contribute anincreasing proportion of our total revenues in the future, which we expect willresult in our gross profit percentage declining incrementally.  In addition, a sudden downturn in demand inone or more of our segments or an inability to control costs on our fixed priceprojects could negatively affect our gross profit percentage.

 

*Selling Expenses. *Selling expenses remained constant at $7.1 million for the quartersended July 1, 2005 and June 25, 2004. Selling expenses as a percentage of net revenues decreased slightly to10.4% for the quarter ended July 1, 2005 from 10.6% for the quarter ended June 25,2004.

 

*General and AdministrativeExpenses. *General and administrative expenses increasedto $14.6 million for the quarter ended July 1, 2005, an increase of 11.1%from $13.1 million for the quarter ended June 25, 2004.  The vast majority of the increase was due tonon-salary costs.  The most significantincrease was in infrastructure costs of approximately $500,000 related tofacilities and equipment needed to directly support our outsourcingbusiness.  Such infrastructure costs nowrepresent approximately $1.0 million per quarter of our general andadministrative expenses.  Further, weincurred approximately $350,000 of severance costs in the quarter ended July 1,2005 (primarily related to a former executive officer) compared to none in thequarter ended June 25, 2004. Finally, we experienced higher costs in a number of other areas includingrecruiting costs in our Health Delivery Services business, outside professionalservices such as audit, legal, and consulting costs, and rent in our growingoffshore shared service centers.  Generaland administrative expenses as a percentage of net revenues increased to 21.5%for the quarter ended July 1, 2005 from 19.5% for the quarter ended June 25,2004.  Although there can be noassurances, we expect the ongoing level of general and administrative expensesto decline at least to some degree from their current level in the near futuredue to increased attention to cost controls.

 

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*Interest Income, Net.** ***Interest income, net of interest expense,increased to $210,000 for the quarter ended July 1, 2005, an increase of47.9% from $142,000 for the quarter ended June 25, 2004, due to higherinterest rates earned on cash and investments. Interest income, net of interest expense as a percentage of net revenuesincreased to 0.3% for the quarter ended July 1, 2005 from 0.2% for thequarter ended June 25, 2004.

 

*Other Expense, Net*. Other expense decreased to $33,000 for the quarter ended July 1,2005, a decrease of 70.0% from $110,000 for the quarter ended June 25,2004.

 

*Income Taxes. *We recorded a $6.0 million tax provision for the quarter ended July 1,2005 versus a $1.0 million tax provision for the quarter ended June 25,2004.  The tax provision for the quarterended July 1, 2005 consisted entirely of a deferred tax asset valuationallowance, compared to a normal tax provision rate of 44% for the quarter endedJune 25, 2004.  The valuationallowance was taken as a result of the recent historical losses we haveincurred, creating additional negative evidence as to the uncertainty of ourability to realize our deferred tax assets, as assessed per the guidance of theapplicable tax accounting standard, SFAS 109. As well as not being subject totaxation due to the ongoing net operating loss carryforwards, a significantamount (approximately $20 million) of any future pretax income will resultin no recorded tax provision in our income statement.

 

*Loss on DiscontinuedOperations*.  The disposition of our Coactive Call CenterService line in the first quarter of fiscal year 2005 has been accounted for asa discontinued operation, and there were no remaining activities in thisbusiness during the quarter ended July 1, 2005.  For the quarter ended June 25, 2004, weincurred a net loss from the operations of this discontinued operation of$218,000. We do not expect to incur any significant costs in the future relatedto the discontinued operation.

 

**Results of Operations for the SixMonths Ended July 1, 2005 and June 25, 2004**

 

*Revenues. *Our net revenues increased to $136.1 million for the six months ended July 1,2005, an increase of 2.6% from $132.6 million for the six months ended June 25,2004.  Our total revenues increased to$143.5 million for the six months ended July 1, 2005, an increase of 1.8%from $141.0 million for the six months ended June 25, 2004.  The increases in net revenues were in HealthDelivery Outsourcing, Government and Technology Services, and Health Plan,offset by decreases in Health Delivery Services and Life Sciences. The HealthDelivery Outsourcing segment had the most significant increase, $4.7 million or8.6%, partly due to the execution of a new outsourcing engagement in late 2004.Government and Technology Services grew by $1.5 million or 9.8%, primarily dueto growth in FCG Software Services, which provides offshore software developmentservices to clients.  The mostsignificant offsetting decrease was in Health Delivery Services, which declinedby $2.9 million or 8.0%, due to a market-based decline in demand for ourconsulting and implementation services in our financial systems practices.

 

*Cost of Services. *Cost of services before reimbursable expenses increased to $95.6million for the six months ended July 1, 2005, an increase of 7.0% from$89.3 million for the six months ended June 25, 2004.  The increase was primarily due to $5.1million of additional costs in the Health Delivery Outsourcing segment associatedwith the increased revenues noted above, and to increased costs at severaloutsourcing clients to achieve client satisfaction.  Additionally, we increased costs in Health DeliveryServices over the past year to add staff in the clinical practice areas inorder to meet increased demand.  We alsoincreased Health Plan costs due to our investment in developing new businessofferings in both information technology and business process outsourcing inthat segment.  Life Sciences costsdeclined as we reduced costs in that area, primarily through staff attrition toimprove profitability.

 

*Gross Profit. *Gross profit decreased to $40.5 million or29.7% of net revenues, for the six months ended July 1, 2005, a decreaseof 6.5% from $43.3 million or 32.6% of net revenues, for the six

 

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months ended June 25, 2004. The decrease was primarily due to a reduction in the Health DeliveryServices segment gross profit, declining from 45.9% of net revenues for the sixmonths ended June 25, 2004 to 35.6% for the six months ended July 1,2005.  This decrease was due to thedecline in revenues in Health Delivery Services in the first six months offiscal year 2005, while cost of services had increased over the past year.  In addition, gross profit decreased in HealthDelivery Outsourcing, declining from 17.4% of net revenues for the six monthsended June 25, 2004 to 15.3% for the six months ended July 1,2005.  This decline was due to costsincurred at several clients to achieve client satisfaction.

 

*Selling Expenses. *Selling expenses decreased slightly to $13.9 million for the six monthsended July 1, 2005, a decrease of 3.6% from $14.4 million for the sixmonths ended June 25, 2004.  Sellingexpenses as a percentage of net revenues also decreased slightly to 10.2% forthe six months ended July 1, 2005 from 10.8% for the six months ended June 25,2004.

 

*General and AdministrativeExpenses. *General and administrative expenses increasedto $29.3 million for the six months ended July 1, 2005, an increase of17.3% from $25.0 million for the six months ended June 25, 2004.  The vast majority of the increase was due tonon-salary costs.  The most significantincrease was in infrastructure costs of approximately $1.6 million related tofacilities and equipment needed to directly support our outsourcing business.  Further, we incurred approximately $470,000of severance costs in the six months ended July 1, 2005 (primarily relatedto a former executive officer) compared to essentially none in the six monthsended June 25, 2004.  Finally, weexperienced higher costs in a number of other areas including outsideprofessional services such as audit, legal, and consulting costs, nonbillabletravel, recruiting costs, and rent in our growing offshore shared servicecenters.  Generaland administrative expenses as a percentage of net revenues increased to 21.6%for the six months ended July 1, 2005 from 18.9% for the six months ended June 25,2004.

 

*Interest Income, Net.** ***Interest income, net of interest expense,increased to $440,000 for the six months ended July 1, 2005, an increaseof 27.9% from $344,000 for the six months ended June 25, 2004, due tohigher interest rates earned on cash and investments.  Interest income, net of interest expense as apercentage of net revenues remained constant at 0.3% for the six months ended July 1,2005 and June 25, 2004.

 

*Other Expense, Net*. Other expense decreased to $33,000 for the six months ended July 1,2005, a decrease of 74.8% from $131,000 for the six months ended June 25,2004.

 

*Expense for Premium on Repurchase of Stock*.  In the first quarter of 2004, we repurchased1.96 million shares of our common stock and certain options from a majorstockholder at a premium to the then current market price (see Note 11 of Notesto Consolidated Financial Statements). The aggregate purchase price for the shares and the options representeda premium of approximately 11% to market. As a result, we recorded a pretaxcharge of approximately $1.6 million (without any tax benefit) for such premiumincluded in the purchase consideration.

 

*Income Taxes. *We recorded a $5.4 million tax provision for the six months ended July 1,2005 versus a $1.8 million tax provision for the six months ended June 25,2004.  The tax provision for the sixmonths ended July 1, 2005 primarily consisted of a $6.0 million tax assetvaluation allowance.  The valuationallowance was recorded as a result of the recent historical losses we haveincurred, creating additional negative evidence as to the uncertainty of ourability to realize our deferred tax assets, as assessed per the guidance of theapplicable tax accounting standard, SFAS 109. The high provision rate of 71% in2004 is due to the non-deductibility of the expense for premium on repurchaseof stock noted above.

 

*Loss on DiscontinuedOperations*.  The disposition of our Coactive Call CenterService line has been accounted for as a discontinued operation.  During the six months ended July 1,2005, we incurred

 

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$866,000 of costs related to the operationand wind-down of the business.  Thesecosts, net of a 38% tax benefit, resulted in a net loss of $537,000, comparedto a net loss from the operations of this discontinued operation of $345,000for the six months ended June 25, 2004.

 

**Liquidity and Capital Resources**

 

During the six months ended July 1, 2005, we generatedcash flow from operations of $217,000. During the six months ended July 1, 2005, we used $2.5 million torepurchase shares of our common stock from the previous owners of FCGInfrastructure Services, Inc. (formerly Codigent Solutions Group, Inc.).  Further, we used approximately $3.2 million of cash topurchase property and equipment, primarily information technology and relatedequipment.  Combined billed and unbilledaccounts receivables decreased by $1.5 million due to lower quarterly revenues.  At July 1, 2005, we had cash andinvestments available for sale of $35.4 million compared to $40.3 million at December 31,2004.  One of our new outsourcingaccounts will have a net negative impact of approximately $4.6 million on cashover the next two quarters, related to fees we are deferring, and to transitioncosts we are incurring. We expect cash to decrease in those quarters due to thesedeferred fees and transition costs and to costs associated with our assumptionof work previously performed by a subcontractor at our UHHS outsourcing account.

 

We have a revolving line of credit, underwhich we are allowed to borrow up to $7.0 million at an interest rate of theprevailing prime rate with an expiration of May 1, 2006.  There was no outstanding balance under the lineof credit at July 1, 2005.  Due to thesecond quarter loss, an amendment was required to certain of the loan covenantsin order to maintain compliance.  Termsof this amendment were approved subsequent to July 1, 2005, and we are incompliance with such amended terms.

 

As of July 1, 2005, the following tablesummarizes our contractual and other commitments (in thousands):

 
| ** **                          | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------|------------|----------------------------|------------|
| **Contractual  Obligations**        | ** ** | **Less than 1  Year**      | ** ** | **1 -3  Years** | ** ** | **3-5  Years** | ** ** | **More Than  5 Years** | ** ** | **Total** | ** ** |
| Operating  leases, net of subleases |       | $                          | 4,602      |   | $ | 7,570 |   | $ | 1,339 |   | $ | 87 |   | $ | 13,598 |   |
| Purchase  obligations               |       | 232                        |       | — |   | — |   | — |   | 232 |   |
| Total                               |       | $                          | $4,834     |   | $ | 7,570 |   | $ | 1,339 |   | $ | 87 |   | $ | 13,830 |   |

 

Management believes that our existing cashand investments, together with funds generated from operations, will besufficient to meet operating requirements for at least the next twelvemonths.  Our cash and investments are availablefor capital expenditures (which are projected to be approximately $8.0 millionfor 2005), upfront setup costs and deferred fees on new contracts, strategicinvestments, mergers and acquisitions, and other potential large-scale cashneeds that may arise.

 

**CriticalAccounting Policies and Estimates**

 

The foregoingdiscussion and analysis of our financial condition and results of operations isbased upon our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.  The preparation of these financial statementsrequires us to make estimates and assumptions that affect the reported amountsof assets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities.  On anon-going basis, we evaluate our estimates, including those related to revenuerecognition, cost to complete client engagements, valuation of goodwill andlong-lived and intangible assets, accrued liabilities, income taxes,restructuring costs, idle facilities, litigation and disputes, and theallowance for doubtful accounts.  We baseour estimates on historical experience and on various other assumptions that webelieve to be reasonable under the circumstances, the results of which form thebasis for making judgments about the carrying

 

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value of assets and liabilitiesthat are not readily apparent from other sources.  Our actual results may differ from ourestimates and we do not assume any obligation to update any forward-lookinginformation.

 

We believe thefollowing critical accounting policies reflect our more significant assumptionsand estimates used in the preparation of our consolidated financial statements.

 

***Revenue Recognition and Unbilled Receivables***

 

Revenues arederived primarily from information technology outsourcing services, consulting,and systems integration.  Revenues arerecognized on a time-and-materials, level-of-effort, percentage-of-completion,or straight-line basis.  Before revenuesare recognized, the following four criteria must be met: (a) persuasiveevidence of an arrangement exists; (b) delivery has occurred or servicesrendered; (c) the fee is fixed and determinable; and (d) collectibilityis reasonably assured.  We determine ifthe fee is fixed and determinable and collectibility is reasonably assuredbased on our judgments regarding the nature of the fee charged for servicesrendered and products delivered. Arrangements vary in length from less than one year to seven years.  The longer-term arrangements are generallylevel-of-effort or fixed price arrangements.

 

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

 

Revenuesrecognized on fixed price consulting and system integration contracts aresubject to revisions as the contract progresses to completion.  If we do not accurately estimate theresources required or the scope of the work to be performed, do not completeour projects within the planned periods of time, or do not satisfy ourobligations under the contracts, then profit may be significantly andnegatively affected.  Revisions in ourcontract estimates are reflected in the period in which the determination ismade that facts and circumstances dictate a change of estimate. Favorablechanges in estimates result in additional revenues recognized, and unfavorablechanges in estimates result in a reduction of recognized revenues. Provisionsfor estimated losses on individual contracts are made in the period in whichthe loss first becomes known.  Somecontracts include incentives for achieving either schedule targets, costtargets, or other defined goals. Revenues from incentive type arrangements are recognized when it isprobable they will be earned.

 

We account forcertain of our outsourcing contracts using EITF 00-21, “Accounting for RevenueArrangements with Multiple Deliverables,” which addresses how to account forarrangements that involve the delivery or performance of multiple products,services, and/or rights to use assets. Revenue arrangements with multiple deliverables are divided intoseparate units of accounting if the deliverables in the arrangement meet thefollowing criteria: (1) the delivered item has value to the customer on astandalone basis; (2) there is objective and reliable evidence of the fairvalue of undelivered items; and (3) delivery of any undelivered item isprobable.  Arrangement consideration isallocated among the separate units of accounting based on their relative fairvalues, with the amount allocated to the delivered

 

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item being limited to theamount that is not contingent on the delivery of additional items or meetingother specified performance conditions.

 

In our outsourcing contracts, a significant portion of our revenues arefixed and allocated over the contract on a straight-line basis, as we arerequired to provide a specified level of services subject to certainperformance measurements.  Also, certainrevenues may fluctuate under the contracts based on the volume of transactionswe process or other measurements of service provided.  If we incur higher costs to provide therequired services or receive less revenues due to reduced transaction volumesor penalties associated with service level failures, our gross profit can benegatively impacted.

 

On certain contracts, or elements of contracts, costs are incurredsubsequent to the signing of the contract, but prior to the rendering ofservice and associated recognition of revenue. Where such costs are incurred and realization of those costs is eitherpaid for upfront or guaranteed by the contract, those costs are deferred andlater expensed over the period of recognition of the related revenue.  At July 1, 2005, we had deferred $1.7million of unamortized deferred costs which are included in other non-current assets.  Several of our recent contract awards includesignificant setup costs, so our deferred costs are expected to increasesignificantly over the remainder of the year.

 

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

 

Softwarelicense and maintenance revenues comprised approximately 4% of our net revenuesin the second quarter of 2005. Additionally, we realized substantial additional revenues from theimplementation of our software.  Werecognize software revenues in accordance with the provisions of the AmericanInstitute of Certified Public Accountants Statement of Position (“SOP”) 97-2, “SoftwareRevenue Recognition”, as amended by SOP 98-4, “Deferral of the Effective Dateof a Provision of SOP 97-2, Software Revenue Recognition” and SOP 98-9, “Modificationof SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions”,and in accordance with the Securities and Exchange Commission Staff AccountingBulletin (SAB) No. 104, “Revenue Recognition”. We license software undernon-cancelable license agreements and provide related professional services,including consulting, training, and implementation services, as well as ongoingcustomer support and maintenance.  Mostof our software license fee revenues are from arrangements which includeimplementation services that are essential to the functionality of our softwareproducts, and are recognized using contract accounting, including thepercentage-of-completion methodology, over the period of the implementation.

 

In those morelimited cases where our software arrangements do not include services essentialto the functionality of the product, license fee revenues are recognized whenthe software product has been shipped, provided a non-cancelable license agreementhas been signed, there are no uncertainties surrounding product acceptance, thefees are fixed or determinable and collection of the related receivable isconsidered probable. We do not generally offer rights of return or acceptanceclauses to our customers. In situations where we do provide rights of return oracceptance clauses, revenue is deferred until the clause expires. Typically,our software license fees are due within a twelve-month period from the date ofshipment. If the fee due from the customer is not fixed or determinable,including payment terms greater than twelve months from shipment, revenue isrecognized as payments become due and all other conditions for revenuerecognition have been satisfied. In software arrangements that include rightsto multiple software products, specified upgrades, maintenance or services, weallocate the total arrangement fee among the deliverables using the fair valueof each of the deliverables determined using vendor-specific objectiveevidence. Vendor-specific objective evidence of fair value is determined using

 

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the price charged when thatelement is sold separately. In software arrangements in which we have fairvalue of all undelivered elements but not of a delivered element, we use theresidual method to record revenue. Under the residual method, the fair value ofthe undelivered elements is deferred and the remaining portion of thearrangement fee is allocated to the delivered element(s) and is recognized asrevenue. In software arrangements in which we do not have vendor-specificobjective evidence of fair value of all undelivered elements, revenue isdeferred until fair value is determined or all elements have been delivered.

 

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

 

Unbilledreceivables represent revenues recognized for services performed that were notbilled at the balance sheet date.  Themajority of these amounts are billed in the subsequent month. Unbillableamounts arising from contracts occur when revenues recognized exceed allowablebillings in accordance with the contractual agreements.  Such unbillable amounts most often becomebillable upon reaching certain project milestones stipulated per the contract,or in accordance with the percentage completion methodology.  As of July 1, 2005, we had unbillablerevenues included in current unbilled receivables of approximately $476,000,which were generally expected to be billed within one year.  In addition, we had an other currentreceivable of $2.9 million at July 1, 2005 and a long-term accountreceivable of $3.8 million at December 31, 2004, on a single majoroutsourcing contract with a term of seven years.  This receivable was originally scheduled tobe billed and collected over the remaining 18 months of the contract throughcontractual billings that will exceed the amounts to be earned as revenues; however,due to the early termination of the contract for convenience by the client, itis now scheduled to be received in full by December 31, 2005.

 

Customeradvances are comprised of payments from customers for which services have notyet been performed or prepayments against work in process. These unearnedrevenues are deferred and recognized as future contract costs are incurred andas contract services are rendered.

 

***Allowance for Doubtful Accounts***

 

We maintain an allowance for doubtfulaccounts for estimated losses resulting from the inability of our clients tomake required payments. This allowance is based on the amount and aging of ouraccounts receivable, creditworthiness of our clients, historical collectionexperience, current economic trends, and changes in client paymentpatterns.  If the financial condition ofour clients was to deteriorate, resulting in an impairment of their ability tomake payments, additional allowances would be required.

 

***Deferred Income Taxes***

 

We account for income taxes in accordance with SFAS No. 109,“Accounting for Income Taxes,” which requires recognition of deferred taxassets and liabilities for the expected future tax consequences of events thathave been included in the financial statements which differ from our taxreturns.  We use significant estimates indetermining what portion of our deferred tax asset is more likely than not tobe realized.  Our net deferred tax assetshave historically consisted primarily of the tax benefit related torestructuring costs for facility closures, supplemental executive retirementplan contributions, and other accrued liabilities such as accrued vacation pay,which are not deductible for tax purposes until paid.  During fiscal year 2003, we generatedadditional deferred tax assets for net operating loss carryforwards which werecreated by our pretax losses combined with the fact that we were outside theperiod it is

 

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allowable to carry back losses. Taking into account our then-recent history of cumulative losses, werecorded a valuation allowance of $5.5 million in the fourth quarter of fiscalyear 2003.  Together with a fullvaluation allowance of $5.5 million we had already taken against the netoperating loss carryforwards of companies we had previously acquired, we had avaluation allowance of $11.0 million against a total deferred tax asset of$21.6 million at December 26, 2003.

 

During the fourth quarter of fiscal year 2004, were-evaluated our requirement for a valuation allowance after having completed afull year in which we recorded taxable income in each quarter.  At that time, we determined that it was morelikely than not we would realize an additional $3.0 million of our deferred taxassets and recorded a tax benefit in this amount.  During the first quarter of 2005, we incurreda pretax loss; however, based on management’s expectation of pretax earningsfor 2005, no change in the valuation allowance was recorded.  During the first six months of 2005, weincurred a pretax loss from continuing operations of $2.3 million.  Based on such recent historical performance,following inconsistent profitability in several recent past years, we haveincreased our deferred tax asset valuation allowance this quarter by $6.0million.  This does not, in any way,limit our ability to use our deferred tax assets, primarily loss carryforwards,to offset income earned in the future. As well as not being subject to taxation, a significant amount (approximately$20 million) of any future pretax income will not require a tax provisionin the income statement.  Afterapplication of this additional valuation allowance, we have approximately $6.0million of deferred tax assets other than net operating losses unreserved on ourbalance sheet.  However, there is noguarantee that our taxable income will be sufficient to realize such remainingnet deferred tax assets, and we will continue to evaluate the appropriatenessfor an additional valuation allowance on an ongoing basis.  Additionally, if at some point in the future,the realization of a greater amount of our deferred tax assets is consideredmore likely than not, we will reverse all or a portion of the existingvaluation allowance at that time.

 

***Goodwill and Intangible Assets***

 

Under SFAS No142, we no longer amortize our goodwill and are required to complete an annualimpairment testing during the fourth quarter of each year.  We believe that the accounting assumptionsand estimates related to the annual goodwill impairment testing are criticalbecause these can change from period to period. The impairment test requires us to forecast our future cash flows, whichinvolves significant judgment. Accordingly, if our expectations of future operating results change, orif there are changes to other assumptions, our estimate of the fair value ofour reporting units could change significantly resulting in a goodwillimpairment charge, which could have a significant impact on our consolidatedfinancial statements.  As of July 1,2005, we have $18.2 million of goodwill and $1.7 million of intangible assetsrecorded on our balance sheet (see Note 5 of the Notes to ConsolidatedFinancial Statements).

 

***Recent Accounting Pronouncements***

 

In December 2004, the FinancialAccounting Standards Board (“FASB”) enacted Statement of Financial AccountingStandards 123 (revised 2004) (“SFAS 123R”), “Share-Based Payment” whichreplaces Statement of Financial Accounting Standards No. 123 (“SFAS 123”),“Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25(“APB 25”), “Accounting for Stock Issued to Employees.” SFAS 123Rrequires the measurement of all share-based payments to employees, includinggrants of employee stock options, using a fair-value-based method and therecording of such expense in the consolidated statements of income. Theaccounting provisions of SFAS 123R were originally planned to be effective forall quarterly reporting periods beginning after June 15, 2005.  In April 2005, the Securities andExchange Commission adopted a revision to SFAS 123R to make the accountingprovisions applicable to all fiscal year reporting periods commencing after June 15,2005.  As a result, we are now requiredto adopt SFAS 123R commencing in the first quarter of 2006.

 

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Upon theadoption of SFAS 123R, the pro forma disclosures previously permitted underSFAS 123 no longer will be an alternative to financial statementrecognition. Although we have not yet determined our method of adoption orwhether the adoption of SFAS 123R will result in amounts that aresimilar to the current pro forma disclosures under SFAS 123, we areevaluating the requirements under SFAS 123R and we expect that the adoptionwill have an adverse impact on our reported earnings and net income per share.

 

**Risks Relating to Our Business**

 

Beforedeciding to invest in us or to maintain or increase your investment, you shouldcarefully consider the risks described below, in addition to the otherinformation contained in this report. The risks and uncertainties described below are not the only ones facingour company.  Additional risks anduncertainties not presently known to us or that we currently deem immaterialmay also affect our business operations. If any of these risks are realized, our business, financial condition orresults of operations could be seriously harmed.  In that event, the market price for ourcommon stock could decline and you may lose all or part of your investment.

 

*Manyfactors may cause our net revenues, operating results and cash flows tofluctuate and possibly decline.*

 

Our netrevenues, operating results, and cash flows may fluctuate significantly becauseof a number of factors, many of which are outside of our control.  These factors may include:

 

•                  Our ability toachieve and maintain profitability in each of our business segments;

•                  The loss of oneor more significant clients in any of our business segments, including anyfailure to secure renewals for any of our large outsourcing contracts or anyearly termination of any significant contracts;

•                  Our ability torealize our deferred tax assets through future pretax earnings;

•                  Use of offsiteand offshore resources on our engagements and adoption of a blended shore deliverymodel in the healthcare IT industry;

•                  The roll-off orcompletion of significant projects in any of our business segments;

•                  Fluctuations inmarket demand for our services which affect associate hiring and utilization;

•                  Delays or increasedexpenses in securing and completing client engagements;

•                  Timing andcollection of fees and payments;

•                  The financialperformance and credit worthiness of our clients;

•                  Timing of newclient engagements in any of our business segments;

•                  Increased competitionand pricing pressures;

•                  Budgeting andother capital expenditure decisions of our clients;

•                  Our ability toanticipate changing customer demands and preferences;

•                  Our ability toincorporate the use of variable labor staffing into our projects;

•                  The loss of keypersonnel and other employees;

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

•                  The timing ofcertain general and administrative expenses;

•                  Costs associatedwith integrating acquired operations;

•                  Costs associatedwith the disposition of certain assets;

•                  Impairment ofgoodwill from our acquisitions;

•                  Variability inthe number of billable days in each quarter;

•                  The write-off ofclient billings;

•                  Return of feesfor work deemed unsatisfactory by a client or claims or litigation resultingfrom the same;

 

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•                  Service levelcredits and penalties associated with our outsourcing engagements;

•                  Entry into fixedprice engagements and engagements where some fees are contingent upon theclient realizing a certain return on investment for a project;

•                  Availability offoreign net operating losses and other credits against our earnings;

•                  Internationalcurrency fluctuations;

•                  Expenses relatedto the issuance of stock options to our employees; and

•                  The fixed natureof a substantial portion of our expenses, particularly personnel and relatedcosts, depreciation, office rent, and occupancy costs.

 

One or more ofthe foregoing factors may cause our operating expenses to be unexpectedly highor result in a decrease in our revenues during any given period.  In addition, we bill certain of our serviceson a fixed-price basis, and any assignment delays or expenditures of timebeyond that projected for the assignment could result in write-offs of clientreceivables (both unbilled and billed). Significant write-offs could materially adversely affect our business,financial condition, and results of operations. Our business also has significant collection risks.  If we are unable to collect our receivablesin a timely manner, our business and financial condition could alsosuffer.  If these or any other variablesor unknowns were to cause a shortfall in revenues or earnings or otherwisecause a failure to meet public market expectations, our business could beadversely affected.

 

We adoptedEITF 00-21 in the first quarter of 2003, which affects the way we recognizerevenue on long-term outsourcing agreements. The adoption of EITF 00-21 resultsin separating our outsourcing contracts into multiple elements and separatelyaccounting for each element, rather than accounting for all elements togetheras a group.  As a result, we nowrecognize revenue from certain service elements of our outsourcing agreementson a straight-line basis over the life of the contract, rather than on apercentage of completion basis.  Since wetypically incur greater costs and expenses during the early phase of theservice elements (which now have straight-line revenue recognition) than we doin the later years of those elements, we believe our net income will be lessduring the early stages of our outsourcing engagements.  In addition, if we are unable to manage costsas planned in the later stages of an outsourcing engagement, our net incomewill likewise be negatively impacted.  Ingeneral, income from our outsourcing contracts will be less stable in thefuture, since it will be more susceptible to changes in the mix of newer versusolder contracts, and to the impact of cost fluctuations from quarter to quarterwithout a compensating change in revenues. 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, wereported a net loss for the six months ended July 1, 2005.  As a result, we cannot assure you that wewill achieve or maintain positive earnings in the future.  If we are unable to achieve profitability ona quarterly or annual basis, the market price of our common stock could beadversely affected and our financial condition would suffer.

 

*We are dependent on our outsourcing engagements for a significant partof our revenues.*

 

Net revenuesfrom our outsourcing relationships, for the six months ended July 1, 2005,represented approximately 43.7% of our consolidated net revenues.  The substantial majority of these revenuesare received from four large outsourcing accounts that have signed long-termagreements with us.  However, the loss ofany of our outsourcing relationships, including a failure to gain renewal ofany of these contracts (some of which are due to expire in the next 12 to 24months), could have an adverse impact on our business and results ofoperations.  Specifically, we recentlyreceived a termination for convenience notice from The New York andPresbyterian Hospital, our largest client, and our outsourcing engagement withthem will terminate effective December 31, 2005.  If we lose any of our other outsourcing accounts,our business and results of operations could be adversely impacted.  Further, if we

 

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are unable to successfullyclose and implement the new outsourcing relationships that we are pursuing(including the renewal of our existing outsourcing clients), our business andresults of operations will be adversely impacted.

 

In each of ouroutsourcing engagements, the clients have fully outsourced their informationtechnology staff and functions to us. In all of our outsourcing relationships, we generally enter intodetailed 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 and profitabilityfrom our outsourcing engagements could be significantly reduced if we areunable to satisfy our performance levels or standards, or if we are unable toimprove our delivery costs as planned on such engagements. Additionally, ouroutsourcing contracts can be terminated at the convenience of our clients uponthe payment of a termination fee.

 

In addition,many of our outsourcing agreements require that we invest significant amountsof time and resources in order to win the engagement, transition the client’sinformation technology department to our management, and complete the initialtransformation of our client’s information technology functioning to provideimproved service at a lower cost and meet agreed-upon service levels.  Often, we recover this investment through paymentsover the life of the outsourcing agreement. If we are unable to achieve agreed-upon service levels or otherwisebreach the terms of our outsourcing agreements, the clients may have rights toterminate our agreements for cause and we may be unable to recover ourinvestments.  Any failure by us torecover these investments could reduce our outsourcing revenues, which wouldhave a material adverse effect on our financial condition, results ofoperations, and price of our common stock.

 

Ouroutsourcing engagements may also require that we hire part or all of a client’sinformation technology personnel.  Wecannot assure you that we will be able to retain these individuals, andeffectively hire additional personnel as needed to meet the obligations of ourcontract.  Any failure by us to retainthese individuals or otherwise satisfy our contractual obligations could have amaterial adverse effect on the profitability of our outsourcing business andour reputation as an information technology services outsourcing provider.

 

Finally, weare expanding our outsourcing business to perform discrete informationtechnology services for clients.  Theamount of time and resources required to win client engagements for ouroutsourcing business is significant, and we may not win the number or type ofclient 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 that we have anticipated.

 

*The length of time required to engage a client and to complete anassignment may be unpredictable and could negatively impact our net revenuesand operating results.*

 

The timing ofsecuring our client engagements and service fulfillment is difficult to predictwith any degree of accuracy.  Priorengagement cycles are not necessarily an indication of the timing of futureclient engagements or revenues.  Thelength of time required to secure a new client engagement or complete anassignment often depends on factors outside our control, including:

 

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•                  Existinginformation systems at the client site;

•                  Changes or theanticipation of changes in the regulatory environment affecting healthcare andpharmaceutical organizations;

•                  Changes in themanagement or ownership of the client;

•                  Budgetary cyclesand constraints;

•                  Changes in theanticipated scope of engagements;

•                  Availability ofpersonnel and other resources; and

•                  Consolidation inthe healthcare and pharmaceutical industries.

 

Prior toclient engagements, we typically spend a substantial amount of time andresources (1) identifying strategic or business issues facing the client, (2) definingengagement objectives, (3) gathering information, (4) preparingproposals, and (5) negotiating contracts. Our failure to procure an engagement after spending such time andresources could materially adversely affect our business, financial condition,and results of operations.  We may alsobe required to hire new associates before securing a client engagement.  If clients defer committing to newassignments for any length of time or for any reason we could be required tomaintain a significant number of under-utilized associates which couldadversely affect our operating results and financial condition during any givenperiod.  Further, our outsourcingbusiness has very long sales and contract lead times, requiring us to spend asubstantial 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 may benegatively impacted if our investments in products and emerging service linesare unsuccessful.*

 

We havepublicly announced our strategy to increase our investment in productdevelopment, including further investment in FirstDoc® as well asinvestment in FirstGatewaysTM. These investments are in addition to continuing our investments in otheremerging service lines and products.  Wetypically do not capitalize the cost of our product development activities anddo not anticipate capitalizing expected investments this year.  As a result, our financial results may beadversely impacted by such increased investment in the short term.  If such product development activities orinvestment in our emerging service lines do not result in relevant offerings,we will not achieve desired levels of return on these investments.  As a result, our business and results ofoperations could be adversely affected.

 

*If we areunable to generate additional revenue from our existing clients, our businessmay be negatively affected.*

 

Our successdepends, to a significant extent, on obtaining additional engagements from ourexisting clients.  A substantial portionof our revenues is derived from additional services provided to our existingclients.  The loss of a small number ofclients, a reduction in the number of engagements with these clients, or thefailure to secure renewals from any of our outsourcing clients may result in amaterial decline in revenues and cause us to fail to meet public marketexpectations of our financial performance and operating results.  If we fail to generate additional revenuesfrom our existing clients, it may materially adversely affect our business,financial condition, and results of operations.

 

*If we fail to meet client expectations in the performance of ourservices, our business could suffer.*

 

Our servicesoften involve assessing and/or implementing complex information systems andsoftware, which are critical to our clients’ operations.  Our failure to meet client expectations inthe performance of our services, including the quality, cost and timeliness ofour services, may damage our reputation in the healthcare and pharmaceuticalindustries and adversely affect our ability to attract and

 

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retain clients.  If a client is not satisfied with ourservices, we will generally spend additional human and other resources at ourown expense to ensure client satisfaction. Such expenditures will typically result in a lower margin on suchengagements and could materially adversely affect our business, financialcondition, and results of operations.

 

Further, inthe course of providing our services, we will often recommend the use ofsoftware and hardware products.  Theseproducts may not perform as expected or contain defects.  If this occurs, our reputation could bedamaged and we could be subject to liability. We attempt contractually to limit our exposure to potential liabilityclaims; however, such limitations may not be effective.  A successful liability claim brought againstus may adversely affect our reputation in the healthcare and pharmaceuticalindustries and could have a material adverse effect on our business, financialcondition, and results of operations. 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 a sufficient number of qualifiedemployees.*

 

Our businessis labor-intensive and requires highly skilled employees.  Many of our associates possess extensiveexpertise in the healthcare, insurance, pharmaceutical, information technologyand consulting fields.  To serve agrowing client base, we must continue to recruit and retain qualified personnelwith expertise in each of these areas. We must also seek certain employees that are willing to work on avariable or per diem basis.  Competitionfor such personnel 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, including salary,bonuses, stock, and stock options.  If weare unable to recruit and retain a sufficient number of qualified personnel toserve existing and new clients, our ability to expand our client base orservices and to offer our services at competitive rates could be impaired andour business would suffer.

 

*The loss of our key client service employees and executive officerscould negatively affect us.*

 

Ourperformance depends on the continued service of our executive officers, seniormanagers, and key employees.  Inparticular, we depend on such persons to secure new clients and engagements andto manage our business and affairs.  Theloss of such persons could result in the disruption of our business, longer ordelayed sales cycles, and could have a material adverse effect on our businessand results of operations.  Generally, wehave not entered into long-term employment contracts with any of our employeesand do not maintain key employee life insurance.

 

*We could be negatively impacted if we fail to successfully integratethe businesses we acquire.*

 

We have grown,in part, by acquiring complementary businesses that could enhance ourcapability to serve the healthcare and pharmaceutical industries.  All acquisitions involve risks that couldmaterially and adversely affect our business and operating results.  These risks include:

 

•                  Distractingmanagement from our business;

•                  Losing keypersonnel and other employees;

•                  Losing clients;

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

•                  The impairmentof acquired assets and goodwill;

•                  Acquiring thecontingent and other liabilities of the businesses we acquire; and

•                  Not realizingthe intended or expected benefits of the acquisitions.

 

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In addition,acquired businesses may not enhance our services, provide us with increasedclient opportunities, or result in the growth that we anticipate.  Furthermore, integrating acquired operationsis a complex, time-consuming, and expensive process.  Combining acquired operations with us mayresult in lower overall operating margins, greater stock price volatility, andquarterly earnings fluctuations. Cultural incompatibilities, career uncertainties, and other factorsassociated with such acquisitions may also result in the loss of employees andclients.  Failing to acquire andsuccessfully integrate complementary practices, or failing to achieve thebusiness synergies or other anticipated benefits, could materially adverselyaffect our business and results of operations.

 

*Continued or increased employee turnover could negatively affect ourbusiness.*

 

We haveexperienced employee turnover as a result of:

 

•                  Dependence onlateral hiring of associates;

•                  Travel demandsimposed on our associates;

•                  Loss ofemployees to competitors and clients; and

•                  Reductions inforce as certain areas of our business have seen less demand.

 

Continued orincreased employee turnover could materially adversely affect our business,financial condition, and results of operations. In addition, many of our associates develop strong businessrelationships with our clients.  Wedepend on these relationships to generate additional assignments andengagements.  The loss of a substantialnumber of associates could erode our client base and decrease our revenues, andcould adversely impact our ability to meet contractual obligations to clients.

 

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

 

Our businesshas historically grown rapidly, and though our overall revenues have remainedflat for the past several years, we have experienced growth and increaseddemand in certain areas of our business. In response to shifts in market demand and in an effort to better alignour business with our markets, we restructured our organization and hiredpersons with appropriate skills, including salespersons, and reduced ourworkforce in practice areas experiencing less demand.  We have also hired employees willing to workon a variable or per diem basis in order to better manage project costs andgeneral and administrative expense associated with underutilizedresources.  These market conditions andrestructuring efforts have placed new and increased demands on our managementpersonnel.  It has also placedsignificant and increasing demands on our financial, technical and operationalresources, and on our information systems. If we are unable to manage growth effectively or if we experiencebusiness disruptions due to shifts in market demand, or growth orrestructuring, 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 and implementnew procedures and controls to accommodate new operations, services andclients.  Increasing operational andadministrative demands may make it difficult for our senior managers to engagein business development activities and their other day-to-day responsibilities.  Further, the addition of new employees andoffices to offset any increasing demands may impair our ability to maintain ourservice delivery standards and corporate culture.  In addition, we have in the past changed, andmay 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 disruption inour business and could cause a material adverse effect on our financialcondition and results of operations.

 

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*Changes in the healthcare and pharmaceutical industries or the economyin general could negatively impact our revenues.*

 

We derive asubstantial portion of our revenues from clients in the healthcareindustry.  As a result, our business,financial condition, and results of operations are influenced by conditionsaffecting this industry, particularly any trends towards consolidation amonghealthcare and pharmaceutical organizations. Such consolidation may reduce the number of existing and potentialclients for our services.  In addition,the resulting organizations could have greater bargaining power, which coulderode the current pricing structure for our services and decrease ourrevenues.  The reduction in the size ofour target market or our failure to maintain our pricing goals could have amaterial adverse effect on our business, financial condition, and results ofoperations.  Finally, each of the marketswe serve is highly 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.

 

A substantialportion of our revenues has also come from companies in the pharmaceuticalindustry.  Our revenues are, in part,linked to the pharmaceutical industry’s research and development and technologyexpenditures.  Should any of thefollowing events occur in the pharmaceutical industry, our business could benegatively affected in a material way:

 

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

•                  Continuedconsolidation of companies; or

•                  A decrease inpharmaceutical companies’ research and development or technology expenditures.

 

A trend in thepharmaceutical industry is for companies to outsource either large informationtechnology-dependent projects or their information systems staff.  We benefit when pharmaceutical companiesoutsource to us, but may lose significant future business when pharmaceuticalcompanies outsource to our competitors. If this outsourcing trend slows down or stops, or if pharmaceuticalcompanies direct their business away from us, our financial condition andresults of operations could be impacted in a materially adverse way.

 

*Our international operations create specialized risks that cannegatively affect us.*

 

We are subjectto many risks as a result of the services we provide to our internationalclients or services we may provide through subcontractors or employees that arelocated outside of the U.S.  We havebusiness operations and employees located in India, Vietnam, and throughoutEurope.  Our international operations aresubject to a variety of risks, including:

 

•                  Increasing anduncertain labor costs and high turnover rates;

•                  Difficulties increating market demand for our offshore services based on perceived qualityissues and potential political risk;

•                  Difficulties inenforcing contractual obligations and intellectual property rights;

•                  Difficulties increating international market demand for our other services;

•                  Unfavorablepricing and price competition;

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

•                  Currencyfluctuations;

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

 

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•                  Changes inavailability of, and requirements for, the types of work visas we may seek forour foreign employees working in the U.S.;

•                  Additionalcosts, including income tax equalization, associated with foreign employeescoming to work in the U.S.;

•                  Longer paymentcycles in some countries and difficulties in collecting international accountsreceivable;

•                  Terroristattacks or armed hostilities;

•                  Adverse taxconsequences;

•                  Increased costsassociated with maintaining international marketing efforts and offices;

•                  Governmentregulations and restrictions;

•                  Adverse changesin regulatory requirements; and

•                  Economic orpolitical instability.

 

We performservices in Europe for our international pharmaceutical clients.  We cannot assure you that we will be able tobecome profitable in our European operations, which may materially adverselyaffect our financial condition, results of operations, and price for our commonstock.

 

Ouracquisition of Paragon Solutions, Inc. in 2003 provided us a means to implementour global sourcing strategy to provide software development and otherinformation technology services to our clients. If we are unable to realize perceived cost benefits of such a strategyor if we are unable to receive high quality services from foreign employees orsubcontractors, our business may be adversely impacted. Further, ourinternational operations in Vietnam and India subject our business to a varietyof risks and uncertainties unique to operating businesses in these countries,including the risk factors discussed above.

 

Any one or allof these factors may cause increased operating costs, lower than anticipatedfinancial performance, and may materially adversely affect our business,financial condition, and results of operations.

 

*If we do not compete effectively in the healthcare and pharmaceuticalinformation services industries, our business will be negatively impacted.*

 

The market forhealthcare and pharmaceutical information technology consulting is verycompetitive.  We have competitors thatprovide some or all of the services we provide. For example, in strategic consulting services, we compete withinternational, regional, and specialty consulting firms such as Bearing Point(formerly KPMG Consulting), the Capgemini Group, IBM Global ConsultingServices, Wipro Technologies, and Accenture.

 

In integrationand co-management services, we compete with:

 

•                  Informationsystem vendors such as McKesson, Siemens Medical Solutions, Cerner Corporation,and IBM Global Systems;

•                  Service groupsof computer equipment companies;

•                  Systemsintegration companies such as Affiliated Computer Services (“ACS”), ElectronicData Systems Corporation, Perot Systems Corporation, SAIC, the Capgemini Group,and Computer Sciences Corporation;

•                  Clients’ internalinformation management departments;

•                  Other consultingfirms such as Accenture, Healthlink (a unit of IBM), and Computer SciencesCorporation’s consulting division; and

•                  Other healthcareand pharmaceutical consulting and outsourcing firms, including SuperiorConsultant, which has recently been acquired by ACS.

 

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In e-healthand e-commerce related services, we compete with the traditional competitorsoutlined above, as well as newer internet product and service companies.  We also compete with companies that providesoftware development, information technology consulting and outsourcing, andother integration and maintenance services, such as Wipro Technologies, CognizantTechnology Solutions Corporation, and Tata Technologies Limited.

 

Several of ourcompetitors employ a global sourcing strategy to provide software developmentand other information technology services to their clients, while at the sametime reducing their cost structure and improving the quality of services theyprovide.  If we are unable to realize theperceived cost benefits of our recently implemented global sourcing strategy orif we are unable to receive high quality services from foreign employees orsubcontractors, our business may be adversely impacted and we may not be ableto compete effectively.

 

Many of ourcompetitors have significantly greater financial, human, and marketingresources than us.  As a result, suchcompetitors may be able to respond more quickly to new or emerging technologiesand changes in customer demands, or to devote greater resources to thedevelopment, promotion, sale, and support of their products and services thanwe do.  In addition, as healthcareorganizations become larger and more complex, our larger competitors may bebetter able to serve the needs of such organizations.  If we do not compete effectively with currentand future competitors, we may be unable to secure new and renewed clientengagements, or we may be required to reduce our rates in order to competeeffectively.  This could result in areduction in our revenues, resulting in lower earnings or operating losses, andotherwise materially adversely affecting our business, financial condition, andresults of operations.

 

*If we fail to establish and maintain relationships with vendors ofsoftware and hardware products, it could have a negative effect on our abilityto secure engagements.*

 

We have anumber of relationships with software and hardware vendors.  For example, our Life Sciences business ishighly dependent upon a non-exclusive relationship with EMC Documentum, avendor of document management software applications with which we integrate ourFirstDoc TM solution.    Weoften are engaged by vendors or their customers to implement or integratevendor products based on our relationship with a particular vendor.  In addition, our clients may request that wehost or operate a vendor application as part of a hosting or outsourcingrelationship, which may require the consent or cooperation of the vendor.  As a result, we believe that our relationshipwith vendors is important to our operations, including our sales, marketing,and support activities.  If we fail tomaintain our relationships with these vendors, or fail to establish additionalnew relationships, our business could be materially adversely affected.

 

*Our relationships with vendors of software and hardware products couldhave a negative impact on our ability to secure consulting engagements.*

 

Our growingnumber of relationships with software and hardware vendors could result inclients perceiving that we are not independent from those software and hardwarevendors.  Our ability to secureassessment and other consulting engagements is often dependent, in part, on ourbeing independent of software and hardware solutions that we may review,analyze or recommend to clients.  Ifclients believe that we are not independent of those software and hardwarevendors, clients may not engage us for certain consulting engagements relatingto those vendors, which could reduce our revenues and materially adverselyaffect our business.

 

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*We may infringe the intellectual property rights of third parties.*

 

Our successdepends, in part, on not infringing patents, copyrights, and other intellectualproperty rights held by others.  We donot know whether patents held or patent applications filed by third parties mayforce us to alter our methods of business and operation or require us to obtainlicenses from third parties.  If weattempt to obtain such licenses, we do not know whether we will be grantedlicenses or whether the terms of those licenses will be fair or acceptable tous.  Third parties may assertinfringement claims against us in the future. Such claims may result in protracted and costly litigation, penalties,judgments, and fines that could adversely affect our business regardless of themerits of such claims.

 

*Our business is highly dependent on the availability of businesstravel.*

 

Our associatesand service providers often reside or work in cities or other locations thatrequire them to travel to a client’s site to perform and execute the client’sproject.  As a result of the September 11,2001 terrorist attacks, air travel has become more time-consuming to businesstravelers due to increased security, flight delays, reduced flight schedules,and other variables.  If efficient andcost effective air travel becomes unavailable to our associates, or if domesticor international air travel is significantly reduced or halted, we may beunable to satisfactorily perform our client engagements on a timely basis,which could have a materially adverse impact on our business.  Further, if our associates refuse to utilizeair travel to perform their job functions for any reason, our business andreputation would be negatively affected.

 

*If we fail to keep pace with regulatory and technological changes, ourbusiness could be materially adversely affected.*

 

The healthcareand pharmaceutical industries are subject to regulatory and technologicalchanges that may affect the procurement practices and operations of healthcareand pharmaceutical organizations.  Duringthe past several years, the healthcare and pharmaceutical industries have beensubject to an increase in governmental regulation and reform proposals.  These reforms could increase governmentalinvolvement in the healthcare and pharmaceutical industries, lowerreimbursement rates or otherwise change the operating environment of ourclients.  Also, certain reforms thatcreate potential work for us could be delayed or cancelled.  Healthcare and pharmaceutical organizationsmay react to these situations by curtailing or deferring investments, includingthose for our services.  In addition, ifwe are unable to maintain our skill and expertise in light of regulatory ortechnological changes, our services may not be marketable to our clients and wecould lose existing clients or future engagements.  Finally, government regulations, particularlyHIPAA, may require our clients to impose additional contractualresponsibilities on us, which may make it more costly to perform certain of ourengagements and subject us to increased risk in the performance of theseengagements, including immediate termination of an engagement.

 

Technologicalchange in the network and application markets has created high demand forconsulting, implementation, and integration services.  If the pace of technological change were todiminish, we could experience a decrease in demand for our services.  Any material decrease in demand wouldmaterially adversely affect our business, financial condition, and results ofoperations.

 

*We may be unable to effectively protect our proprietary information andprocedures.*

 

We mustprotect our proprietary information, including our proprietary methodologies,research, tools, software code, and other information.  To do this, we rely on a combination ofcopyright and trade secret laws and confidentiality procedures to protect ourintellectual property.  These steps maynot protect our proprietary information. In addition, the laws of certain foreign countries do not protect orenforce proprietary rights to the same extent, as do the laws of the UnitedStates.  We are currently providing ourservices to clients in international markets and have business operations inEurope, India

 

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and Vietnam.  Our proprietary information may not beprotected to the same extent as provided under the laws of the United States,if at all.  The unauthorized use of ourintellectual property could have a material adverse effect on our business,financial condition, or results of operations.

 

*The price of our common stock may be adversely affected by marketvolatility.*

 

The tradingprice of our common stock fluctuates significantly.  Since our common stock began trading publiclyin February 1998, the reported sale price of our common stock on theNasdaq National Market has been as high as $29.13 and as low as $3.63 pershare.  This price may be influenced bymany factors, including:

 

•                  Our performanceand prospects;

•                  The depth andliquidity of the market for our common stock;

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

•                  Changes inearnings estimates or buy/sell recommendations by analysts;

•                  Generalfinancial and other market conditions;

•                  Domestic andinternational economic conditions; and

•                  The other risksrelated to our business discussed above.

 

In addition,public stock markets have experienced extreme price and trading volumevolatility.  This volatility hassignificantly affected the market prices of securities of many companies forreasons frequently unrelated to or disproportionately impacted by the operatingperformance of these companies.  These broadmarket fluctuations may adversely affect the market price of our commonstock.  As a result, we may be unable toraise capital or use our stock to acquire businesses on attractive terms andinvestors may be unable to resell their shares of our common stock at or abovetheir purchase price.  Further, ifresearch analysts stop covering our company or reduce their expectations of us,our stock price could decline or the liquidity of our common stock may beadversely impacted, which could create difficulty for investors to resell theirshares of our common stock.

 

*If our stock price is volatile, we may become subject to securitieslitigation, which is expensive and could result in a diversion of resources.*

 

If our stockprice experiences periods of volatility, our security holders may initiatesecurities class action litigation against us. If we become involved in this type of litigation it could be veryexpensive and divert our management’s attention and resources, which couldmaterially and adversely affect our business and financial condition.

 

*Our charter documents, Delaware law and stockholders rights plan willmake it more difficult to acquire us and may discourage take-over attempts andthus depress the market price of our common stock.*

 

Our Board of Directorshas the authority to issue up to 9,500,000 shares of undesignated preferredstock, to determine the powers, preferences, and rights and the qualifications,limitations, or restrictions granted to or imposed upon any unissued series ofundesignated preferred stock and to fix the number of shares constituting anyseries and the designation of such series, without any further vote or actionby our stockholders.  The preferred stockcould be issued with voting, liquidation, dividend, and other rights superiorto the rights 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 incorporation eliminates the right of stockholders to actwithout a meeting and does not provide cumulative voting for the election ofdirectors.  Our certificate of

 

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incorporation also provides fora classified Board of Directors.  Theability of our Board of Directors to issue preferred stock and these otherprovisions of our certificate of incorporation and bylaws may have the effectof deterring hostile takeovers or delaying changes in control or management.

 

We are alsosubject to the provisions of Section 203 of the Delaware GeneralCorporation Law, which could delay or prevent a change in control of us, impedea merger, consolidation, or other business combination involving us ordiscourage a potential acquirer from making a tender offer or otherwiseattempting to obtain control.  Any ofthese provisions, which may have the effect of delaying or preventing a changein control, could adversely affect the market value of our common stock.

 

In 1999, ourBoard of Directors adopted a rights agreement that is intended to protect ourstockholders’ interests in the event we are confronted with coercive takeovertactics.  Pursuant to the stockholdersrights plan, we distributed “rights” to purchase up to 500,000 shares of our Series AJunior Participating Preferred Stock. Under some circumstances, these rights become the rights to purchaseshares of our common stock or securities of an acquiring entity at one-half themarket value.  The rights are notintended to prevent our takeover, rather they are designed to deal with thepossibility of unilateral actions by hostile acquirers that could deprive ourBoard of Directors and stockholders of their ability to determine our destinyand obtain the highest price for our common stock.

 

## **Item3.  Quantitative and QualitativeDisclosures about Market Risks**

## ** **

Our financialinstruments include cash and cash equivalents, short-term investments, accountsreceivable, unbilled receivables, accounts payable, and a revolving line ofcredit.  Only the cash and cash equivalents and short-term investments,which totaled $35.4 million at July 1, 2005, present us with market riskexposure resulting primarily from changes in interest rates.  Based on thisbalance, a change of one percent in the interest rate would cause a change ininterest income for the annual period of approximately $354,000.  Ourobjective in maintaining these investments is the flexibility obtained inhaving cash available for payment of accrued liabilities and acquisitions.

 

Our borrowingsare primarily dependent upon the prevailing prime rate.  As of July 1,2005, we had no borrowings under our revolving line of credit and an availableborrowing capacity of $7.0 million.  See “Item 2. Management’s Discussionand Analysis of Financial Condition and Results of Operations - Liquidity andCapital Resources.”  The estimated fair value of borrowings under therevolving line is expected to approximate its carrying value.

 

## **Item4.  Controls and Procedures**

## ** **

We maintaindisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in our Exchange Act reports is recorded, processed,summarized, and reported within the time periods specified in the Securitiesand Exchange Commission’s rules and forms, and that such information isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow for timelydecisions regarding required disclosure. In designing and evaluating thedisclosure controls and procedures, management is required to apply itsjudgment in evaluating the cost-benefit relationship of possible controls andprocedures.  Our disclosure controls andprocedures are designed to provide a reasonable level of assurance of reachingour desired disclosure control objectives.

 

As required bySEC Rule 13a-15(b), we carried out an evaluation, under the supervisionand with the participation of our management, including our Chief ExecutiveOfficer and our Chief Financial Officer, of the effectiveness of the design andoperation of our disclosure controls and procedures as of the end of thequarter covered by this report. Based on the foregoing, our Chief ExecutiveOfficer and

 

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Chief Financial Officerconcluded that our disclosure controls and procedures were effective, and wereoperating at the reasonable assurance level.

 

There has beenno change in our internal controls over financial reporting during our mostrecent fiscal quarter that has materially affected, or is reasonably likely tomaterially affect, our internal controls over financial reporting.

 

# **PART II.  OTHER INFORMATION**

#  

## **Item1.  Legal Proceedings.**

## ** **

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

 

## **Item2.  Unregistered Sales of EquitySecurities and Use of Proceeds.**

## ** **

None.

 

## **Item3.  Defaults Upon Senior Securities.**

## ** **

None.

 

## **Item4.  Submission of Matters to a Vote ofSecurity Holders.**

## ** **

We held our 2005 AnnualMeeting of Stockholders on June 1, 2005. The stockholders elected the Board’s nominees as directors to servethree-year terms expiring at the 2008 Annual Meeting of Stockholders by thevotes indicated:

 

| **Nominee**               | ** ** | **Votes in  Favor** | ** ** | **Votes  Against** | ** ** | **Abstentions** | ** ** |
|---------------------------|------------|---------------------|------------|--------------------|------------|-----------------|------------|
| Steven Heck               |       | 18,005,591          |       | 854,672            |       | 0               |       |
| F. Richard  Nichol, Ph.D. |       | 18,234,419          |       | 625,844            |       | 0               |       |
| Stephen E.  Olson         |       | 18,208,748          |       | 651,515            |       | 0               |       |

 

The stockholders alsoratified our selection of Grant Thornton LLP as our independent auditors forthe year ending December 30, 2005, with 18,427,564 votes cast in favor,226,823 votes cast against and 205,876 votes abstaining from the proposal.

 

## **Item5.  Other Information.**

 

None.

 

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## **Item6.  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                                                                   |
| 10.1     |       | Letter Agreement between  First Consulting Group, Inc. and Mitch Morris dated May 17, 2005 |
| 10.2 (5) |       | Form of Change in  Control Agreement                                                            |
| 11.1 (6) |       | Statement of computation  of per share earnings                                                      |
| 31.1     |       | Rule 13a-14(a)/Rule 15d-14(a) Certification  of the Chief Executive Officer           |
| 31.2     |       | Rule 13a-14(a)/Rule 15d-14(a) Certification  of the Chief Financial Officer           |
| 32.1     |       | Section 1350  Certification of the Chief Executive Officer                                      |
| 32.2     |       | Section 1350  Certification of the Chief Financial Officer                                      |

 

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

 

(2)          Incorporatedby reference to Exhibit 99.1 to FCG’s Current Report on Form 8-Kdated December 9, 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)          Incorporatedby reference to Exhibit 10.1 to FCG’s Current Report on Form 8-Kdated July 1, 2005.

 

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

 

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# **SIGNATURES**

 

Pursuant tothe requirements of the Securities and Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                        | FIRST  CONSULTING GROUP, INC.               |
|-----------------------------|---------------------------------------------|
|                        |                                        |
|                        |                                        |
| Date:  August 10, 2005 | /s/LUTHER J.  NUSSBAUM                      |   |
|                        | Luther J.  Nussbaum                         |
|                        | Chairman of  the Board and                  |
|                        | Chief  Executive Officer                    |
|                        |                                        |
|                        |                                        |
| Date:  August 10, 2005 | /s/THOMAS A  WATFORD                        |   |
|                        | Thomas A. Watford                           |
|                        | Executive  Vice President and Interim Chief |
|                        | 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                                                                   |
| 10.1     |       | Letter Agreement between  First Consulting Group, Inc. and Mitch Morris dated May 17, 2005 |
| 10.2 (5) |       | Form of Change in  Control Agreement                                                            |
| 11.1 (6) |       | Statement of computation  of per share earnings                                                      |
| 31.1     |       | Rule 13a-14(a)/Rule 15d-14(a) Certification  of the Chief Executive Officer           |
| 31.2     |       | Rule 13a-14(a)/Rule 15d-14(a) Certification  of the Chief Financial Officer           |
| 32.1     |       | Section 1350 Certification  of the Chief Executive Officer                                      |
| 32.2     |       | Section 1350  Certification of the Chief Financial Officer                                      |

 

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

 

(2)          Incorporatedby reference to Exhibit 99.1 to FCG’s Current Report on Form 8-Kdated December 9, 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)          Incorporatedby reference to Exhibit 10.1 to FCG’s Current Report on Form 8-Kdated July 1, 2005.

 

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

 

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