**UNITEDSTATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C.  20549**

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**FORM 10-Q**

**(MarkOne)**

x                               **QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period ended March 30, 2007**

**OR**

o                                  **TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the transition period from                to                 **

**Commission File Number 0-23651**

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**First Consulting Group, Inc.**

(Exact name of registrant as specified in its charter)

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

 

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

(Address of principal executive offices, including zip code)

**(562)624-5200**

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes **x** No **o**

**Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerate filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. **

**Largeaccelerated filer**o                                           Accelerated filerx                                            Non-accelerated filero  

**Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act).    **Yeso  Nox

**Indicate the number of shares outstanding of each of theRegistrant’s classes of common stock, as of the latest practicable date.**

 

| **Common Stock, $.001 par value** |   | **26,875,553**                   |
|-----------------------------------|--------|----------------------------------|
| (Class)                           |   | (Outstanding at  April 27, 2007) |

 

 

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**FirstConsulting Group, Inc.**

**Table of Contents**
| COVER PAGE                                                                                                 |   |
|------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                       |   |
| TABLE OF CONTENTS                                                                                          |   |
|                                                                                                       |   |
| PART  I.         FINANCIAL INFORMATION                        |   |
|                                                                                                       |   |
| Item  1. Financial Statements                                                                              |   |
|                                                                                                       |   |
| Consolidated Balance  Sheets                                                                               |   |
|                                                                                                       |   |
| Consolidated  Statements of Operations                                                                     |   |
|                                                                                                       |   |
| Consolidated  Statements of Cash Flows                                                                     |   |
|                                                                                                       |   |
| Notes to  Consolidated Financial Statements                                                                |   |
|                                                                                                       |   |
| Item  2.  Management’s Discussion and  Analysis of Financial Condition and Results of Operations |   |
|                                                                                                       |   |
| Item  3.  Quantitative and Qualitative  Disclosures about Market Risk                                 |   |
|                                                                                                       |   |
| Item  4.  Controls and Procedures                                                                     |   |
|                                                                                                       |   |
| PART II.  OTHER INFORMATION                                                                           |   |
|                                                                                                       |   |
| Item  1.  Legal Proceedings                                                                           |   |
|                                                                                                       |   |
| Item  1A.  Risk Factors                                                                               |   |
|                                                                                                       |   |
| Item  2.  Unregistered Sales of Equity  Securities and Use of Proceeds                                |   |
|                                                                                                       |   |
| Item  3.  Defaults Upon Senior Securities                                                             |   |
|                                                                                                       |   |
| Item  4.  Submission of Matters to a Vote of  Security Holders                                        |   |
|                                                                                                       |   |
| Item  5.  Other Information                                                                           |   |
|                                                                                                       |   |
| Item 6.  Exhibits                                                                                     |   |
|                                                                                                       |   |
| SIGNATURES                                                                                                 |   |
|                                                                                                       |   |
| EXHIBIT INDEX                                                                                              |   |

 

2

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# **Part I. FinancialInformation**

## **Item1. Financial Statements**

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

### **Consolidated Balance Sheets**

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

**(unaudited)**
| ** **                                                                                      | ** ** | **March 30,  2007** | ** ** | **December 29,  2006** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                      | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current assets:                                                                                 |       |                     |       |                        |       |
| Cash and cash  equivalents                                                                      |       | $                        | 64,639     |                        | $          | 58,493 |   |
| Short-term  investments                                                                         |       | 5,019                    |       | 5,004                       |       |
| Accounts  receivable, less allowance of $1,648 as of both March 30, 2007 and December  29, 2006 |       | 22,770                   |       | 20,559                      |       |
| Unbilled  receivables                                                                           |       | 15,558                   |       | 12,252                      |       |
| Prepaid expenses  and other current assets                                                      |       | 4,163                    |       | 3,971                       |       |
| Total current  assets                                                                           |       | 112,149                  |       | 100,279                     |       |
|                                                                                            |       |                     |       |                        |       |
| Property and equipment:                                                                         |       |                     |       |                        |       |
| Furniture,  equipment, and leasehold improvements                                               |       | 7,049                    |       | 6,905                       |       |
| Information  systems equipment and software                                                     |       | 29,930                   |       | 29,874                      |       |
|                                                                                            |       | 36,979                   |       | 36,779                      |       |
| Less accumulated  depreciation and amortization                                                 |       | 26,994                   |       | 25,680                      |       |
|                                                                                            |       | 9,985                    |       | 11,099                      |       |
| Other assets:                                                                                   |       |                     |       |                        |       |
| Executive  benefit trust                                                                        |       | 11,327                   |       | 11,079                      |       |
| Long-term  accounts receivable, net                                                             |       | 2,455                    |       | 2,413                       |       |
| Deferred  contract costs                                                                        |       | 6,500                    |       | 5,585                       |       |
| Goodwill, net                                                                                   |       | 17,820                   |       | 17,820                      |       |
| Intangibles, net                                                                                |       | 287                      |       | 456                         |       |
| Other                                                                                           |       | 2,051                    |       | 2,762                       |       |
|                                                                                            |       | 40,440                   |       | 40,115                      |       |
| Total assets                                                                                    |       | $                        | 162,574    |                        | $          | 151,493 |   |

 

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

3

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

**ConsolidatedBalance Sheets (Continued)**

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

**(unaudited)**
| ** **                                                                                                                                                                                         | ** ** | **March 30,  2007** | ** ** | **December 29,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                      | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                                                                                               |       |                     |       |                        |       |
| Accounts payable                                                                                                                                                                                   |       | $                        | 2,859      |                        | $          | 2,381 |   |
| Accrued liabilities                                                                                                                                                                                |       | 1,876                    |       | 2,377                       |       |
| Accrued payroll and payroll taxes                                                                                                                                                                  |       | 3,599                    |       | 3,631                       |       |
| Accrued vacation                                                                                                                                                                                   |       | 6,400                    |       | 5,975                       |       |
| Accrued employee benefits                                                                                                                                                                          |       | 3,785                    |       | 2,108                       |       |
| Customer advances                                                                                                                                                                                  |       | 14,984                   |       | 11,856                      |       |
| Taxes payable                                                                                                                                                                                      |       | 3,403                    |       | 1,630                       |       |
| Total current liabilities                                                                                                                                                                          |       | 36,906                   |       | 29,958                      |       |
| Non-current  liabilities:                                                                                                                                                                          |       |                     |       |                        |       |
| Supplemental executive retirement plan                                                                                                                                                             |       | 9,056                    |       | 10,193                      |       |
|                                                                                                                                                                                               |       |                     |       |                        |       |
| Commitments and  contingencies                                                                                                                                                                     |       | —                   |       | —                      |       |
|                                                                                                                                                                                               |       |                     |       |                        |       |
| Stockholders’  equity:                                                                                                                                                                        |       |                     |       |                        |       |
| Preferred Stock, $.001 par value; 9,500,000 shares  authorized, no shares issued and outstanding                                                                                                   |       | —                   |       | —                      |       |
| Series A Junior Participating Preferred Stock, $.001  par value; 500,000 shares authorized, no shares issued and outstanding                                                                       |       | —                   |       | —                      |       |
| Common Stock, $.001 par value; 50,000,000 shares  authorized,  26,678,154 shares issued  and outstanding at March 30, 2007 and 26,253,061 shares issued and  outstanding at December 29, 2006 |       | 27                       |       | 26                          |       |
| Additional paid-in capital                                                                                                                                                                         |       | 104,676                  |       | 102,739                     |       |
| Retained earnings                                                                                                                                                                                  |       | 11,605                   |       | 8,302                       |       |
| Accumulated other comprehensive income                                                                                                                                                             |       | 304                      |       | 275                         |       |
| Total stockholders’ equity                                                                                                                                                                    |       | 116,612                  |       | 111,342                     |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                   |       | $                        | 162,574    |                        | $          | 151,493 |   |

 

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

4

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

### **Consolidated Statements of Operations**

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

**(unaudited)**
| ** **                                     | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **March  30, 2007**         | ** ** | **March  31, 2006** | ** ** |
| Revenues before  reimbursements                |       | $                                | 66,915     |   | $ | 66,686 |   |
| Reimbursements                                 |       | 3,374                            |       | 3,779 |   |
| Total revenues                                 |       | 70,289                           |       | 70,465 |   |
|                                           |       |                             |       |   |   |
| Cost of services  before reimbursable expenses |       | 49,597                           |       | 48,593 |   |
| Reimbursable  expenses                         |       | 3,374                            |       | 3,779 |   |
| Total cost of services                         |       | 52,971                           |       | 52,372 |   |
|                                           |       |                             |       |   |   |
| Gross profit                                   |       | 17,318                           |       | 18,093 |   |
|                                           |       |                             |       |   |   |
| Selling expenses                               |       | 4,022                            |       | 4,379 |   |
| General and  administrative expenses           |       | 9,179                            |       | 9,175 |   |
| Income from operations                         |       | 4,117                            |       | 4,539 |   |
| Other income  (expense):                       |       |                             |       |   |   |
| Interest income, net                           |       | 848                              |       | 338 |   |
| Other expense, net                             |       | (26                              | )          | (15 | ) |
| Income before income tax provision             |       | 4,939                            |       | 4,862 |   |
| Income tax provision                           |       | 1,284                            |       | 340 |   |
| Net income                                     |       | $                                | 3,655      |   | $ | 4,522 |   |
|                                           |       |                             |       |   |   |
| Basic and  diluted net income per share:       |       |                             |       |   |   |
| Basic net income per share                     |       | $                                | 0.14       |   | $ | 0.18 |   |
| Diluted net income per share                   |       | 0.13                             |       | 0.18 |   |
|                                           |       |                             |       |   |   |
| Weighted average  shares used in computing:    |       |                             |       |   |   |
| Basic net income per share                     |       | 26,557                           |       | 24,705 |   |
| Diluted net  income per share                  |       | 27,501                           |       | 24,910 |   |

 

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

5

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

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

**(in thousands)**

**(unaudited)**

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **March 30,  2007**         | ** ** | **March 31,  2006** | ** ** |
| Cash flows from  operating activities:                                             |       |                             |       |   |   |
| Net income:                                                                        |       | $                                | 3,655      |   | $ | 4,522 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                             |       |   |   |
| Depreciation and amortization                                                      |       | 1,648                            |       | 1,752 |   |
| Intangible amortization                                                            |       | 169                              |       | 193 |   |
| Provision for bad debts                                                            |       | —                           |       | (75 | ) |
| Loss on sale/disposal of assets                                                    |       | 15                               |       | 47 |   |
| Stock-based compensation                                                           |       | 465                              |       | 193 |   |
| Change in assets and liabilities:                                                  |       |                             |       |   |   |
| Accounts receivable                                                                |       | (2,211                           | )          | (513 | ) |
| Unbilled receivables                                                               |       | (3,306                           | )          | (2,946 | ) |
| Prepaid expenses and other current assets                                          |       | (192                             | )          | (555 | ) |
| Long-term accounts receivable                                                      |       | (42                              | )          | (825 | ) |
| Deferred contract costs                                                            |       | (915                             | )          | (3 | ) |
| Other assets                                                                       |       | 689                              |       | (95 | ) |
| Accounts payable                                                                   |       | 478                              |       | 297 |   |
| Accrued liabilities                                                                |       | (501                             | )          | (1,126 | ) |
| Accrued payroll and payroll taxes                                                  |       | (32                              | )          | 847 |   |
| Accrued vacation                                                                   |       | 425                              |       | (874 | ) |
| Accrued employee benefits                                                          |       | 1,677                            |       | (1,095 | ) |
| Accrued severance                                                                  |       | —                           |       | (2,342 | ) |
| Customer advances                                                                  |       | 3,128                            |       | 799 |   |
| Taxes payable                                                                      |       | 1,421                            |       | 429 |   |
| Accrued restructuring costs                                                        |       | —                           |       | (386 | ) |
| Supplemental executive retirement plan                                             |       | (1,385                           | )          | (641 | ) |
| Other                                                                              |       | 17                               |       | (4 | ) |
| Net cash provided by (used in) operating activities                                |       | 5,203                            |       | (2,401 | ) |
| Cash flows from  investing activities:                                             |       |                             |       |   |   |
| Purchase of investments, net                                                       |       | (15                              | )          | — |   |
| Purchase of property and equipment                                                 |       | (547                             | )          | (1,603 | ) |
| Net cash used in investing activities                                              |       | (562                             | )          | (1,603 | ) |
| Cash flows from  financing activities:                                             |       |                             |       |   |   |
| Proceeds from issuance of capital stock, net                                       |       | 1,492                            |       | 1,593 |   |
| Collections of loan receivable                                                     |       | 3                                |       | 24 |   |
| Net cash provided by financing activities                                          |       | 1,495                            |       | 1,617 |   |
| Effect of exchange rate changes on cash and cash  equivalents                      |       | 10                               |       | 29 |   |
| Net change in cash and cash equivalents                                            |       | 6,146                            |       | (2,358 | ) |
| Cash and cash  equivalents at beginning of period                                  |       | 58,493                           |       | 35,106 |   |
| Cash and cash  equivalents at end of period                                        |       | $                                | 64,639     |   | $ | 32,748 |   |
|                                                                               |       |                             |       |   |   |
| Supplemental  disclosure of cash flow information                                  |       |                             |       |   |   |
| Cash paid during the period for interest                                           |       | $                                | 1          |   | $ | 4 |   |
| Cash paid during the period for income taxes, net of  refunds                      |       | $                                | (80        | ) | $ | (89 | ) |
| Supplemental  disclosure of non-cash investing and financing activities            |       |                             |       |   |   |
| Repayment of  officer loan with common stock                                       |       | $                                | 19         |   | $ | 13 |   |

 

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

6

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

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

**March 30,2007**

**Note 1            AccountingPolicies**

Basisof Presentation

The accompanying consolidated balance sheet of First Consulting Group,Inc. and subsidiaries (the “Company” or “FCG”) at March 30, 2007 andconsolidated statements of operations and consolidated statements of cash flowsfor the periods ended March 30, 2007 and March 31, 2006 are unaudited.  These interim financial statements reflectall adjustments, consisting of only normal recurring adjustments, which, in theopinion of management, are necessary to fairly present the financial positionof the Company at March 30, 2007 and the results of operations for the periodsended March 30, 2007 and March 31, 2006. The results of operations and cash flows for the three-month periodended March 30, 2007 are not necessarily indicative of the results to beexpected for the year ending December 28, 2007. For more complete financial information, these financial statements shouldbe read in conjunction with the audited financial statements for the year endedDecember 29, 2006 included in the Company’s Annual Report on Form 10-K.  

Principlesof Consolidation

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

Stock-BasedCompensation

*Restricted Stock*

A summary of restricted stock activity for the three months ended March30, 2007 is as follows:
|                               | ** ** | **Shares** | ** ** | **Weighted Average  Grant Date  Fair Value** | ** ** |
|-------------------------------|------------|------------|------------|-------------------------------------------------------------|------------|
| Balance at  December 29, 2006 |       | 130,000    |       | $                                                           | 8.49       |   |
| Grants                        |       | 236,600    |       | 13.64                                                       |       |
| Cancelled                     |       | (27,400    | )          | 13.66                                                       |       |
| Balance at March 30,  2007    |       | 339,220    |       | 11.67                                                       |       |
|                               |            |            |            |                                                             |            |  |

 

During the firstquarter of 2007, the Company issued 236,600 shares of restricted stock awardswith a vesting period of three and four years to eight board members and 38vice presidents, respectively.  For thethree months ended March 30, 2007, the Company recognized $242,000 ofcompensation costs related to these awards of which $110,000 was a component ofcost of services, $19,000 was as a component of selling expense, and $113,000was a component of general and administrative expense.  There was no such expense for the quarterended March 31, 2006.  At March 30, 2007,there was $3.6 million of total unrecognized compensation costs related tounvested stock, which is expected to be recognized over a weighted averageperiod of 3.9 years.

7

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*Adoption of SFAS 123R*

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

SFAS 123R requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates in orderto derive the Company’s best estimate of awards ultimately expected to vest.Forfeitures have been estimated based on the Company’s historical experience.In the Company’s pro forma information required under SFAS 123 for the periodsprior to 2006, the Company accounted for forfeitures as they occurred.

*Valuationand Expense Information under SFAS 123R*

As a result ofadopting SFAS 123R, expense associated with stock-based compensation for thequarter ended March 30, 2007 is $223,000, which had the effect of reducingoperating income and net income by this amount, and reducing basic and dilutedearnings per share by less than $0.01. Stock-based compensation included $35,000 as a component of cost ofservices, $11,000 as a component of selling expense, and $177,000 as acomponent of general and administrative expense for the quarter ended March 30,2007.  For the three months endedMarch 31, 2006, the stock-based compensation was $193,000, which had theeffect of reducing basic and diluted earnings per share by $0.01 for thatquarter.  Stock-based compensationincluded $76,000 as a component of cost of services, $37,000 as a component ofselling expense, and $80,000 as a component of general and administrativeexpense for the quarter ended March 31, 2006. In addition, prior to the adoption of SFAS 123R, the Company presentedthe tax benefit of stock option exercises as operating cash flows.  Upon the adoption of SFAS 123R, tax benefitsresulting from tax deductions in excess of the compensation cost recognized forthose options are classified as financing cash flows.  For the quarters ended March 30, 2007 andMarch 31, 2006, there were no tax benefits resulting from tax deductions inexcess of the compensation cost recognized. Because the Company maintained a full valuation allowance on itsdeferred tax assets, the Company did not recognize any tax benefit related tostock-based compensation expense for the quarters ended March 30, 2007 andMarch 31, 2006.

The Company hashistorically used the Black-Scholes option pricing model to value its optionsunder SFAS 123, and has elected to continue to do so under SFAS 123R.  There were no options granted for the threemonths ended March 30, 2007.  The fairvalue of the options granted for the three months ended March 31, 2006calculated using the Black-Scholes pricing model was $3.51 per share. Thefollowing assumptions were used in the Black-Scholes pricing model: 
|                                       | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|
| ** **                            | ** ** | **March 31, 2006**     | ** ** |
|                                  | ** ** | ** **                       | ** ** |
| Dividend yield                        |       | —                           |       |
| Expected  volatility                  |       | 0.59                             |       |
| Weighted average  expected volatility |       | 0.59                             |       |
| Risk-free  interest rate              |       | 4.3                              | %          |
| Expected life                         |       | 6.18 years                       |       |

 

8

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

Stock optionactivity for the quarter ended March 30, 2007 is as follows:
| ** **                        | ** ** | **Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Remaining  Contractual Life  (Years)** | ** ** |
|-----------------------------------|------------|------------|------------|------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| Outstanding at  December 29, 2006 |       | 2,915,960  |       | $                                              | 7.73       |                                                                 |       |   |
| Exercised                         |       | (218,183   | )          | $                                              | 6.85       |                                                                 |       |   |
| Cancelled                         |       | (56,232    | )          | $                                              | 8.13       |                                                                 |       |   |
| Outstanding at  March 30, 2007    |       | 2,641,545  |       | $                                              | 7.79       |                                                                 | 5.67       |   |
|                              |       |       |       |                                           |       |                                                                 |       |
| Exercisable at March  30, 2007    |       | 1,908,579  |       | $                                              | 7.69       |                                                                 | 4.56       |   |

 

As of March 30, 2007, there was $2.0 million of total unrecognizedcompensation cost related to unvested stock options.  This cost is expected to be recognized over aweighted average period of approximately 1.2 years.

Basicand Diluted Net Income per Share

Basic net incomeper share is computed using the weighted average number of common sharesoutstanding.  Diluted net income pershare is computed using the assumption that stock options were exercised.  Dilution is computed by applying the treasurystock method. Under this method, options are assumed to be exercised at thebeginning of the period (or at the time of issuance, if later), and as if fundsobtained by the Company from such exercise were used by the Company to purchasecommon stock at the average market price during the period.  Stock options are not considered whencomputing diluted net loss per share as they are considered anti-dilutive.

The following represents a reconciliation of basic and diluted netincome per share for the three months ended March 30, 2007 and March 31, 2006(in thousands, except per share data):
|                                                        | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **March 30  29, 2007** | ** ** | **March 31,  2006** | ** ** |
| Net income                                             |       | $                                | 3,655      |   | $ | 4,522 |   |
|                                                   |       |                             |       |   |   |
| Basic weighted  average number of shares outstanding   |       | 26,557                           |       | 24,705 |   |
| Effect of  dilutive options and contingent shares      |       | 944                              |       | 205 |   |
| Diluted weighted average number of shares  outstanding |       | 27,501                           |       | 24,910 |   |
|                                                   |       |                             |       |   |   |
| Basic and  diluted net income per share:               |       |                             |       |   |   |
| Basic net income per share                             |       | $                                | 0.14       |   | $ | 0.18 |   |
| Diluted net  income per share                          |       | 0.13                             |       | 0.18 |   |

 

For the three months ended March 30, 2007 and March 31, 2006, therewere 710,134 and 2,768,983 anti-dilutive outstanding stock options,respectively, excluded from the calculation of diluted income per share.

9

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Useof Estimates

In preparingfinancial statements in conformity with accounting principles generallyaccepted in the United States of America, management is required to makeestimates and assumptions that affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities at the date ofthe financial statements, and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.  On an ongoing basis, management evaluates itsestimates, including those related to revenue recognition, valuation ofgoodwill, stock-based compensation, long-lived and intangible assets, accruedliabilities, income taxes including the amount of tax asset valuation allowancerequired, facility closure costs, litigation and disputes, and the allowancefor doubtful accounts.

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

Cash and Cash Equivalents

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

Recent Accounting Pronouncements

*Considering the Effects of PriorYear Misstatements when Quantifying Misstatements in Current Year FinancialStatements*

In September 2006,the Securities and Exchange Commission issued Staff Accounting Bulletin 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements” (“SAB 108”).  SAB 108 requires thatregistrants utilize both an income statement assessment and a balance sheetassessment (“dual approach”) to evaluate the quantitative effects of financialstatement misstatements.  SAB 108 permits the Company to initially applyits provisions either by i) restating prior financial statements as if the dualapproach had always been used or ii) recording the cumulative effect ofinitially applying the dual approach as adjustments to the carrying values ofassets and liabilities as of the beginning of the Company’s 2006 fiscal year,with an offsetting adjustment recorded to the opening balance of retainedearnings.  The guidance in SAB 108 must be applied to annual financialstatements for fiscal years ending after November 15, 2006.  The Company’sadoption of SAB 108 did not have a material impact on the consolidatedfinancial statements.

*Fair Value Measurements*

InSeptember 2006 and February 2007, respectively, the FASB issued SFASNo. 157, “Fair Value Measurements” (“SFAS 157”), which provides guidancefor using fair value to measure assets and liabilities, and SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”(“SFAS 159”), which allows the measurement of many financial instruments andcertain other items at fair value. SFAS 157 will apply whenever another standard requires or permits assetsor liabilities to be measured at fair value. The standard does not expand theuse of fair value to any new circumstances. SFAS 159 will permit companies to use fair value measurements in certaincircumstances.  Both standards areeffective for financial statements issued for fiscal years beginning afterNovember 15, 2007.  The Company’sadoption of SFAS 157 and SFAS 159 is not expected to have a material impact onthe consolidated financial statements.

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*Accounting for Uncertainty inIncome Taxes*

  In June 2006, the FASB issued FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”).  FIN 48 clarifies the application of SFAS No.109, “Accounting for Income Taxes”, by establishing a threshold condition thata tax position must meet for any part of the benefit of that position to berecognized in the financial statements. In addition to recognition, FIN 48 provides guidance concerningmeasurement, de-recognition, classification, and disclosure of tax positions.  FIN 48 is effective for fiscal years beginningafter December 15, 2006.  The Companyadopted FIN 48 in the first quarter of 2007 and recorded a cumulative effectadjustment of $352,000 which was accounted for as an adjustment to thebeginning balance of retained earnings. See Note 7, “Income Taxes” for additional information regarding suchadoption.

**Note 2            Investments**

The Company had$5.0 million in short-term investments at March 30, 2007 and December 29,2006.  Such investments were heldprimarily in corporate notes and government agency securities.  Gross and net unrealized gains and losses oninvestments were immaterial at March 30, 2007. Additionally, the Company had $325,000 of non-marketable equityinvestments at March 30, 2007 and December 29, 2006, valued at the lower ofcost or estimated fair value, which were included within other assets.

**Note 3            Long-TermReceivable**

At March 30, 2007, the Company carried $2.5 million in long-termaccounts receivable.  Of this amount,$2.3 million represents the discounted value of the deferral of one andone-half month’s revenue on an outsourcing contract which began in August2005.  This payment has been deferreduntil the current expiration date of the contract in December 2009.  The receivable was discounted using aninterest rate of 7% and the unamortized discount at March 30, 2007 was$478,000.

**Note 4            Goodwill andIntangible Assets**

Under SFAS 142,the Company no longer amortizes its goodwill and is required to complete anannual impairment testing which is performed during the fourth quarter of eachyear.  The Company believes that the accounting assumptions and estimatesrelated to the annual goodwill impairment testing are critical because thesecan change from period to period.  Various assumptions, such as discountrates, and comparable company analysis are used in performing thesevaluations.  The impairment test requiresthe Company to forecast future cash flows, which involves significantjudgment.   Accordingly, if expectations of future operating resultschange, or if there are changes to other assumptions, estimates of the fairvalue of reporting units could change significantly resulting in a goodwillimpairment charge, which could have a significant impact on the consolidatedfinancial statements.  The Company performed an impairment test on each ofits components of goodwill as of the fourth quarter of fiscal year 2006 anddetermined that none of its goodwill was impaired.  As of March 30, 2007, the Company had $17.8million of goodwill and $287,000 of amortizable intangible assets recorded onits balance sheet.

There were no changes in the net carrying amounts of goodwill for thethree months ended March 30, 2007.  Theamounts of goodwill are as follows (in thousands):
| ** **                       | ** ** | **Health  Delivery  Services** | ** ** | **Health  Delivery  Outsourcing** | ** ** | **Life  Sciences** | ** ** | **Software  Services** | ** ** | **Total**  | ** ** |
|----------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|--------------------|------------|------------------------|------------|------------|------------|
| Balance as of  December 29, 2006 |       | $                              | 3,225      |                              | $          | 5,193              |       | $                      | 1,481      |       | $          | 7,921 | ** ** | **$** | **17,820** | ** ** |
| Acquired                         |       | —                         |       | —                            |       | —             |       | —                 | ** ** | **—** | ** ** |
| Balance as of March 30,  2007    |       | $                              | 3,225      |                              | $          | 5,193              |       | $                      | 1,481      |       | $          | 7,921 | ** ** | **$** | **17,820** | ** ** |

 

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As of March 30, 2007, the Company had the following acquired intangibleassets (in thousands):
|                                  | ** ** | **Customer Related** | ** ** |
|----------------------------------|------------|---------------------------|------------|
| Balance as of  December 29, 2006 |       | $                         | 456        |   |
| Amortization                     |       | (169                      | )          |
| Balance as of March 30,  2007    |       | $                         | 287        |   |

 

The remaining$287,000 of intangible assets at March 30, 2007 is scheduled to be amortized infull during fiscal year 2007.

**Note 5            ComprehensiveIncome**

Comprehensive income, net of taxes, for the three months ended March30, 2007 and March 31, 2006, is as follows (in thousands):
|                                                | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **March 30, 2007**     | ** ** | **March 31, 2006** | ** ** |
| Net income                                     |       | $                                | 3,655      |   | $ | 4,522 |   |
|                                           |       |                             |       |   |   |
| Foreign currency  translation adjustment       |       | 30                               |       | 5 |   |
| Unrealized loss  on investments                |       | (1                               | )          | (6 | ) |
| Other  comprehensive income (loss), net of tax |       | 29                               |       | (1 | ) |
|                                           |       |                             |       |   |   |
| Comprehensive income                           |       | $                                | 3,684      |   | $ | 4,521 |   |

 

**Note 6            Disclosure ofSegment Information**

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

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

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

·                  LifeSciences - the delivery of consulting and systems integration services topharmaceutical and other life sciences clients;

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

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

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

Additionally, theCompany has four shared service centers that provide services to multiplebusiness segments.  These shared servicecenters include FCG India, FCG Vietnam, Integration Services, 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 operating income.  Certain selling and general andadministrative expenses (including corporate functions, occupancy relatedcosts, depreciation, professional development, recruiting, and marketing) aremanaged at the corporate level and allocated to each operating segment based oneither net revenues and/or actual usage. The Company does not manage or track most assets by segment.  As a result, interest and other charges arenot included in the tables below.

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The followingsegment information is for the three months ended March 30, 2007 and March 31,2006 (in thousands):

**For thethree months ended March 30, 2007:**
| **(in thousands)**                       | ** ** | **Health  Delivery  Services** | ** ** | **Health  Delivery  Outsourcing** | ** ** | **Life  Sciences** | ** ** | **Health  Plans** | ** ** | **Software  Services** | ** ** | **Software  Products** | ** ** | **Other** | ** ** | **Totals** | ** ** |
|-----------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|--------------------|------------|-------------------|------------|------------------------|------------|------------------------|------------|-----------|------------|------------|------------|
|                                          |       |                           |       |                              |       |               |       |              |       |                   |       |                   |       |      | ** ** | ** ** | ** ** |
| Revenues before reimbursements                |       | $                              | 14,606     |                              | $          | 28,288             |       | $                 | 8,690      |                   | $          | 8,301                  |       | $         | 6,545      |       | $          | 485 |   | $ | — | ** ** | **$** | **66,915** | ** ** |
| Reimbursements                                |       | 2,241                          |       | 70                                |       | 120                |       | 815               |       | 127                    |       | 1                      |       | —    | ** ** | **3,374**  | ** ** |
| Total revenues                                |       | 16,847                         |       | 28,358                            |       | 8,810              |       | 9,116             |       | 6,672                  |       | 486                    |       | —    | ** ** | **70,289** | ** ** |
| Cost of services before reimbursable expenses |       | 9,522                          |       | 25,138                            |       | 3,751              |       | 5,974             |       | 4,745                  |       | 604                    |       | (137      | )          | **49,597** | ** ** |
| Reimbursable expenses                         |       | 2,241                          |       | 70                                |       | 120                |       | 815               |       | 127                    |       | 1                      |       | —    | ** ** | **3,374**  | ** ** |
| Total cost of services                        |       | 11,763                         |       | 25,208                            |       | 3,871              |       | 6,789             |       | 4,872                  |       | 605                    |       | (137      | )          | **52,971** | ** ** |
| Gross profit                                  |       | 5,084                          |       | 3,150                             |       | 4,939              |       | 2,327             |       | 1,800                  |       | (119                   | )          | 137       | ** ** | **17,318** | ** ** |
| Selling expenses                              |       | 1,580                          |       | 356                               |       | 865                |       | 565               |       | 572                    |       | 181                    |       | (97       | )          | **4,022**  | ** ** |
| General & administrative  expenses        |       | 1,969                          |       | 1,984                             |       | 2,008              |       | 1,018             |       | 941                    |       | 213                    |       | 1,046     | ** ** | **9,179**  | ** ** |
| Income (loss) from operations                 |       | $                              | 1,535      |                              | $          | 810                |       | $                 | 2,066      |                   | $          | 744                    |       | $         | 287        |       | $          | (513 | ) | $ | (812 | ) | **$** | **4,117** | ** ** |

 

**For thethree months ended March 31, 2006:**
| **(in thousands)**                       | ** ** | **Health  Delivery  Services** | ** ** | **Health  Delivery  Outsourcing** | ** ** | **Life  Sciences** | ** ** | **Health  Plans** | ** ** | **Software  Services** | ** ** | **Software  Products** | ** ** | **Other** | ** ** | **Totals** | ** ** |
|-----------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|--------------------|------------|-------------------|------------|------------------------|------------|------------------------|------------|-----------|------------|------------|------------|
|                                          |       |                           |       |                              |       |               |       |              |       |                   |       |                   |       |      | ** ** | ** ** | ** ** |
| Revenues before reimbursements                |       | $                              | 16,534     |                              | $          | 27,433             |       | $                 | 7,747      |                   | $          | 6,823                  |       | $         | 6,559      |       | $          | 958 |   | $ | 632 | ** ** | **$** | **66,686** | ** ** |
| Reimbursements                                |       | 2,464                          |       | 37                                |       | 211                |       | 916               |       | 130                    |       | 13                     |       | 8         | ** ** | **3,779**  | ** ** |
| Total revenues                                |       | 18,998                         |       | 27,470                            |       | 7,958              |       | 7,739             |       | 6,689                  |       | 971                    |       | 640       | ** ** | **70,465** | ** ** |
| Cost of services before reimbursable expenses |       | 10,146                         |       | 24,046                            |       | 4,745              |       | 4,551             |       | 4,069                  |       | 812                    |       | 224       | ** ** | **48,593** | ** ** |
| Reimbursable expenses                         |       | 2,464                          |       | 37                                |       | 211                |       | 916               |       | 130                    |       | 13                     |       | 8         | ** ** | **3,779**  | ** ** |
| Total cost of services                        |       | 12,610                         |       | 24,083                            |       | 4,956              |       | 5,467             |       | 4,199                  |       | 825                    |       | 232       | ** ** | **52,372** | ** ** |
| Gross profit                                  |       | 6,388                          |       | 3,387                             |       | 3,002              |       | 2,272             |       | 2,490                  |       | 146                    |       | 408       | ** ** | **18,093** | ** ** |
| Selling expenses                              |       | 2,220                          |       | 162                               |       | 883                |       | 473               |       | 474                    |       | 118                    |       | 49        | ** ** | **4,379**  | ** ** |
| General & administrative expenses         |       | 2,420                          |       | 1,883                             |       | 2,161              |       | 1,103             |       | 794                    |       | 258                    |       | 556       | ** ** | **9,175**  | ** ** |
| Income  (loss) from operations                |       | $                              | 1,748      |                              | $          | 1,342              |       | $                 | (42        | )                      | $          | 696                    |       | $         | 1,222      |       | $          | (230 | ) | $ | (197 | ) | **$** | **4,539** | ** ** |

 

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

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**Note 7            Income Taxes**

The Company recorded a $1.3 million tax provision for the three monthsended March 30, 2007 versus a $340,000 tax provision for the three months endedMarch 31, 2006.

The 7% tax provision for the quarter ended March 31, 2006 was only forcurrent taxes payable for U.S. federal alternative minimum tax and certainstate and foreign income taxes, as the net operating loss carryforwards offsetmost of the federal and certain state tax liabilities.  Since these carryforwards have a fullvaluation allowance applied against them, their use reduces the income taxrate.

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

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

The Company recognizes interest related to uncertaintax positions as part of interest expense, and penalties as a component ofincome tax expense.  As of the first dayof fiscal year 2007, the Company had accrued interest and penalty ofapproximately $500,000 associated with its uncertain tax positions.  During the three months ended March 30, 2007,the Company recorded $50,000 of interest for uncertain tax positions withininterest expense.

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

**Note 8            Health PlansOutsourcing Contract**

In April 2006, the Company began a $12 million outsourcing contract inthe Health Plans segment.  This contractrequires the Company to complete a system implementation prior to beginning theoperations phase of the contract.  Sincethe fair value of the operations phase is difficult to objectively verify inorder to separately account for it under EITF 00-21, the Company is accountingfor the arrangement as a single outsourcing service arrangement.  The implementation phase of this contract isbeing accounted for as deferred cost, and all revenue from the implementationwill be recognized over the period of outsourcing operations.  As a result, the Company expects to receiveapproximately $7 million of cash which is being accounted for as a customeradvance prior to earning revenue on the contract, and the Company’s deferredcosts on the balance sheet are increasing accordingly.  As of March 30, 2007, the Company haddeferred $3.6 million of costs and $2.8 million of revenues under thiscontract.

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

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

**Overview**

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

We typicallybill for our services on an hourly or fixed-fee basis as specified by theagreement with a particular client.  Inour consulting and systems integration (“CSI”) businesses, we often bill ourservices on an hourly basis, by multiplying the amount of time expended on eachassignment by the project hourly rate for the staff members assigned to theengagement.  Fixed fees, includingoutsourcing fees, are established on a per-assignment or monthly basis and arebased on several factors such as the size, scope, complexity and duration of anassignment, the number of our employees required to complete the assignment,and the volume of transactions or interactions. Revenues are generally recognized related to the level of servicesperformed, the amount of cost incurred on the assignment versus the estimatedtotal cost to complete the assignment, or on a straight-line basis over theperiod of performance of service. Additionally, we have been licensing an increased amount of our softwareproducts, generally in conjunction with the customization and implementation ofsuch software products.  Revenues fromour software licensing and maintenance were approximately 4% of our net revenuesduring the first quarters of 2007 and 2006. We expect our software licensing and related implementation revenues tocontinue to grow incrementally in the near future.

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

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

Cost of servicesprimarily consists of the salaries, bonuses, and related benefits ofclient-serving staff, subcontractor expenses, and infrastructure costs relatedto services provided to clients and in our offshore shared service center.  Selling expenses primarily consist of thesalaries, benefits, travel, and other costs of our sales force, as well as marketingand market research expenses.  Generaland administrative expenses primarily consist of costs to support our businesssuch as non-billable travel, internal information systems and infrastructure,salaries and expenses for executive management, financial accounting andadministrative personnel, and legal and other professional services.  As staff related costs are relatively fixedin the short term, variations in our revenues and operating results in our CSIbusiness can occur as a result of variations in billing margins and utilizationrates of our billable associates.

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Our most significant expenses are our human resourceand related salary and benefit expenses. As of March 30, 2007, approximately 1,603 of our 2,696 employees arebillable consultants and software developers. Another 738 employees are part of our outsourcing business.  The salaries and benefits of such billablestaff and outsourcing related employees are recognized in our cost ofservices.  Most non-billable employeesalaries and benefits are recognized as a component of either selling orgeneral and administrative expenses. Approximately 13.2% of our workforce, or 355 employees, are classifiedas non-billable.  Our cost of services asa percentage of net revenues is directly related to several factors, including,but not limited to:

·                  Our staffutilization, which is the ratio of total billable hours to available hours in agiven period;

·                  The amount andtiming of cost incurred;

·                  Our ability tocontrol costs on our outsourcing projects;

·                  The billed rateon time and material contracts; and

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

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

In our CSIbusiness, we manage staff utilization by monitoring assignment requirements andtimetables, available and required skills, and available staff hours per weekand per month.   Differences in personnelutilization rates can result from variations in the amount of non-billed time,which has historically consisted of training time, vacation time, time lost toillness and inclement weather, and unassigned time.  Non-billed time also includes time devoted toother necessary and productive activities such as sales support andinterviewing prospective employees. Unassigned time results from differences in the timing of the completionof an existing assignment and the beginning of a new assignment.  In order to reduce and limit unassigned time,we actively manage personnel utilization by monitoring and projecting estimatedengagement start and completion dates and matching staff availability withcurrent and projected client requirements. The number of people staffed on an assignment will vary according to thesize, complexity, duration, and demands of the assignment.  Assignment terminations, completions, inclementweather, and scheduling delays may result in periods in which staff members arenot optimally utilized.  An unanticipatedtermination of a significant assignment or an overall lengthening of the salescycle could result in a higher than expected number of unassigned staff membersand could cause us to experience lower margins. In addition, entry into new market areas and the hiring of staff inadvance of client assignments have resulted and may continue to result inperiods of lower staff utilization.

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

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

**Results of Operations for theThree Months Ended March 30, 2007 and March 31, 2006**

*Revenues. *Our net revenues were $66.9 million for thequarter ended March 30, 2007, a slight increase of 0.3% from $66.7 million forthe quarter ended March 31, 2006.  Ourtotal revenues were $70.3 million for the quarter ended March 30, 2007, aslight decrease of 0.2% from $70.5 million for the quarter ended March 31,2006.  The consistent level of netrevenues was primarily due to increases in Health Plans, Life Sciences, andHealth Delivery Outsourcing, offset by decreases in Health Delivery Servicesand Software Products.  The Health Planssegment had the most significant increase in revenues compared to the quarterended March 31, 2006, $1.5 million, or 21.7%, primarily due to marketacceptance of our global delivery model by mid-size and large healthplans.  In Life Sciences, net revenuesincreased by $943,000, or 12.2%, primarily due to low revenue in the firstquarter of 2006 related to project completions during that quarter and theprevious quarter.

In Health Delivery Services, net revenues declined by $1.9 million, or11.7%, due to lower revenues from our consulting and implementationservices.  The lower revenues wereattributable to a slowdown in sales as we restructured our sales model in thisarea in an effort to improve our sales effectiveness.  As of April 2007, we are fully staffed withsalespeople in each of our sales regions in this segment.

One of our existing major outsourcing contracts, University ofPennsylvania Health System (UPHS), expired on March 31, 2007, and UPHS informedus in early April that the contract would not be renewed.  Under the terms of the contract, theengagement automatically converts to a six-month period of post-expirationtransition services.  We have begunworking with UPHS on a transition plan. The expiring contract accounted for $26.7 million of our revenuesin fiscal year 2006 and $7.7 million of our revenues in the first quarter of2007, of which $5.3 million and $1.1 million, respectively, were zero-margin,pass-through revenue to a major infrastructure subcontractor.  The future net income impact of the contractexpiration to us is uncertain at this time, and is dependent upon the level oftransition services that UPHS requires and the level of continuing FCGservices, if any, that UPHS decides to retain. As a result of this contract expiration, we expect our Health DeliveryOutsourcing revenues to decline significantly over the remainder of this year.

Revenues in our other business units are not expected to changesignificantly from current levels in the near future, with some modest growthexpected in Life Sciences and Health Plans.  Growth in Health Delivery Services and HealthDelivery Outsourcing is highly dependent on capturing market share throughsuccessfully restructuring our sales model and acceptance by the healthdelivery market of our global delivery model. We also have experienced, and expect to continue to experience, weaknessin Software Services revenues, as several larger clients have been acquired byother entities or reduced their scope of operations utilizing our services   The market for our services in this businessis extremely competitive and we are seeking new clients and new markets (i.e.,direct selling for our offshore centers into other countries) to attempt toreplace lost revenues.

*Cost of Services. *Cost of services before reimbursable expenseswas $49.6 million for the quarter ended March 30, 2007, an increase of 2.1%from $48.6 million for the quarter ended March 31, 2006.  The increase was primarily due to a $1.4million increase in costs in the Health Plans segment and a $1.1 millionincrease in costs in the Health Delivery Outsourcing segment, both directlyrelated to the

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respectiveincreases in revenues in those segments, and a $676,000 increase in SoftwareServices, where labor costs increased to meet a higher number of hours requiredto achieve the same level of revenue, due to the loss of higher margin projectsand their replacement with lower margin projects.  These increases are partially offset by a$1.0 million decrease in Life Sciences labor and subcontractor costs, and a$624,000 decrease in Health Delivery Services costs primarily related to costreduction to match the decline in revenues in that segment.

*Gross Profit. *Gross profit was $17.3 million, or 25.9% ofnet revenues, for the quarter ended March 30, 2007, a decrease of 4.3% from$18.1 million, or 27.1% of net revenues, for the quarter ended March 31, 2006.  This decrease was primarily due to $1.3million of reduced gross profit in the Health Delivery segment due to therevenue decrease in that segment, and $690,000 of reduced gross profit inSoftware Services due to lower margin projects. These decreases were partially offset by $1.9 million of higher grossmargin in Life Sciences due to higher revenues and higher margin projects.

We expect to see lower gross profit in Health Delivery Outsourcinglater this year when the UPHS contract winds down, as described above.

*Selling Expenses. *Selling expenses were $4.0 million for thequarter ended March 30, 2007, a decrease of 8.2% from $4.4 million for thequarter ended March 31, 2006.  Thisdecrease was primarily due to reductions in the sales force and in marketingexpenditures that occurred during the latter half of 2006.  Selling expenses as a percentage of netrevenues decreased to 6.0% for the quarter ended March 30, 2007 from 6.6% forthe quarter ended March 31, 2006 for the same reasons.  Selling expenses are expected to increasefrom current levels during 2007 as sales staff have been added, primarily inHealth Delivery Services, and an investment is made in the sales force as weseek to increase our revenues, which have not grown overall recently.

*General and Administrative Expenses. *General andadministrative expenses were consistent at $9.2 million for the quarters endedMarch 30, 2007 and March 31, 2006. General and administrative expenses as a percentage of net revenuesdecreased slightly to 13.7% for the quarter ended March 30, 2007 from 13.8% forthe quarter ended March 31, 2006.

*Interest Income, Net.** ***Interest income, net of interest expense, was$848,000 for the quarter ended March 30, 2007, an increase of 165.7% from$338,000 for the quarter ended March 31, 2006, primarily due to higher cash andinvestments balances, but also due to higher interest rates.  Interest income, net of interest expense, asa percentage of net revenues increased to 1.3% for the quarter ended March 30,2007 from 0.5% for the quarter ended March 31, 2006.

*Other Expense, Net*.  Other expense was negligiblefor the quarters ended March 30, 2007 and March 31, 2006.

*Income Taxes. *We recorded a $1.3 million tax provision forthe quarter ended March 30, 2007, compared to a $340,000 tax provision for thequarter ended March 31, 2006.  The 7% taxprovision for the quarter ended March 31, 2006 was only for current taxespayable for U.S. federal alternative minimum tax and certain state and foreignincome taxes, as our net operating loss carryforwards, which were fullyreserved, offset most of the federal and certain state tax liabilities.

Our estimated tax rate infiscal year 2007 of 26% has increased significantly from the rate experiencedin fiscal year 2006 as we expect to exhaust the loss carryforwards whichremain.  We expect that our tax provisionin 2008 and thereafter will return to levels consistent with statutory federaland state tax rates.  During this 2007transition, when our loss carryforwards are covering only a part of ourexpected pretax income, our estimated full year tax rate may be more volatilethan typical from quarter to quarter, as changes in our estimated level ofpretax income will significantly impact the tax rate.

18

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**Liquidity and Capital Resources**

At March 30, 2007, we had cash and investmentsavailable for sale of $69.7 million compared to $63.5 million at December 29,2006.  During the quarter ended March 30,2007, we generated cash flow from operations of $5.2 million which primarilyconsisted of $3.7 million of net income. Additionally, our cash flow benefited from $1.5 million of stock optionexercises.

Our days sales outstanding (DSO) of accountsreceivable (including unbilled receivables and customer advances) increased to31 days for the first quarter of 2007 from 28 days for the fourth quarter of2006.  The increased DSO was primarilydue to a slightly less aggressive collection effort than we undertook for theprior quarter.  We do not currentlyanticipate any significant changes in our DSO in the near future.  We also do not currently expect anysignificant cash flow changes related to the other elements of the workingcapital cycle such as accounts payable and accrued liabilities; however, we aresusceptible to ongoing routine fluctuations in these areas.

We used $547,000 of cash to purchase property andequipment, primarily information technology and related equipment, whileincurring approximately $1.6 million of depreciation and amortization.

Our cash flow in fiscal year 2007 is highly dependenton our ability to continue to be profitable. Generally, we expect any net profitability in fiscal year 2007 tocontribute positively to cash flow. Approximately $12 million of any future pretax income from the beginningof fiscal year 2007 will also be shielded by tax loss carryforwards and for themost part will not require a tax provision in the income statement.  We expect that both our effective tax rateand cash tax payment in fiscal year 2007 will increase significantly from the7.5% of pretax income level experienced in fiscal year 2006 as we exhaust thesecarryforwards, and that our long-term tax provision will return to levelsconsistent with full federal and state tax rates.

As of March 30, 2007, thefollowing table summarizes our contractual commitments (in thousands):
| ** **                          | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligation**     | ** ** | **Less than 1  Year**           | ** ** | **1 - 3  Years** | ** ** | **3 - 5  Years** | ** ** | **More than  5 Years** | ** ** | **Total** | ** ** |
| Operating  leases, net of subleases |       | $                                         | 3,812      |   | $ | 4,242 |   | $ | 3,022 |   | $ | 21 |   | **$** | **11,097** |   |
| Purchase  obligations               |       | 329                                       |       | 247 |   | — |   | — | ** ** | **576** | ** ** |
| **Total**                           | ** ** | **$**                                     | **4,141**  | ** ** | **$** | **4,489** | ** ** | **$** | **3,022** | ** ** | **$** | **21** | ** ** | **$** | **11,673** | ** ** |

 

Additionally, as of March 30, 2007, we had $1.9million of current liabilities in the consolidated balance sheet forunrecognized tax positions. However, the periods of cash settlement with therespective tax authorities cannot be reasonably estimated.

Management believes that our existing cash and cashequivalents, together with funds generated from operations, will be sufficientto meet operating requirements for at least the next twelve months.  Our cash and cash equivalents are availablefor capital expenditures (which are projected at approximately $6 million for2007), upfront setup costs and deferred fees on new contracts, strategicinvestments, mergers and acquisitions, and other potential large-scale cashneeds that may arise.  In addition, wemay consider incurring indebtedness or issuing debt or equity securities in thefuture to fund potential acquisitions or investments, or for general corporatepurposes.

**Off-Balance Sheet Arrangements**

None.

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**Critical Accounting Policies andEstimates**

The foregoingdiscussion and analysis of our financial condition and results of operations isbased upon our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the UnitedStates.  The preparation of thesefinancial statements requires us to make estimates and assumptions that affectthe reported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities.  On an ongoing basis, we evaluate ourestimates, including those related to revenue recognition, cost to completeclient engagements, valuation of goodwill and long-lived and intangible assets,accrued liabilities, income taxes, restructuring costs, idle facilities,litigation and disputes, and the allowance for doubtful accounts.  We base our estimates on historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying value of assets and liabilities that are notreadily apparent from other sources.  Ouractual results may differ from our estimates and we do not assume anyobligation to update any forward-looking information.

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

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

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

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

Revenuesrecognized on fixed price consulting and system integration contracts aresubject to revisions as the contract progresses to completion.  If we do not accurately estimate theresources required or the scope of the work to be performed, do not completeour projects within the planned periods of time, or do not satisfy ourobligations under the contracts, then profit may be significantly andnegatively affected.  Revisions in 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 which theloss first becomes known.  At March 30,2007, we did not identify any contracts that required an accrual forlosses.  Some contracts includeincentives for achieving either schedule targets, cost targets, or otherdefined goals.  Revenues from incentivetype arrangements are recognized when it is probable they will be earned.

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

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

On certaincontracts, or elements of contracts, costs are incurred subsequent to thesigning of the contract, but prior to the rendering of service and associatedrecognition of revenue.  Where such costsare incurred and realization of those costs is either paid for upfront orguaranteed by the contract, those costs are deferred and later expensed overthe period of recognition of the related revenue.  At March 30, 2007 and December 29, 2006, wehad deferred $6.5 million and $5.6 million, respectively, of unamortized costswhich are included in non-current assets.

In April 2006, webegan a $12 million outsourcing contract in the Health Plans segment.  This contract requires us to complete asystem implementation prior to beginning the operations phase of thecontract.  Since the fair value of theoperations phase is difficult to objectively verify in order to separatelyaccount for it under EITF 00-21, we are accounting for the arrangement as asingle outsourcing service arrangement. The implementation phase of this contract is being accounted for asdeferred cost, and all revenue from the implementation will be recognized overthe period of outsourcing operations.  Asa result, we expect to receive approximately $7 million of cash which is beingaccounted for as a customer advance prior to earning revenue on the contract,and our deferred costs on the balance sheet are increasing accordingly.  As of March 30, 2007, we had deferred $3.6million of costs and $2.8 million of revenues under this contract.

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

Software licenseand maintenance revenues comprised 4% of our net revenues for the quarter endedMarch 30, 2007.  Additionally, werealized additional revenues from the implementation of our software.  We recognize software revenues in accordancewith the provisions of the American Institute of Certified Public AccountantsStatement of Position (“SOP”) 97-2, “Software Revenue Recognition”, as amendedby SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, WithRespect to Certain Transactions”, and in accordance with the Securities andExchange Commission Staff Accounting

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Bulletin (“SAB”)No. 104, “Revenue Recognition”. We license software under non-cancelablelicense agreements and provide related professional services, includingconsulting, training, and implementation services, as well as ongoing customersupport and maintenance.  Most of oursoftware 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 licenseagreement has been signed, there are no uncertainties surrounding productacceptance, the fees are fixed or determinable and collection of the relatedreceivable is considered probable. We do not generally offer rights of returnor acceptance clauses to our customers. In situations where we do providerights of return or acceptance clauses, revenue is deferred until the clauseexpires. Typically, our software license fees are due within a twelve-monthperiod from the date of shipment. If the fee due from the customer is not fixedor determinable, including payment terms greater than twelve months fromshipment, revenue is recognized as payments become due and all other conditionsfor revenue recognition have been satisfied. In software arrangements thatinclude rights to multiple software products, specified upgrades, maintenanceor services, we allocate the total arrangement fee among the deliverables usingthe fair value of each of the deliverables determined using vendor-specificobjective evidence. Vendor-specific objective evidence of fair value isdetermined using the price charged when that element is sold separately. Insoftware arrangements in which we have fair value of all undelivered elementsbut not of a delivered element, we use the residual method to record revenue.Under the residual method, the fair value of the undelivered elements isdeferred and the remaining portion of the arrangement fee is allocated to thedelivered element(s) and is recognized as revenue. In software arrangements inwhich we do not have vendor-specific objective evidence of fair value of allundelivered elements, revenue is deferred until fair value is determined or allelements have been delivered, or is spread over the term of an arrangement as asubscription.

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

At March 30, 2007and December 29, 2006, we had unbilled receivables of $15.6 million and $12.3million, respectively, which represent revenues recognized for servicesperformed that were not billed at the balance sheet date.  The majority of these amounts are billed inthe subsequent month; however, certain unbillable amounts arising fromcontracts occur when revenues recognized exceed allowable billings inaccordance with the contractual agreements. Such unbillable amounts most often become billable upon reaching certainproject milestones stipulated per the contract, or in accordance with thepercentage of completion methodology.  Asof March 30, 2007, we had unbillable amounts of approximately $3.9 million,which were generally expected to be billed within one year.

We had a long-termreceivable at March 30, 2007 and December 29, 2006 of $2.5 million and $2.4million.  Of the long-term receivable of$2.5 million at March 30, 2007, $1.3 million was created in August 2005 throughthe deferral until 2009 of the first month of fees of a new outsourcingcontract.  In January 2006, an additionalamount of approximately $800,000 related to this contract was deferred until2009.  Both deferrals were in accordancewith the terms of the contract executed with this client in July 2005.  Imputed interest income at a rate of 7.0% of$39,000 was accrued during the first quarter of 2007 on this receivable.  Unamortized discount of $478,000 remained atMarch 30, 2007.

22

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

***Allowance forDoubtful Accounts***

We maintain an allowance for doubtful accounts forestimated losses resulting from the inability of our clients to make requiredpayments. This allowance is based on the amount and aging of our accountsreceivable, creditworthiness of our clients, historical collection experience,current economic trends, and changes in client payment patterns.  If the financial condition of our clients wasto deteriorate, resulting in an impairment of their ability to make payments,additional allowances would be required. Our bad debt losses have generally been moderate due to the size andquality of our customers; however, we have recently incurred some bad debtlosses in our growing Software Services segment due to the lower credit qualityof our clients in that segment.  Shouldone of our larger clients unexpectedly become unable to pay us, our allowancewould have to increase significantly. Our allowance for doubtful accounts at March 30, 2007 and December 29,2006 included a specific reserve of approximately $900,000 for identifiedcustomer balances that are uncertain of collection, primarily two accounts inour Software Services segment, and a general reserve of approximately $750,000for unknown losses.

***Deferred Income Taxes***

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

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

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

This valuation allowance does not, in any way, limitour ability to use our deferred tax assets, primarily loss carryforwards, tooffset taxable income in the future.  Wewere not subject to federal taxation, other than the Alternative Minimum Tax,during 2006, due to the use of net operating loss carryforwards.  Approximately $12 million of any futurepretax income from the beginning of fiscal year 2007 will also be shielded byloss carryforwards and not require a significant tax provision in the incomestatement.  Additionally, if at somepoint in the future, the realization of any of our other deferred tax assets isconsidered more likely than not based on successive years of generating taxableincome and

23

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other factors, we will reverse all or a portion of anyexisting valuation allowance at that time. Our valuation allowance for deferred income taxes has been aparticularly volatile estimate over the past several years, as our level ofincome and loss has fluctuated, requiring us to reassess the likelihood ofrealization of our tax assets.

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

***Goodwill and Intangible Assets***

Under SFAS 142, weno longer amortize our goodwill and are required to complete an annualimpairment testing which we perform during the fourth quarter of eachyear.  We believe that the accounting assumptions and estimates related tothe annual goodwill impairment testing are critical because these can changefrom period to period.  We use various assumptions, such as discountrates, and comparable company analysis in performing these valuations.  The impairment test requires us to forecastour future cash flows, which involves 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.  We performed an impairment test on each of ourcomponents of goodwill as of the fourth quarter of fiscal year 2006 anddetermined that none of our goodwill was impaired.  As of March 30, 2007, we have $17.8 millionof goodwill and $287,000 of intangible assets recorded on our balance sheet (seeNote 4 of the Notes to Consolidated Financial Statements included in thisreport).

***Recent Accounting Pronouncements***

In September 2006,the Securities and Exchange Commission issued Staff Accounting Bulletin 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements” (see Recent Accounting Pronouncements inNote 1 of the financial statements in Item 1 of this report).

InSeptember 2006 and February 2007, respectively, the FASB issued SFAS No. 157,“Fair Value Measurements” and SFAS No. 159, “The Fair Value Option of FinancialAssets and Financial Liabilities (see Recent Accounting Pronouncements in Note1 of the financial statements in Item 1 of this report).

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

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

Our financial instrumentsinclude cash and cash equivalents, short-term investments, accounts receivable,unbilled receivables, and accounts payable. Only the cash and cash equivalents and short-term investments whichtotaled $69.7 million at March 30, 2007 present us with market risk exposureresulting 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 $697,000.  Our objectivein maintaining these investments is the flexibility obtained in having cashavailable for payment of accrued liabilities and acquisitions.

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

 We maintain disclosure controls and proceduresthat are designed to ensure that information required to be disclosed in ourExchange Act reports is recorded, processed, summarized, and reported withinthe time periods specified in the Securities and Exchange Commission’s rulesand forms, and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow for timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, management isrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.  Ourdisclosure controls and procedures are designed to provide a reasonable levelof assurance of reaching our desired disclosure control objectives.

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

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

Other than as describedabove, there has been no change in our internal controls over financialreporting during our most recent fiscal quarter that, expect as indicated inthe paragraph below, has materially affected, or is reasonably likely tomaterially affect, our internal controls over financial reporting.

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# **Part II.  Other Information**

## **Item 1. Legal Proceedings**

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

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

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

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

Repurchase of Securities
| **Period**                                            | ** ** | **Total number of  shares  purchased** | ** ** | **Average price  paid per share** | ** ** | **Total shares purchased  as part of publicly  announced programs** | ** ** | **Maximum number of  shares that may yet  be purchased under  the program** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| Month #1  (December 30, 2006 – January 26, 2007) |       | 0                                                |       | $                                                | 0.00       |                                                                                              | N/A        |                                                                                                                | N/A        |   |
| Month #2  (January 27, 2007 – February 23, 2007) |       | 0                                                |       | $                                                | 0.00       |                                                                                              | N/A        |                                                                                                                | N/A        |   |
| Month #3  (February 24, 2007 – March 30, 2007)   |       | 2,290                                            |       | $                                                | 9.23       |                                                                                              | N/A        |                                                                                                                | N/A        |   |
| **Total**                                             | ** ** | **2,290**                                        | ** ** | **$**                                            | **9.23**   | ** **                                                                                        | **N/A**    | ** **                                                                                                          | **N/A**    | ** ** |

 

On March 16, 2007,we repurchased a total of 2,290 shares of common stock from one of ournon-Section 16 officer vice presidents in a private transaction, for a totalpurchase price of $21,137.  All shareswere purchased at the closing price of our common stock on Nasdaq NationalMarket on the date of purchase, or $9.23 per share.  Of the total purchase price, $19,606 of such amountwas applied to an outstanding loan that such vice president had with us.  The remaining amount of the purchase pricepaid to the applicable vice president was intended to cover the individual’sestimated capital gains tax on the sale. The loan was made in connection with restricted stock purchaseagreements between FCG and this vice president that were entered into prior toDecember 2000, when we eliminated a requirement that our vice presidentspurchase and hold common stock of FCG.

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

None.

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

None.

## **Item 5. Other Information**

None.

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## **Item 6. Exhibits**

| Item     | ** ** | **Description**                                                              |
|----------|------------|------------------------------------------------------------------------------|
| 3.1 (1)  |       | Certificate of  Incorporation of the Company                                 |
| 3.2 (2)  |       | Certificate of  Designation of Series A Junior Participating Preferred Stock |
| 3.3 (3)  |       | Bylaws of the  Company                                                       |
| 4.1 (4)  |       | Specimen Common  Stock Certificate                                           |
| 11.1 (5) |       | Statement of  computation of per share earnings                              |
| 31.1     |       | 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)    |   | Incorporated by 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)    |   | Incorporated by reference to Exhibit 99.1 to FCG’s  Current Report on Form 8-K dated December 9, 1999.                                                                |
|   |   |                                                                                                                                                                       |
| (3)    |   | Incorporated by reference to Exhibit 3.3 to FCG’s  Form S-1.                                                                                                          |
|   |   |                                                                                                                                                                       |
| (4)    |   | Incorporated by reference to Exhibit 4.1 to FCG’s  Form S-1.                                                                                                          |
|   |   |                                                                                                                                                                       |
| (5)    |   | See Note 1 of Notes to Consolidated Financial  Statements, “Basic and Diluted Net Income Per Share.”                                                             |

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# **Signatures**

Pursuant to therequirements of the Securities and Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                    | FIRST CONSULTING  GROUP, INC.      |
|--------------------|------------------------------------|
|               |                               |
|               |                               |
| Date: May 9,  2007 | /s/LARRY R.  FERGUSON              |   |
|               | Larry R.  Ferguson                 |
|               | Chief Executive  Officer           |
|               |                               |
|               |                               |
| Date: May 9,  2007 | /s/THOMAS A  WATFORD               |   |
|               | Thomas A.  Watford                 |
|               | Chief Operating  Officer and Chief |
|               | Financial  Officer                 |

 

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**Exhibit Index**
| Item     | ** ** | **Description**                                                              |
|----------|------------|------------------------------------------------------------------------------|
| 3.1 (1)  |       | Certificate of Incorporation of the Company                                  |
| 3.2 (2)  |       | Certificate of Designation of Series A Junior  Participating Preferred Stock |
| 3.3 (3)  |       | Bylaws of the Company                                                        |
| 4.1 (4)  |       | Specimen Common Stock Certificate                                            |
| 11.1 (5) |       | Statement of computation of per share earnings                               |
| 31.1     |       | 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)    |   | Incorporated by 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)    |   | Incorporated by reference to Exhibit 99.1 to FCG’s  Current Report on Form 8-K dated December 9, 1999.                                                                |
|   |   |                                                                                                                                                                       |
| (3)    |   | Incorporated by reference to Exhibit 3.3 to FCG’s  Form S-1.                                                                                                          |
|   |   |                                                                                                                                                                       |
| (4)    |   | Incorporated by reference to Exhibit 4.1 to FCG’s  Form S-1.                                                                                                          |
|   |   |                                                                                                                                                                       |
| (5)    |   | See Note 1 of  Notes to Consolidated Financial Statements, “Basic and Diluted Net Income Per  Share.”                                                            |

 

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