form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
_____________________

FORM 10–Q

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

OR

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

Commission file number: 000-50976

Huron Consulting Group Inc.
(Exact name of registrant as specified in its charter)

Delaware
 
01-0666114
(State or other jurisdiction
 
(IRS Employer
of incorporation or organization)
 
Identification Number)

550 West Van Buren Street
Chicago, Illinois
60607
(Address of principal executive offices)
(Zip Code)

(312) 583-8700
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  x                      No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x                                                 Accelerated filer  o                                                   Non-accelerated filer  o                                                  Smaller reporting company  o

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

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

As of July 29, 2008, approximately 20,749,965 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

 
 

 

HURON CONSULTING GROUP INC.

INDEX

         
Page
Part I – Financial Information
 
       
 
Item 1.
Consolidated Financial Statements
 
   
Consolidated Balance Sheets                                                                                                    
1
   
Consolidated Statements of Income                                                                                                    
2
   
Consolidated Statement of Stockholders’ Equity                                                                                                    
3
   
Consolidated Statements of Cash Flows                                                                                                    
4
   
Notes to Consolidated Financial Statements                                                                                                    
5 – 14
       
 
Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations                                                                                                       
15 – 30
       
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk                                                                                                       
30
       
 
Item 4.
Controls and Procedures                                                                                                       
31
       
Part II – Other Information
 
       
 
Item 1.
Legal Proceedings                                                                                                       
31
       
 
Item 1A.
Risk Factors                                                                                                       
31
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                       
32
       
 
Item 3.
Defaults Upon Senior Securities                                                                                                       
32
       
 
Item 4.
Submission of Matters to a Vote of Security Holders                                                                                                       
32
       
 
Item 5.
Other Information                                                                                                       
32
       
 
Item 6.
Exhibits                                                                                                       
33
       
Signature                                                                                                                            
34

 
 

 

PART I ¾ FINANCIAL INFORMATION
ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

HURON CONSULTING GROUP INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)

 
   
June 30,
2008
   
December 31,
2007
 
Assets
           
Current assets:
           
Cash and cash equivalents                                                                                           
  $ 14,335     $ 2,993  
Receivables from clients, net                                                                                           
    90,198       86,867  
Unbilled services, net                                                                                           
    43,255       28,245  
Income tax receivable                                                                                           
    7,636       13,492  
Deferred income taxes                                                                                           
    13,960       13,680  
Prepaid expenses and other current assets                                                                                           
    13,298       10,435  
Total current assets                                                                                        
    182,682       155,712  
Property and equipment, net                                                                                             
    44,378       38,147  
Deferred income taxes                                                                                             
    2,662       3,628  
Other non-current assets                                                                                             
    12,876       8,737  
Intangible assets, net                                                                                             
    10,519       13,936  
Goodwill                                                                                             
    246,386       223,053  
Total assets                                                                                             
  $ 499,503     $ 443,213  
                 
Liabilities and stockholders’ equity
               
Current liabilities:
               
Accounts payable                                                                                           
  $ 8,138     $ 5,823  
Accrued expenses                                                                                           
    16,206       17,748  
Accrued payroll and related benefits                                                                                           
    29,490       58,279  
Accrued consideration for business acquisitions                                                                                           
          32,422  
Income tax payable                                                                                           
    2,843       1,342  
Deferred revenues                                                                                           
    7,377       5,278  
Note payable and current portion of capital lease obligations
    23,246       1,309  
Total current liabilities                                                                                        
    87,300       122,201  
Non-current liabilities:
               
Deferred compensation and other liabilities                                                                                           
    5,233       3,795  
Capital lease obligations, net of current portion                                                                                           
    127       234  
Bank borrowings                                                                                           
    179,500       123,500  
Deferred lease incentives                                                                                           
    9,046       9,699  
Total non-current liabilities                                                                                        
    193,906       137,228  
Commitments and contingencies                                                                                             
           
Stockholders’ equity
               
Common stock; $0.01 par value; 500,000,000 shares authorized; 19,553,211 and 19,279,176 shares issued at June 30, 2008 and
   December 31, 2007, respectively
    185       182  
Treasury stock, at cost, 328,428 and 589,755 shares at June 30, 2008 and December 31, 2007, respectively
    (18,297 )     (20,703 )
Additional paid-in capital                                                                                             
    128,128       116,148  
Retained earnings                                                                                             
    108,123       88,101  
Accumulated other comprehensive income                                                                                             
    158       56  
Total stockholders’ equity                                                                                           
    218,297       183,784  
Total liabilities and stockholders’ equity                                                                                             
  $ 499,503     $ 443,213  
 

 
The accompanying notes are an integral part of the consolidated financial statements.

 
- 1 -

 

 
HURON CONSULTING GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)

 

   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2008
   
2007
   
2008
   
2007
 
Revenues and reimbursable expenses:
                       
Revenues                                                                        
  $ 143,408     $ 118,266     $ 282,802     $ 234,275  
Reimbursable expenses                                                                        
    12,565       10,910       24,178       20,945  
Total revenues and reimbursable expenses
    155,973       129,176       306,980       255,220  
Direct costs and reimbursable expenses (exclusive of depreciation and amortization shown in 
   operating expenses):
                               
Direct costs                                                                        
    85,991       66,508       169,435       133,411  
Intangible assets amortization                                                                        
    24       2,304       48       4,544  
Reimbursable expenses                                                                        
    12,578       10,814       24,188       20,931  
Total direct costs and reimbursable expenses
    98,593       79,626       193,671       158,886  
Operating expenses:
                               
Selling, general and administrative                                                                        
    31,780       25,606       61,942       49,433  
Depreciation and amortization                                                                        
    5,370       4,177       10,508       8,219  
Total operating expenses                                                                      
    37,150       29,783       72,450       57,652  
Operating income                                                                        
    20,230       19,767       40,859       38,682  
Other income (expense):
                               
Interest income (expense), net                                                                        
    (2,294 )     (1,825 )     (4,127 )     (3,250 )
Other income (expense)                                                                        
    (35 )     95       (329 )     125  
Total other expense                                                                      
    (2,329 )     (1,730 )     (4,456 )     (3,125 )
Income before provision for income taxes                                                                        
    17,901       18,037       36,403       35,557  
Provision for income taxes                                                                        
    8,092       7,936       16,381       15,645  
Net income                                                                        
  $ 9,809     $ 10,101     $ 20,022     $ 19,912  
                                 
Earnings per share:
                               
Basic                                                                      
  $ 0.56     $ 0.60     $ 1.15     $ 1.19  
Diluted                                                                      
  $ 0.54     $ 0.56     $ 1.10     $ 1.11  
                                 
Weighted average shares used in calculating earnings per share:
                               
Basic                                                                      
    17,558       16,842       17,465       16,784  
Diluted                                                                      
    18,178       17,993       18,197       17,881  
                                 
 
 

The accompanying notes are an integral part of the consolidated financial statements.

 
- 2 -

 

HURON CONSULTING GROUP INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
(Unaudited)
 

   
Common Stock
                               
   
Shares
   
Amount
   
Treasury
Stock
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Accumulated Other Compre-hensive
Income
   
Stockholders’ Equity
 
Balance at December 31, 2007
    18,244,073     $ 182     $ (20,703 )   $ 116,148     $ 88,101     $ 56     $ 183,784  
Comprehensive income:
                                                       
Net income                                    
                            20,022             20,022  
Foreign currency translation
adjustment                                 
                                  102       102  
Total comprehensive income
                                                    20,124  
Issuance of common stock in
connection with:
                                                       
Restricted stock awards,
net of cancellations          
    157,331       2       8,150       (8,152 )                  
Exercise of stock options
    131,010       1             180                   181  
Share-based compensation
                      13,568                   13,568  
Shares redeemed for employee
tax withholdings                       
                (5,744 )                       (5,744 )
Income tax benefit on share-
based compensation                    
                      6,384                   6,384  
Balance at June 30, 2008
    18,532,414     $ 185     $ (18,297 )   $ 128,128     $ 108,123     $ 158     $ 218,297  


 
The accompanying notes are an integral part of the consolidated financial statements.

 
- 3 -

 
 
HURON CONSULTING GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

   
Six months ended
June 30,
 
   
2008
   
2007
 
Cash flows from operating activities:
           
Net income                                                                                                          
  $ 20,022     $ 19,912  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization                                                                                                       
    10,556       12,763  
Deferred income taxes                                                                                                       
    687       (7,171 )
Share-based compensation                                                                                                       
    13,568       9,051  
Allowances for doubtful accounts and unbilled services                                                                                                       
    1,172       4,219  
Changes in operating assets and liabilities, net of businesses acquired:
               
Increase in receivables from clients                                                                                                     
    (1,647 )     (19,623 )
Increase in unbilled services                                                                                                     
    (17,866 )     (12,741 )
Decrease in income tax receivable / payable, net                                                                                                     
    7,356       1,987  
Increase in other assets                                                                                                     
    (5,755 )     (8,572 )
Increase in accounts payable and accrued liabilities                                                                                                     
    3,357       3,880  
Decrease in accrued payroll and related benefits                                                                                                     
    (28,789 )     (7,324 )
Increase (decrease) in deferred revenues                                                                                                     
    2,099       (1,599 )
Net cash provided by (used in) operating activities                                                                                                   
    4,760       (5,218 )
                 
Cash flows from investing activities:
               
Purchases of property and equipment, net                                                                                                          
    (13,324 )     (8,094 )
Net investment in life insurance policies                                                                                                          
    (1,249 )     (1,641 )
Purchases of businesses, net of cash acquired                                                                                                          
    (34,554 )     (98,345 )
Net cash used in investing activities                                                                                                   
    (49,127 )     (108,080 )
                 
Cash flows from financing activities:
               
Proceeds from exercise of stock options                                                                                                          
    181       405  
Shares redeemed for employee tax withholdings                                                                                                          
    (5,744 )     (1,894 )
Tax benefit from share-based compensation                                                                                                          
    6,384       3,866  
Proceeds from borrowings under line of credit                                                                                                          
    173,500       184,500  
Repayments on line of credit                                                                                                          
    (117,500 )     (85,500 )
Principal payment of note payable and capital lease obligations                                                                                                          
    (1,214 )     (1,141 )
Net cash provided by financing activities                                                                                                   
    55,607       100,236  
                 
Effect of exchange rate changes on cash                                                                                                          
    102       (73 )
                 
Net increase (decrease) in cash and cash equivalents                                                                                                          
    11,342       (13,135 )
Cash and cash equivalents at beginning of the period                                                                                                          
    2,993       16,572  
Cash and cash equivalents at end of the period                                                                                                          
  $ 14,335     $ 3,437  
                 
Supplemental disclosure of cash flow information:
               
Non-cash investing activity:
               
Issuance of note payable for purchase of a business                                                                                                       
  $ 23,000     $  
                 






The accompanying notes are an integral part of the consolidated financial statements.

 
- 4 -

 
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands, except per share amounts)

1. Description of Business

Huron Consulting Group Inc. was formed in March 2002 and commenced operations in May 2002.  Huron Consulting Group Inc., together with its 100% owned operating subsidiaries (collectively, the “Company”), is an independent provider of financial and operational consulting services, whose clients include Fortune 500 companies, medium-sized businesses, leading academic institutions, healthcare organizations, and the law firms that represent these various organizations.

2. Basis of Presentation

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these financial statements reflect all adjustments of a normal, recurring nature necessary for the fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”). These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2007 included in the Company’s Annual Report on Form 10-K and the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2008. Certain amounts reported in the previous year have been reclassified to conform to the 2008 presentation. The Company’s results for any interim period are not necessarily indicative of results for a full year or any other interim period.

3.  New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements in financial statements, but standardizes its definition and guidance in GAAP. Thus, for some entities, the application of this statement may change prior practice. The Company adopted SFAS No. 157 effective beginning on January 1, 2008 for financial assets and financial liabilities, which did not have any impact on the Company’s financial statements. In February 2008, the FASB issued FASB Staff Position FAS 157-2, “Effective Date of FASB Statement No. 157,” which delayed by one year the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company will adopt SFAS No. 157 for its nonfinancial assets and nonfinancial liabilities, such as goodwill and intangible assets, effective January 1, 2009, which is not expected to have a material impact on the Company’s future financial position, results of operations, earnings per share, or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of this statement is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company adopted SFAS No. 159 effective beginning on January 1, 2008. The adoption of this statement did not have any impact on the Company’s financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,” (“SFAS No. 141R”). SFAS No. 141R was issued to improve the relevance, representational faithfulness, and comparability of information in financial statements about a business combination and its effects. SFAS No. 141R will be effective for the Company beginning on January 1, 2009 and will apply prospectively to business combinations that the Company completes on or after that date. This statement retains the acquisition method of accounting for business combinations, but requires a number of changes. The changes that may have the most significant impact to the Company include: contingent consideration, such as earn-outs, will be recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value will be recognized in earnings until settled; acquisition-related transaction and restructuring costs will be expensed as incurred; previously-issued financial information will be revised for subsequent adjustments made to finalize the purchase price accounting; reversals of valuation allowances related to acquired deferred tax assets and changes to acquired income tax uncertainties will be

 
- 5 -

 
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Tabular amounts in thousands, except per share amounts)

recognized in earnings, except in certain situations.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.” SFAS No. 160 was issued to improve the relevance, comparability, and transparency of financial information provided in financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 will be effective for the Company beginning on January 1, 2009 and will apply prospectively, except for the presentation and disclosure requirements, which will apply retrospectively. The Company is currently evaluating the impact that the adoption of this statement may have on its future financial position, results of operations, earnings per share, and cash flows.

4. Business Combinations

Acquisition of Stockamp & Associates, Inc. (Subsequent Event)

On July 8, 2008, the Company acquired Stockamp & Associates, Inc., (“Stockamp”), a management consulting firm specializing in helping high-performing hospitals and health systems optimize their financial and operational performance. With the acquisition of Stockamp, the Company will expand its presence in the hospital consulting market and will be better positioned to serve multiple segments of the healthcare industry, including major health systems, academic medical centers and community hospitals. This acquisition was consummated on July 8, 2008 and the results of operations of Stockamp will be included within the Health and Education Consulting segment beginning on that date.

The initial purchase price paid at closing of approximately $218.5 million consisted of $168.5 million paid in cash and $50.0 million paid through the issuance of 1,100,740 shares of the Company’s common stock.  Of the 1,100,740 shares of common stock issued, 330,222 shares with an aggregate value of $15.0 million were deposited into escrow for a period of one year, beginning on July 8, 2008, to secure certain indemnification obligations of Stockamp and its shareholders.  The cash portion of the initial purchase price was financed with borrowings under the Company’s credit agreement as described in note “10. Subsequent Events.”

The purchase agreement provides for the following potential payments after the closing date:

1.  
A payment based on the net working capital of Stockamp as of the closing date, which will be recorded as an adjustment to the initial purchase price.

2.  
On the date that is six months and one day after the closing date (the “Contingent Payment Date”), the Company will pay Stockamp (in cash, shares of common stock, or any combination of cash and common stock at the election of the Company) the amount, if any, equal to $35 million less the value of the common stock issued on the closing date, based on 95% of the average daily closing price per share of common stock for the ten consecutive trading days prior to the Contingent Payment Date. No payment will be made if the common stock so valued equals or exceeds $35.0 million on the Contingent Payment Date. Any additional payment resulting from this price protection will not change the purchase consideration.

3.  
When the shares of common stock are released to Stockamp (the “Contingent Escrow Payment Date”), the Company will pay Stockamp (in cash, shares of common stock, or any combination of cash and common stock at the election of the Company) the amount, if any, equal to $15.0 million (or such pro rata portion thereof, to the extent fewer than all shares are being released) less the value of the common stock released from escrow based on 95% of the average daily closing price per share of common stock for the ten consecutive trading days prior to the Contingent Escrow Payment Date. No payment will be made if the common stock so valued equals or exceeds $15 million on the Contingent Escrow Payment Date (or the applicable pro rata portion thereof). Any additional payment resulting from this price protection will not change the purchase consideration.

4.  
For the period beginning on the closing date and ending on December 31, 2011, additional purchase consideration may be payable if specific performance targets are met. Such amounts will be recorded as additional purchase consideration and an adjustment to goodwill.

 
- 6 -

 
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Tabular amounts in thousands, except per share amounts)
 
Based on a preliminary valuation that is subject to refinement, the Company estimates the purchase price allocation as follows: approximately $5.0 million of current assets, net of current liabilities, approximately $2.0 million of property and equipment, approximately $32.0 million of identifiable intangible assets, and approximately $179.5 million of goodwill. The Company intends to deduct the goodwill for income tax purposes.

Acquisition of Callaway Partners, LLC
In July 2007, the Company acquired Callaway Partners, LLC (“Callaway”), a professional services firm that specializes in finance and accounting projects, financial reporting, internal audit and controls and corporate tax solutions. With Callaway’s extensive senior consultant and project management skills, along with its variable, on-demand workforce, the Company is better positioned to assist clients with their accounting and corporate compliance challenges. This acquisition was consummated on July 29, 2007 and the results of operations of Callaway have been included within the Company’s Financial Consulting segment since that date.

The aggregate purchase price of this acquisition was approximately $88.4 million, consisting of $58.5 million in cash paid at closing, $1.5 million in cash paid upon the collection of receivables acquired, $0.6 million of transaction costs, a $4.8 million working capital adjustment, and $23.0 million paid in the form of a note payable relating to the settlement of the earn-out provision in the Callaway Asset Purchase Agreement, as described in note “7. Line of Credit and Note Payable.” The $58.5 million paid at closing was financed with borrowings under the Company’s bank credit agreement.

The identifiable intangible assets that were acquired totaled $5.7 million and have an estimated weighted average useful life of 27 months, which consists of customer contracts totaling $1.9 million (5 months useful life), customer relationships totaling $2.4 million (19 months useful life), and non-competition agreements totaling $1.4 million (72 months useful life). Additionally, the Company recorded approximately $72.0 million of goodwill, which the Company is deducting for income tax purposes.

Acquisition of Wellspring Partners LTD
In January 2007, the Company acquired Wellspring Partners LTD (“Wellspring”), a management consulting firm specializing in integrated performance improvement services for hospitals and health systems. With the acquisition of Wellspring, the Company expanded its national presence in the healthcare provider sector and now provides a full complement of services to a wide spectrum of hospitals and multi-hospital systems. This acquisition was consummated on January 2, 2007 and the results of operations of Wellspring have been included within the Company’s Health and Education Consulting segment since that date.

The aggregate purchase price of this acquisition was approximately $90.2 million, consisting of $64.7 million in cash paid at closing, $0.4 million of transaction costs, a $0.7 million working capital adjustment, $0.3 million in cash paid upon the collection of receivables acquired, and $24.1 million of additional purchase price earned by selling shareholders subsequent to the acquisition, as certain performance targets were met. The Company financed this acquisition with a combination of cash on hand and borrowings of $55.0 million under the Company’s bank credit agreement. Additional purchase consideration may be payable if specific performance targets are met over a five-year period. Such amounts will be recorded as additional purchase price and an adjustment to goodwill.

Concurrent with the Stockamp acquisition described above, on July 8, 2008 the Company entered into an amendment to the Wellspring Stock Purchase Agreement (“Wellspring Amendment”). Effective January 1, 2009, Wellspring will cede the revenue cycle portion of its business to Stockamp and will no longer be eligible for earn-out payments pertaining to that portion of the Wellspring business. In consideration for this, the Company paid the sellers $20.0 million through the issuance of 440,296 shares of its common stock. In addition, on the date that is six months and one day after the date of the Wellspring Amendment (the “Wellspring Contingent Payment Date”), the Company will pay the sellers (in cash, shares of common stock, or any combination of cash and common stock at the election of the Company) the amount, if any, equal to $20.0 million less the value of the common stock issued on the date of the Wellspring Amendment, based on 95% of the average daily closing price per share of common stock for the ten consecutive trading days prior to the Wellspring Contingent Payment Date. No payment will be made if the common stock so valued equals or exceeds $20.0 million on the Wellspring Contingent Payment Date. Any additional payment resulting from this price protection will not change the purchase consideration. The earn-out provision, as amended, pertaining to the non-revenue cycle portion of Wellspring’s business will remain in effect through December 31, 2011.

 
- 7 -

 
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Tabular amounts in thousands, except per share amounts)

The identifiable intangible assets that were acquired totaled $13.1 million and have an estimated weighted average useful life of 26 months, which consists of customer contracts totaling $4.7 million (9 months useful life), customer relationships totaling $3.9 million (20 months useful life), non-competition agreements totaling $2.4 million (72 months useful life), and a tradename valued at $2.1 million (24 months useful life). Additionally, the Company recorded approximately $80.6 million of goodwill, which the Company is not deducting for income tax purposes.

Acquisition of Glass & Associates, Inc.
Also in January 2007, the Company acquired Glass & Associates, Inc. (“Glass”), a turnaround and restructuring consulting firm that provides advice and leadership to troubled businesses in the United States and Europe. With the acquisition of Glass, the Company expanded its position in the consulting and restructuring marketplace, as well as expanded its interim management capabilities to distressed companies in industries beyond healthcare. The stock purchase agreement for this acquisition was executed on January 2, 2007 and the transaction was consummated on January 9, 2007 upon the satisfaction of certain closing conditions. The results of operations of Glass have been included within the Company’s Corporate Consulting segment since January 2, 2007.

The aggregate purchase price of this acquisition was approximately $35.0 million, consisting of $30.0 million in cash paid at closing, $0.8 million of transaction costs, a $1.0 million working capital adjustment, $1.6 million in cash paid to sellers for a tax election reimbursement, and $1.6 million of additional purchase price earned by selling shareholders subsequent to the acquisition. The Company financed this acquisition with a combination of cash on hand and borrowings of $20.0 million under the Company’s bank credit agreement. Additional purchase consideration may be payable if specific performance targets are met over a four-year period. Such amounts will be recorded as additional purchase price and an adjustment to goodwill. Also, additional payments may be made based on the amount of revenues the Company receives from referrals made by certain employees of Glass over a four-year period. Such amounts will be recorded as an expense.

The identifiable intangible assets that were acquired totaled $4.3 million and have an estimated weighted average useful life of 37 months, which consists of customer contracts totaling $1.0 million (6 months useful life), customer relationships totaling $1.1 million (19 months useful life), and non-competition agreements totaling $2.2 million (60 months useful life). Additionally, the Company recorded approximately $29.5 million of goodwill, which the Company is deducting for income tax purposes.

Purchase Price Allocations
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed for the Company’s significant business acquisitions.

   
Callaway
July 29,
2007
   
Wellspring
January 2, 2007
   
Glass
January 2, 2007
 
Assets Acquired:
                 
Current assets                                                                      
  $ 12,418     $ 9,868     $ 2,705  
Property and equipment                                                                      
    698       1,073       215  
Non-current assets                                                                      
    23             23  
Intangible assets                                                                      
    5,700       13,100       4,300  
Goodwill                                                                      
    71,989       80,566       29,517  
      90,828       104,607       36,760  
Liabilities Assumed:
                       
Current liabilities                                                                      
    2,354       9,128       1,727  
Non-current liabilities                                                                      
    94       5,278        
      2,448       14,406       1,727  
                         
Net Assets Acquired                                                                         
  $ 88,380     $ 90,201     $ 35,033  

 
- 8 -

 
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Tabular amounts in thousands, except per share amounts)

Pro Forma Financial Data
The following unaudited pro forma financial data for the three and six months ended June 30, 2007 give effect to the acquisition of Callaway as if it had been completed at the beginning of the period. The actual results from the acquisition of Callaway have been included within the Company’s consolidated financial results since July 29, 2007. The unaudited pro forma financial data are not necessarily indicative of the results that would have been achieved if the acquisition had occurred on the date indicated, nor are they necessarily indicative of future results.

   
Three Months Ended
June 30, 2007
   
Six Months
Ended
June 30, 2007
 
Revenues, net of reimbursable expenses
  $ 134,490     $ 264,605  
Operating income
  $ 21,383     $ 40,500  
Income before provision for income taxes
  $ 18,788     $ 35,640  
Net income
  $ 10,545     $ 19,961  
Earnings per share:
               
Basic
  $ 0.63     $ 1.19  
Diluted
  $ 0.59     $ 1.12  

The actual results from the acquisitions of Wellspring and Glass have been included within the Company’s consolidated financial results since January 2, 2007; therefore, 2007 pro forma financial information is not presented.

5. Goodwill and Intangible Assets

The table below sets forth the changes in the carrying amount of goodwill by segment for the six months ended June 30, 2008.

   
Health and Education Consulting
   
Financial Consulting
   
Legal Consulting
   
Corporate Consulting
   
Total
 
Balance as of December 31, 2007                                    
  $ 93,561     $ 50,314     $ 15,312     $ 63,866     $ 223,053  
Additional purchase price subsequently recorded for
   business combinations
    86       23,009       44       194       23,333  
Balance as of June 30, 2008                                    
  $ 93,647     $ 73,323     $ 15,356     $ 64,060     $ 246,386  

Identifiable intangible assets with finite lives are amortized over their estimated useful lives. Intangible assets amortization expense was $1.7 million and $3.4 million for the three and six months ended June 30, 2008, respectively. Intangible assets amortization expense was $3.9 million and $7.7 million for the three and six months ended June 30, 2007, respectively. Including the estimated intangible assets acquired related to the acquisition of Stockamp, estimated intangible assets amortization expense is $15.1 million for 2008, $10.2 million for 2009, $7.8 million for 2010, $5.2 million for 2011, $3.3 million for 2012, and $1.5 million for 2013.  Actual amortization expense could differ from these estimated amounts as a result of the finalization of the Stockamp valuation, future acquisitions and other factors.

 
- 9 -

 
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Tabular amounts in thousands, except per share amounts)

Intangible assets are as follows:

   
June 30, 2008
   
December 31, 2007
 
   
Gross  Carrying Amount
   
Accumulated Amortization
   
Gross
Carrying Amount
   
Accumulated Amortization
 
Customer relationships                                              
  $ 9,826     $ 5,843     $ 9,826     $ 3,814  
Non-competition agreements
    8,273       2,476       8,273       1,690  
Tradename                                              
    2,100       1,575       2,100       1,050  
Technology and software                                              
    585       371       585       294  
Total                                           
  $ 20,784     $ 10,265     $ 20,784     $ 6,848  

6. Earnings Per Share

Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period, excluding unvested restricted common stock. Diluted earnings per share reflects the potential reduction in earnings per share that could occur if securities or other contracts to issue common stock were exercised or converted into common stock under the treasury stock method. Earnings per share under the basic and diluted computations are as follows:

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2008
   
2007
   
2008
   
2007
 
Net income                                                                      
  $ 9,809     $ 10,101     $ 20,022     $ 19,912  
                                 
Weighted average common shares outstanding – basic
    17,558       16,842       17,465       16,784  
Weighted average common stock equivalents
    620       1,151       732       1,097  
Weighted average common shares outstanding – diluted
    18,178       17,993       18,197       17,881  
                                 
Basic earnings per share                                                                      
  $ 0.56     $ 0.60     $ 1.15     $ 1.19  
Diluted earnings per share                                                                      
  $ 0.54     $ 0.56     $ 1.10     $ 1.11  

There were approximately 451,800 anti-dilutive securities for the three and six months ended June 30, 2008 and none for the three months ended June 30, 2007.  For the six months ended June 30, 2007, there were approximately 1,600 anti-dilutive securities.

7. Line of Credit and Note Payable

At June 30, 2008, the Company had a credit agreement with various financial institutions under which it may borrow up to $240.0 million. Borrowings under the credit agreement are limited by any outstanding letters of credit, which totaled $5.9 million at June 30, 2008. Fees and interest on borrowings vary based on the Company’s total debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio as set forth in the credit agreement.  Interest is based on a spread, ranging from 0.875% to 2.000%, over the London Interbank Offered Rate (“LIBOR”) or a spread, ranging from 0.0% to 0.75%, over the base rate (which is the greater of the Federal Funds Rate plus 0.50% or the Prime Rate, as selected by the Company). All outstanding principal is due upon expiration of the credit agreement on February 23, 2012. The credit agreement includes quarterly financial covenants that require the Company to maintain certain interest coverage and total debt to EBITDA ratios, and net worth levels. In addition, certain acquisitions and similar transactions will need to be approved by the lenders. Borrowings outstanding under this credit facility at June 30, 2008 totaled $179.5 million and carried a weighted-average interest rate of 4.2%, all of which the Company has classified as long-term as the principal is not due until 2012. Borrowings outstanding at December 31, 2007 were $123.5 million and carried a weighted-average interest rate of 6.1%. At both June 30, 2008 and December 31, 2007, the Company was in compliance with its financial debt covenants.

In July 2008, the Company amended the credit agreement as described in note “10. Subsequent Events.”

 
- 10 -

 
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Tabular amounts in thousands, except per share amounts)

On April 4, 2008, the Company entered into an amendment to the Callaway Asset Purchase Agreement, dated as of July 28, 2007, whereby the Company settled the earn-out provision under Section 3.3 of the agreement in consideration for $23.0 million, payable in the form of a promissory note (the “Note”), and the waiver of certain indemnity obligations.  The Note matures on August 31, 2008 and bears an initial interest rate of 5.0% per annum and increases to 8.0% per annum on July 1, 2008. The Company may elect to extend the maturity date of the Note until January 31, 2009, in which case the interest rate increases to 14.0% per annum beginning on September 1, 2008.  At June 30, 2008, accrued interest for this note was $0.3 million.

8. Commitments and Contingencies

Litigation
On July 3, 2007, The Official Committee (the “Committee”) of Unsecured Creditors of Saint Vincents Catholic Medical Centers of New York d/b/a Saint Vincent Catholic Medical Centers (“St. Vincents”), et al. filed suit against Huron Consulting Group Inc., certain of its subsidiaries, including Speltz & Weis LLC, and two of the Company’s former managing directors, David E. Speltz (“Speltz”) and Timothy C. Weis (“Weis”), in the Supreme Court of the State of New York, County of New York. On November 26, 2007, Gray & Associates, LLC (“Gray”), in its capacity as trustee on behalf of the SVCMC Litigation Trust, was substituted as plaintiff in the place of the Committee and on February 19, 2008, Gray filed an amended complaint in the action. Beginning in 2004, St. Vincents retained Speltz & Weis LLC to provide management services to St. Vincents, and its two principals, Speltz and Weis, were made the interim chief executive officer and chief financial officer, respectively, of St. Vincents. In May of 2005, Speltz & Weis LLC was acquired by the Company.  On July 5, 2005, St. Vincents filed for bankruptcy in the United States Bankruptcy Court for the Southern District of New York (“Bankruptcy Court”). On December 14, 2005, the Bankruptcy Court approved the retention of Speltz & Weis LLC and the Company in various capacities, including interim management, revenue cycle management and strategic sourcing services. The amended complaint filed by Gray alleges, among other things, breach of fiduciary duties, breach of the New York Not-For-Profit Corporation Law, malpractice, breach of contract, tortious interference with contract, aiding and abetting breaches of fiduciary duties, certain fraudulent transfers and fraudulent conveyances, breach of the implied duty of good faith and fair dealing, fraud, aiding and abetting fraud, negligent misrepresentation, and civil conspiracy, and seeks at least $200 million in damages, disgorgement of fees, return of funds or other property transferred to Speltz & Weis LLC, attorneys’ fees, and unspecified punitive and other damages. The Company believes that the claims are without merit and intends to vigorously defend itself in this matter. The suit is in the pre-trial stage and no trial date has been set.

From time to time, the Company is involved in legal proceedings and litigation arising in the ordinary course of business.  As of the date of this Quarterly Report on Form 10-Q, the Company is not a party to or threatened with any other litigation or legal proceeding that, in the opinion of management, could have a material adverse effect on the financial position or results of operations of the Company.

Guarantees
Guarantees in the form of letters of credit totaling $5.9 million and $6.1 million were outstanding at June 30, 2008 and December 31, 2007, respectively, to support certain office lease obligations.

In connection with certain business acquisitions, the Company may be required to pay additional purchase consideration to the sellers if specific performance targets and conditions are met over a number of years as specified in the related purchase agreements. These amounts are generally calculated and payable at the end of each year based on full year financial results. There is no limitation to the maximum amount of additional purchase consideration and the aggregate amount that potentially may be paid could be significant. Based on current and projected financial performance, we anticipate aggregate additional purchase consideration that will be earned by certain sellers to be approximately $30.0 million for the year ending December 31, 2008. This estimate does not take into account the potential earn-out that may be earned by Stockamp, which we acquired on July 8, 2008 as described in note “4. Business Combinations.” Additional purchase consideration earned by certain sellers totaled $32.4 million for the year ended December 31, 2007.

To the extent permitted by law, the Company’s by-laws and articles of incorporation require that the Company indemnify its officers and directors against judgments, fines, and amounts paid in settlement, including attorney’s

 
- 11 -

 
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Tabular amounts in thousands, except per share amounts)

fees, incurred in connection with civil or criminal action or proceedings, as it relates to their services to the Company if such person acted in good faith. Although there is no limit on the amount of indemnification, the Company may have recourse against its insurance carrier for certain payments made.

9. Segment Information

Segments are defined by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” as components of a company in which separate financial information is available and is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.

The Company’s chief operating decision maker manages the business under four operating segments: Health and Education Consulting, Financial Consulting, Legal Consulting, and Corporate Consulting.

·  
Health and Education Consulting.  This segment provides consulting services to hospitals, health systems, physicians, managed care organizations, academic medical centers, colleges, universities, and pharmaceutical and medical device manufacturers. This segment’s professionals develop and implement solutions to help clients address financial management, strategy, operational and organizational effectiveness, research administration, and regulatory compliance. This segment also provides consulting services related to hospital or healthcare organization performance improvement, turnarounds, merger or affiliation strategies, labor productivity, non-labor cost management, information technology, revenue cycle improvement, physician practice management, interim management, clinical quality and medical management, and governance and board development.

·  
Financial Consulting.  This segment assists corporations with complex accounting and financial reporting matters, financial analysis in business disputes and litigation, as well as valuation analysis related to business acquisitions. This segment also consults with management in the areas of corporate governance, Sarbanes-Oxley compliance, internal audit, and corporate tax. Additionally, the Financial Consulting segment provides experienced, project leadership and consultants with a variety of financial and accounting credentials and prior corporate experience as needed to assist clients with finance and accounting projects. This segment is comprised of certified public accountants, economists, certified fraud examiners, chartered financial analysts and valuation experts who serve attorneys and corporations as expert witnesses and consultants in connection with business disputes, as well as in regulatory or internal investigations.

·  
Legal Consulting.  This segment provides guidance and business services to corporate law departments, law firms and government agencies by helping to reduce legal spending, enhance client service delivery and increase operational effectiveness. These services include digital evidence and discovery services, document review, law firm management services, records management, and strategic and operational improvements.

·  
Corporate Consulting.  This segment leads clients through various stages of transformation that result in measurable and sustainable performance improvement. This segment works with clients to solve complex business problems and implements strategies and solutions to effectively address and manage stagnant or declining stock price, acquisitions and divestitures, process inefficiency, third party contracting difficulties, lack of or misaligned performance measurements, margin and cost pressures, performance issues, bank defaults, covenant violations and liquidity issues.

Segment operating income consists of the revenues generated by a segment, less the direct costs of revenue and selling, general and administrative costs that are incurred directly by the segment. Unallocated corporate costs include costs related to administrative functions that are performed in a centralized manner that are not attributable to a particular segment. These administrative function costs include costs for corporate office support, certain office facility costs, costs relating to accounting and finance, human resources, legal, marketing, information technology and company-wide business development functions, as well as costs related to overall corporate management.

The table below sets forth information about the Company’s operating segments for the three and six months ended June 30, 2008 and 2007, along with the items necessary to reconcile the segment information to the totals reported in the accompanying consolidated financial statements.

 
- 12 -

 
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Tabular amounts in thousands, except per share amounts)

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2008
   
2007
   
2008
   
2007
 
Health and Education Consulting:
                       
Revenues                                                                
  $ 56,696     $ 42,810     $ 107,784     $ 81,662  
Operating income                                                                
  $ 22,679     $ 14,021     $ 44,811     $ 26,221  
Segment operating income as a percent of
segment revenues                                                             
    40.0 %     32.8 %     41.6 %     32.1 %
Financial Consulting:
                               
Revenues                                                                
  $ 34,789     $ 32,669     $ 73,600     $ 69,281  
Operating income                                                                
  $ 7,980     $ 15,281     $ 17,569     $ 31,456  
Segment operating income as a percent of
segment revenues                                                             
    22.9 %     46.8 %     23.9 %     45.4 %
Legal Consulting:
                               
Revenues                                                                
  $ 30,498     $ 22,795     $ 55,721     $ 46,066  
Operating income                                                                
  $ 10,076     $ 7,272     $ 16,663     $ 15,174  
Segment operating income as a percent of
segment revenues                                                             
    33.0 %     31.9 %     29.9 %     32.9 %
Corporate Consulting:
                               
Revenues                                                                
  $ 21,425     $ 19,992     $ 45,697     $ 37,266  
Operating income                                                                
  $ 6,617     $ 5,920     $ 15,994     $ 10,116  
Segment operating income as a percent of
segment revenues                                                             
    30.9 %     29.6 %     35.0 %     27.1 %
Total Company:
                               
Revenues                                                                
  $ 143,408     $ 118,266     $ 282,802     $ 234,275  
Reimbursable expenses                                                                
    12,565       10,910       24,178       20,945  
Total revenues and reimbursable expenses
  $ 155,973     $ 129,176     $ 306,980     $ 255,220  
                                 
Statement of operations reconciliation:
                               
Segment operating income                                                                
  $ 47,352     $ 42,494     $ 95,037     $ 82,967  
Charges not allocated at the segment level:
                               
  Other selling, general and administrative expenses
    21,752       18,550       43,670       36,066  
  Depreciation and amortization                                                                
    5,370       4,177       10,508       8,219  
  Other expense (income)                                                                
    2,329       1,730       4,456       3,125  
Income before provision for income taxes
  $ 17,901     $ 18,037     $ 36,403     $ 35,557  

10. Subsequent Events

Amendment to Credit Agreement
On July 8, 2008, the Company executed a sixth amendment to the credit agreement, increasing the maximum amount of principal that may be borrowed from $240.0 million to $460.0 million, with an accordion feature allowing for an additional amount of up to $60.0 million to be borrowed upon approval from the lenders.  The amended credit agreement consists of a $240.0 million revolving credit facility (“Revolver”) and a $220.0 million term loan facility (“Term Loan”) which was drawn in a single advance of $220.0 million on July 8, 2008.  The Revolver and Term Loan are secured by a pledge of 100% of the voting stock or other equity interests in the Company’s domestic subsidiaries and 65% of the voting stock or other equity interests in the Company’s foreign subsidiaries. Under the amended agreement, fees and interest on borrowings vary based on the Company’s total debt to EBITDA ratio as set forth in the amended credit agreement.  Interest is based on a spread, ranging from 1.50% to 2.50%, over LIBOR or a spread, ranging from 0.50% to 1.50%, over the base rate (which is the greater of the Federal Funds Rate plus 0.50% or the Prime Rate, as selected by the Company).  The Term Loan is subject to quarterly amortization of principal in fifteen consecutive quarterly installments beginning on September 30, 2008, with the first fourteen installments being $5.5 million each.  The fifteenth and final installment will be the amount of the remaining outstanding principal balance of the Term Loan and will be payable on February 23, 2012.  All

 
- 13 -

 
HURON CONSULTING GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Tabular amounts in thousands, except per share amounts)

outstanding borrowings under the Revolver will be due upon the expiration of the agreement on February 23, 2012, but can be repaid earlier.

Concurrent with this amendment to the credit agreement, the Company borrowed $164.0 million to fund the acquisition of Stockamp as described in note “4. Business Combinations.” After consideration of this borrowing, the aggregate amount of borrowings outstanding as of July 8, 2008 totaled $347.0 million and carries a current weighted-average interest rate of approximately 5.0%, excluding bank arrangement fees. Also, on July 8, 2008, the Company entered into an amendment to the Wellspring Stock Purchase Agreement, whereby the Company settled the earn-out provision for the revenue cycle portion of Wellspring’s business. See note “4. Business Combinations” for further details relating to these subsequent events.

Restructuring and Severance Charges
During July 2008, the Company initiated reductions in workforce to balance its employee base with current revenue expectations, market demand, and areas of focus. These initiatives will include the elimination of the operational consulting group within the Corporate Consulting segment and a reduction in the number of consultants in the Financial Consulting segment. The Company estimates restructuring and severance charges relating to the workforce reductions of approximately $2 million, all of which is expected to be paid in the third quarter of 2008.

 
- 14 -

 

ITEM 2.                      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms “Huron,” “Company,” “we,” “us” and “our” refer to Huron Consulting Group Inc. and its subsidiaries.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are identified by words such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” or “continues” or the negative of such terms or other comparable terminology. These forward-looking statements reflect our current expectation about our future results, levels of activity, performance or achievements, including without limitation, that our business continues to grow at the current expectations with respect to, among other factors, utilization and billing rates, number of revenue-generating professionals; that we are able to expand our service offerings; that we successfully integrate the businesses we acquire; and that existing market conditions, including those in the credit markets, do not change from current expectations. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Please see “Risk Factors” in our 2007 Annual Report on Form 10-K for a complete description of the material risks we face.

OVERVIEW

Our Business
Huron is an independent provider of financial and operational consulting services, with clients that include Fortune 500 companies, medium-sized businesses, leading academic institutions, healthcare organizations, and the law firms that represent these various organizations. We help clients effectively address complex challenges that arise in litigation, disputes, investigations, regulatory compliance, procurement, financial distress, and other sources of significant conflict or change. We also help our clients deliver superior customer and capital market performance through integrated strategic, operational, and organizational change.

We provide our services and manage our business under four operating segments: Health and Education Consulting, Financial Consulting, Legal Consulting, and Corporate Consulting.

·  
Health and Education Consulting.  Our Health and Education Consulting segment provides consulting services to hospitals, health systems, physicians, managed care organizations, academic medical centers, colleges, universities, and pharmaceutical and medical device manufacturers. This segment’s professionals develop and implement solutions to help clients address financial management, strategy, operational and organizational effectiveness, research administration, and regulatory compliance. This segment also provides consulting services related to hospital or healthcare organization performance improvement, turnarounds, merger of affiliation strategies, labor productivity, non-labor cost management, information technology, revenue cycle improvement, physician practice management, interim management, clinical quality and medical management, and governance and board development.

·  
Financial Consulting.  Our Financial Consulting segment assists corporations with complex accounting and financial reporting matters, financial analysis in business disputes and litigation, as well as valuation analysis related to business acquisitions. This segment also consults with management in the areas of corporate governance, Sarbanes-Oxley compliance, internal audit, and corporate tax. Additionally, the Financial Consulting segment provides experienced, project leadership and consultants with a variety of financial and accounting credentials and prior corporate experience as needed to assist clients with finance and accounting projects. This segment is comprised of certified public accountants, economists, certified fraud examiners, chartered financial analysts and valuation experts that serve attorneys and corporations as expert witnesses and consultants in connection with business disputes, as well as in regulatory or internal investigations.

·  
Legal Consulting.  Our Legal Consulting segment provides guidance and business services to address the challenges that confront today’s legal organizations. These services add value to corporate law departments, law firms and government agencies by helping to reduce legal spending, enhance client service delivery, and

 
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increase operational effectiveness. These services include digital evidence and discovery services, document review, law firm management services, records management, and strategic and operational improvements.

·  
Corporate Consulting.  Our Corporate Consulting segment leads clients through various stages of transformation that result in measurable and sustainable performance improvement. This segment works with clients to solve complex business problems and implements strategies and solutions to effectively address and manage stagnant or declining stock price, acquisitions and divestitures, process inefficiency, third party contracting difficulties, lack of or misaligned performance measurements, margin and cost pressures, performance issues, bank defaults, covenant violations, and liquidity issues.

A large portion of our revenues is generated by our full-time billable consultants who provide consulting services to our clients and are billable to our clients based on the number of hours worked. A smaller portion of our revenues is generated by our other professionals, consisting of finance and accounting consultants and specialized operational consultants who work variable schedules as needed by our clients. Our other professionals also include our document review and electronic data discovery groups who utilize contract reviewers and information technology professionals. Our document review and electronic data discovery groups generate revenues primarily based on number of hours worked and units produced, such as pages reviewed or data processed. We translate the hours that these other professionals work on client engagements into a full-time equivalent measure that we use to manage our business. We refer to our full-time billable consultants and other professionals collectively as revenue-generating professionals.

Revenues generated by our full-time billable consultants are primarily driven by the number of consultants we employ and their utilization rates, as well as the billing rates we charge our clients. Revenues generated by our full-time equivalents are largely dependent on the number of consultants we employ, their hours worked and billing rates charged, as well as the number of pages reviewed and amount of data processed in the case of our document review and electronic data discovery groups.

Most of our revenues are generated under billing arrangements that are based on either the number of hours worked or units produced by our revenue-generating professionals at agreed upon rates. We refer to these types of arrangements as time-and-expense engagements. Time-and-expense engagements represented 70.8% and 71.2% of our revenues in the three months ended June 30, 2008 and 2007, respectively, and 70.9% and 74.2% in the six months ended June 30, 2008 and 2007, respectively.

In fixed-fee engagements, we agree to a pre-established fee in exchange for a pre-determined set of consulting services. We set the fees based on our estimates of the costs and timing for completing the fixed-fee engagements. It is the client’s expectation in these engagements that the pre-established fee will not be exceeded except in mutually agreed upon circumstances. For the three months ended June 30, 2008 and 2007, fixed-fee engagements represented 28.3% and 27.3% of our revenues, respectively; while they represented 27.8% and 24.6% of our revenues in the six months ended June 30, 2008 and 2007, respectively.

Performance-based fee engagements generally tie fees to the attainment of contractually defined objectives. We enter into performance-based engagements in essentially two forms. First, we generally earn fees that are directly related to the savings formally acknowledged by the client as a result of adopting our recommendations for improving cost effectiveness in the procurement area. Second, we have performance-based engagements in which we earn a success fee when and if certain pre-defined outcomes occur. Often this type of success fee supplements time-and-expense or fixed-fee engagements. While performance-based fee revenues represented only 0.9% and 1.5% of our revenues for the three months ended June 30, 2008 and 2007, respectively, and 1.3% and 1.2% for the six months ended June 30, 2008 and 2007, respectively, such revenues in the future may cause significant variations in quarterly revenues and operating results due to the timing of achieving the performance-based criteria.

We also bill our clients for reimbursable expenses such as travel and out-of-pocket costs incurred in connection with engagements. We manage our business on the basis of revenues before reimbursable expenses. We believe this is the most accurate reflection of our services because it eliminates the effect of these reimbursable expenses that we bill to our clients at cost.

 
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Business Strategy, Opportunities and Challenges
Our primary strategy is to meet the needs of our clients by providing a balanced portfolio of service offerings and capabilities, so that we can adapt quickly and effectively to emerging opportunities in the marketplace.  To achieve this, we have entered into select acquisitions of complementary businesses and continue to hire highly qualified professionals.  As of June 30, 2008, we had 1,207 full-time billable consultants. Additionally, we have a roster of consultants with a variety of financial and accounting credentials and prior corporate experience who work variable schedules as needed by our clients, as well as contract reviewers who are readily available to meet our clients’ needs.

Time-and-expense engagements do not provide us with a high degree of predictability as to performance in future periods. Unexpected changes in the demand for our services can result in significant variations in utilization and revenues and present a challenge to optimal hiring and staffing. Moreover, our clients typically retain us on an engagement-by-engagement basis, rather than under long-term recurring contracts. The volume of work performed for any particular client can vary widely from period to period.

To expand our business, we will remain focused on growing our existing relationships and developing new relationships, continue to promote and provide an integrated approach to service delivery, broaden the scope of our existing services, and continue to acquire complementary businesses. Additionally, we intend to enhance our visibility in the marketplace by continuing to build our brand.

CRITICAL ACCOUNTING POLICIES

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP.  The preparation of financial statements in conformity with GAAP requires management to make assessments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period.  Critical accounting policies are those policies that we believe present the most complex or subjective measurements and have the most potential to impact our financial position and operating results.  While all decisions regarding accounting policies are important, we believe that there are five accounting policies that could be considered critical.  These critical accounting policies relate to revenue recognition, allowances for doubtful accounts and unbilled services, carrying values of goodwill and other intangible assets, valuation of net deferred tax assets, and share-based compensation.

Revenue Recognition
We recognize revenues in accordance with Staff Accounting Bulletin, or SAB, No. 101, “Revenue Recognition in Financial Statements,” as amended by SAB No. 104, “Revenue Recognition.” Revenue is recognized when persuasive evidence of an arrangement exists, the related services are provided, the price is fixed or determinable and collectibility is reasonably assured. Most of our services are rendered under arrangements that require the client to pay based on either the number of hours incurred or units produced by our revenue-generating professionals at agreed-upon rates and recognized as services are provided. Revenues related to fixed-fee engagements are recognized based on estimates of services provided versus the total services to be provided under the engagement. Losses, if any, on fixed-fee engagements are recognized in the period in which the loss first becomes probable and reasonably estimable. To date, such losses have not been significant. Revenues related to performance-based engagements are recognized when all performance-based criteria are met. We also have contracts with clients to deliver multiple services that are covered under both individual and separate engagement letters. These arrangements allow for our services to be valued and accounted for on a separate basis. We recognize reimbursable expenses related to time and expense and fixed-fee engagements as revenue in the period in which the expense is incurred. We recognize reimbursable expenses subject to performance-based criteria as revenue when all performance criteria are met. We recognize direct costs incurred on all types of engagements, including performance-based engagements, in the period in which incurred.

We record differences between the timing of billings and the recognition of revenue as either unbilled services or deferred revenue. We record revenues recognized for services performed but not yet billed to clients as unbilled services. We record amounts billed to clients but not yet recognized as revenues as deferred revenue. We also

 
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classify client prepayments and retainers that are unearned as deferred revenue and recognize over future periods as earned in accordance with the applicable engagement agreement.

Allowances for Doubtful Accounts and Unbilled Services
We maintain allowances for doubtful accounts and for services performed but not yet billed for estimated losses based on several factors, including the historical percentages of fee adjustments and write-offs by practice group, an assessment of a client’s ability to make required payments and the estimated cash realization from amounts due from clients. The allowances are assessed by management on a regular basis. If the financial condition of a client deteriorates in the future, impacting the client’s ability to make payments, an increase to our allowance might be required or our allowance may not be sufficient to cover actual write-offs.

We record the provision for doubtful accounts and unbilled services as a reduction in revenue to the extent the provision relates to fee adjustments and other discretionary pricing adjustments. To the extent the provision relates to a client’s inability to make required payments on accounts receivables, we record the provision in operating expenses.

Carrying Values of Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. Our goodwill balance as of June 30, 2008 was $246.4 million. Pursuant to the provisions of Statement of Financial Accounting Standards, or SFAS, No. 142, “Goodwill and Other Intangible Assets,” we test goodwill for impairment annually or whenever indications of impairment arise, such as loss of key personnel, unanticipated competition, or other unforeseen developments. Impairment exists when the carrying amount of goodwill exceeds its implied fair value, resulting in an impairment charge for this excess. An impairment test involves considerable management judgment and estimates regarding future operating results and cash flows. Pursuant to our policy, we performed the annual goodwill assessment as of April 30, 2008 and determined that no impairment of goodwill existed as of that date. Further, no indications of impairment have arisen since that date.

Intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill. Our intangible assets, net of accumulated amortization, totaled $10.5 million at June 30, 2008, and consist of customer relationships, non-competition agreements, a tradename, as well as technology and software. We use valuation techniques in estimating the initial fair value of acquired intangible assets. These valuations are primarily based on the present value of the estimated net cash flows expected to be derived from the client relationships, discounted for assumptions about future customer attrition. We evaluate our intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Therefore, higher or earlier-than-expected customer attrition may result in higher future amortization charges or an impairment charge for customer-related intangible assets.

Valuation of Net Deferred Tax Assets
We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are recorded for future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. To the extent that deferred tax assets will not likely be recovered from future taxable income, a valuation allowance is established against such deferred tax assets.

In preparing financial statements, we exercise significant judgment in determining our provision for income taxes, deferred tax assets and liabilities, and the valuation allowance. In determining our provision for income taxes on an interim basis, we estimate our annual effective tax rate based on information available at each interim period. In determining whether a valuation allowance is warranted, we consider the historical and estimated future taxable income and other relevant factors of the operation recording the respective deferred tax asset. If actual results differ from our estimates, or if these estimates are adjusted in future periods, an adjustment to the valuation allowance may be required. To the extent that we increase the valuation allowance, our provision for income taxes will increase and our net income will decrease in the period that the adjustment is made. As of June 30, 2008, we have recorded net deferred tax assets totaling $16.6 million and have established a valuation allowance of $1.3 million due to uncertainties relating to our ability to utilize deferred tax assets recorded for foreign operating losses.

 
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Share-based Compensation
Effective January 1, 2006, we adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” which requires that companies recognize compensation expense for grants of stock, stock options and other equity instruments based on fair value. Given the lack of a public market for our common stock prior to our IPO, we established an estimated fair value of the common stock as well as the exercise price for the options to purchase this stock. We estimated the fair value of our common stock by evaluating our results of business activities and projections of our future results of operations.

RESULTS OF OPERATIONS

The table below sets forth selected segment and consolidated operating results and other operating data for the periods indicated. Segment operating income consists of the revenues generated by a segment, less the direct costs of revenue and selling, general and administrative costs that are incurred directly by the segment. Unallocated corporate costs include costs related to administrative functions that are performed in a centralized manner that are not attributable to a particular segment.

 
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Segment and Consolidated Operating Results
 
Three Months Ended
 June 30,
   
Six Months Ended
 June 30,
 
(in thousands):
 
2008
   
2007
   
2008
   
2007
 
Revenues and reimbursable expenses:
                       
Health and Education Consulting                                                                         
  $ 56,696     $ 42,810     $ 107,784     $ 81,662  
Financial Consulting                                                                         
    34,789       32,669       73,600       69,281  
Legal Consulting                                                                         
    30,498       22,795       55,721       46,066  
Corporate Consulting                                                                         
    21,425       19,992       45,697       37,266  
Total revenues                                                                      
    143,408       118,266       282,802       234,275  
Total reimbursable expenses                                                                         
    12,565       10,910       24,178       20,945  
Total revenues and reimbursable expenses
  $ 155,973     $ 129,176     $ 306,980     $ 255,220  
Operating income:
                               
Health and Education Consulting                                                                         
  $ 22,679     $ 14,021     $ 44,811     $ 26,221  
Financial Consulting                                                                         
    7,980       15,281       17,569       31,456  
Legal Consulting                                                                         
    10,076       7,272       16,663       15,174  
Corporate Consulting                                                                         
    6,617       5,920       15,994       10,116  
Total segment operating income                                                                      
    47,352       42,494       95,037       82,967  
Operating expenses not allocated to segments
    27,122       22,727       54,178       44,285  
Total Operating income                                                                         
  $ 20,230     $ 19,767     $ 40,859     $ 38,682  
                                 
Other Operating Data:
                               
    Number of full-time billable consultants (at period end) (1):
                               
    Health and Education Consulting                                                                        
    489       355                  
    Financial Consulting                                                                        
    338       291                  
    Legal Consulting                                                                        
    159       126                  
    Corporate Consulting                                                                        
    221       168                  
Total                                                                      
    1,207       940                  
Average number of full-time billable consultants (for the period) (1):
                               
    Health and Education Consulting                                                                        
    481       356       467       350  
    Financial Consulting                                                                        
    352       288       360       284  
    Legal Consulting                                                                        
    166       122       170       122  
    Corporate Consulting                                                                        
    225       170       226       170  
Total                                                                      
    1,224       936       1,223       926  
Full-time billable consultant utilization rate (2):
                               
    Health and Education Consulting                                                                        
    80.8 %     80.5 %     79.5 %     79.4 %
    Financial Consulting                                                                        
    51.9 %     74.6 %     51.9 %     79.8 %
    Legal Consulting                                                                        
    62.6 %     79.0 %     60.1 %     77.3 %
    Corporate Consulting                                                                        
    62.3 %     77.1 %     63.8 %     72.7 %
Total                                                                      
    66.8 %     77.9 %     65.9 %     78.0 %
Full-time billable consultant average billing rate per hour (3):
                               
    Health and Education Consulting                                                                        
  $ 267     $ 255     $ 268     $ 252  
    Financial Consulting                                                                        
  $ 285     $ 311     $ 276     $ 304  
    Legal Consulting                                                                        
  $ 236     $ 247     $ 235     $ 243  
    Corporate Consulting                                                                        
  $ 303     $ 311     $ 317     $ 302  
Total                                                                      
  $ 273     $ 281     $ 275     $ 276  
Revenue per full-time billable consultant (in thousands):
                               
    Health and Education Consulting                                                                        
  $ 106     $ 99     $ 210     $ 193  
    Financial Consulting                                                                        
  $ 66     $ 111     $ 131     $ 237  
    Legal Consulting                                                                        
  $ 68     $ 85     $ 133     $ 163  
    Corporate Consulting                                                                        
  $ 91     $ 114     $ 196     $ 213  
Total                                                                      
  $ 87     $ 104     $ 174     $ 206  

 
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Three Months Ended
 June 30,
   
Six Months Ended
 June 30,
 
Other Operating Data:
 
2008
   
2007
   
2008
   
2007
 
    Average number of full-time equivalents (for the period) (4):
                       
    Health and Education Consulting                                                                        
    50       60       43       60  
    Financial Consulting                                                                        
    185       6       212       8  
    Legal Consulting                                                                        
    619       341       544       368  
    Corporate Consulting                                                                        
    9       6       8       5  
Total                                                                    
    863       413       807       441  
   Revenue per full-time equivalents (in thousands):
                               
   Health and Education Consulting                                                                        
  $ 113     $ 125     $ 223     $ 234  
   Financial Consulting                                                                        
  $ 63     $ 97     $ 124     $ 256  
   Legal Consulting                                                                        
  $ 31     $ 36     $ 61     $ 71  
   Corporate Consulting                                                                        
  $ 98     $ 91     $ 181     $ 223  
Total                                                                    
  $ 43     $ 51     $ 87     $ 98  

(1)  
Consists of our full-time professionals who provide consulting services and generate revenues based on the number of hours worked.
(2)  
Utilization rate for our full-time billable consultants is calculated by dividing the number of hours all our full-time billable consultants worked on client assignments during a period by the total available working hours for all of these consultants during the same period, assuming a forty-hour work week, less paid holidays and vacation days.
(3)  
Average billing rate per hour for our full-time billable consultants is calculated by dividing revenues for a period by the number of hours worked on client assignments during the same period.
(4)  
Consists of consultants who work variable schedules as needed by our clients, as well as contract reviewers and other professionals who generate revenues primarily based on number of hours worked and units produced, such as pages reviewed and data processed.

Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007

Revenues
Revenues increased $25.1 million, or 21.3%, to $143.4 million for the second quarter of 2008 from $118.3 million for the second quarter of 2007. Revenues for the second quarter of 2008 included revenues generated by Callaway, which we acquired in July 2007.

Of the overall $25.1 million increase in revenues, $8.7 million was attributable to our full-time billable consultants and $16.4 million was attributable to our full-time equivalents. Full-time equivalents consist of our variable, on-demand consultants, contract reviewers and our document review and processing groups. The $8.7 million increase in full-time billable consultant revenues was attributable to an increase in the number of consultants, partially offset by a decline in both our average billing rate and utilization rate of our consultants. The $16.4 million increase in full-time equivalent revenues resulted from our acquisition of Callaway, which heavily utilizes variable, on-demand consultants, as well as increased usage of contract reviewers in our document review group.

Total Direct Costs
Our direct costs increased $19.5 million, or 29.3%, to $86.0 million in the second quarter of 2008 from $66.5 million in the second quarter of 2007. Approximately $15.7 million of the increase was attributable to the increase in full-time billable consultants and the promotion of our employees during the year, including ten to the managing director level effective January 1, 2008, and their related compensation and benefit costs. Additionally, $2.3 million of the increase in direct costs was attributable to an increased usage of independent contractors. Share-based compensation expense associated with our revenue-generating professionals increased $1.4 million, or 50.0%, to $4.2 million in the second quarter of 2008 from $2.8 million in the second quarter of 2007.

Total direct costs for the three months ended June 30, 2007 included $2.3 million of intangible assets amortization expense, primarily attributable to customer contracts acquired in connection with the acquisitions of Wellspring and Glass and that were fully amortized during 2007.

 
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Operating Expenses
Selling, general and administrative expenses increased $6.2 million, or 24.1%, to $31.8 million in the second quarter of 2008 from $25.6 million in the second quarter of 2007. Of the $6.2 million increase, $2.4 million was due to higher marketing spending, $2.1 million was attributable to higher salaries and related benefit costs, and $1.3 million was attributable to increased facilities costs. Share-based compensation expense associated with our non-revenue-generating professionals increased $0.9 million, or 42.9%, to $3.0 million in the second quarter of 2008 from $2.1 million in the second quarter of 2007.

Depreciation expense increased $1.1 million, or 42.3%, to $3.7 million in the three months ended June 30, 2008 from $2.6 million in the three months ended June 30, 2007 as computers, network equipment, furniture and fixtures, and leasehold improvements were added to support our increase in employees. Non-direct intangible assets amortization expense increased slightly to $1.7 million for the three months ended June 30, 2008 from $1.6 million for the comparable period last year. Non-direct intangible assets amortization relates to customer relationships, non-competition agreements and a tradename acquired in connection with our acquisitions.

Operating Income
Operating income increased $0.4 million, or 2.3%, to $20.2 million in the second quarter of 2008 from $19.8 million in the second quarter of 2007. Operating margin, defined as operating income expressed as a percentage of revenues, decreased to 14.1% in the three months ended June 30, 2008 from 16.7% in the three months ended June 30, 2007. The decline in operating margin was attributable to higher total compensation cost as a percentage of revenues, partially offset by a decrease in direct intangible assets amortization.

Net Income
Net income decreased slightly to $9.8 million for the three months ended June 30, 2008 from $10.1 million for the comparable period last year. Diluted earnings per share for the second quarter of 2008 was $0.54 compared to $0.56 for the second quarter of 2007.

Segment Results

Health and Education Consulting

Revenues
Health and Education Consulting segment revenues increased $13.9 million, or 32.4%, to $56.7 million for the second quarter of 2008 from $42.8 million for the second quarter of 2007. Revenues from time-and-expense engagements, fixed-fee engagements and performance-based engagements represented 53.3%, 44.8% and 1.9% of this segment’s revenues during the three months ended June 30, 2008, respectively, compared  to 51.1%, 47.6% and 1.3%, respectively, for the comparable period in 2007.

Of the overall $13.9 million increase in revenues, $15.8 million was attributable to our full-time billable consultants, partially offset by a decrease of $1.9 million attributable to our full-time equivalents. The $15.8 million increase in full-time billable consultant revenues reflected an increase in the number of consultants, an increase in the average billing rate per hour for this segment, as well as a slight increase in the utilization rate of our consultants.

Operating Income
Health and Education Consulting segment operating income increased $8.7 million, or 61.8%, to $22.7 million in the three months ended June 30, 2008 from $14.0 million in the three months ended June 30, 2007. Segment operating margin, defined as segment operating income expressed as a percentage of segment revenues, increased to 40.0% for the second quarter of 2008 from 32.8% in the same period last year. The increase in this segment’s operating margin reflects lower total compensation cost as a percentage of revenues, coupled with lower total compensation cost per consultant, as well as the absence of amortization expense.

 
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Financial Consulting

Revenues
Financial Consulting segment revenues increased $2.1 million, or 6.5%, to $34.8 million for the second quarter of 2008 from $32.7 million for the second quarter of 2007. Revenues for the second quarter of 2008 included revenues generated by Callaway, which we acquired in July 2007. For the second quarter of 2008 and 2007, most of this segment’s revenues were from time-and-expense engagements.

Of the overall $2.1 million increase in revenues, $11.1 million was attributable to our full-time equivalents, which was largely offset by a decrease of $9.0 million attributable to our full-time billable consultants. The $9.0 million decrease in full-time billable consultant revenues was primarily due to a decline in this segment’s utilization rate as we added a significant number of consultants during the second half of 2007, coupled with several large engagements during the first half of 2007 that have since wound down. The $11.1 million increase in full-time equivalent revenues resulted from our acquisition of Callaway, which heavily utilizes variable, on-demand consultants.

Operating Income
Financial Consulting segment operating income decreased $7.3 million, or 47.8%, to $8.0 million in the three months ended June 30, 2008 from $15.3 million in the three months ended June 30, 2007. Segment operating margin declined to 22.9% for the second quarter of 2008 from 46.8% in the same period last year. The decline was attributable to lower utilization of this segment’s full-time billable consultants as discussed above.

Legal Consulting

Revenues
Legal Consulting segment revenues increased $7.7 million, or 33.8%, to $30.5 million for the second quarter of 2008 from $22.8 million for the second quarter of 2007. Revenues from time-and-expense engagements and fixed-fee engagements represented 92.9% and 7.1% of this segment’s revenues during the three months ended June 30, 2008, respectively, compared to 91.6% and 6.7%, respectively, for the comparable period in 2007.  Revenues from performance-based engagements were immaterial in the second quarter of 2008 and represented 1.7% of revenues in the second quarter of 2007.

The $7.7 million increase in revenues was primarily attributable to our full-time equivalents, reflecting a greater demand for our document review services.

Operating Income
Legal Consulting segment operating income increased $2.8 million, or 38.6%, to $10.1 million in the three months ended June 30, 2008 from $7.3 million in the three months ended June 30, 2007. Segment operating margin increased to 33.0% for the second quarter of 2008 from 31.9% in the same period last year. The slight increase in this segment’s operating margin was attributable to lower total compensation cost as a percentage of revenues.

Corporate Consulting

Revenues
Corporate Consulting segment revenues increased $1.4 million, or 7.2%, to $21.4 million for the second quarter of 2008 from $20.0 million for the second quarter of 2007. Revenues from time-and-expense engagements, fixed-fee engagements and performance-based engagements represented 44.6%, 54.6% and 0.8% of this segment’s revenues during the three months ended June 30, 2008, respectively, compared to 46.4%, 49.1% and 4.5%, respectively, for the comparable period in 2007.

The $1.4 million increase in revenues was primarily attributable to our full-time billable consultants. This increase in full-time billable consultant revenues reflected an increase in the number of consultants, partially offset by a decline in the utilization rate of our consultants and a decrease in the average billing rate per hour for this segment.

 
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Operating Income
Corporate Consulting segment operating income increased $0.7 million, or 11.8%, to $6.6 million in the three months ended June 30, 2008 from $5.9 million in the three months ended June 30, 2007. Segment operating margin increased to 30.9% for the second quarter of 2008 from 29.6% in the same period last year. The slight increase in this segment’s operating margin reflects lower operating expenses and the absence of amortization expense, partially offset by higher total compensation cost as a percentage of revenues.

Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007

Revenues
Revenues increased $48.5 million, or 20.7%, to $282.8 million for the first half of 2008 from $234.3 million for the first half of 2007. Revenues for the first half of 2008 included revenues generated by Callaway, which we acquired in July 2007.

Of the overall $48.5 million increase in revenues, $21.5 million was attributable to our full-time billable consultants and $27.0 million was attributable to our full-time equivalents. The $21.5 million increase in full-time billable consultant revenues was attributable to an increase in the number of consultants, partially offset by a decline in the utilization rate and a slight decrease in the average billing rate of our consultants. The $27.0 million increase in full-time equivalent revenues resulted from our acquisition of Callaway, which heavily utilizes variable, on-demand consultants, as well as increased usage of contract reviewers in our document review group.

Total Direct Costs
Our direct costs increased $36.0 million, or 27.0%, to $169.4 million in the first half of 2008 from $133.4 million in the first half of 2007. Approximately $31.3 million of the increase was attributable to the increase in full-time billable consultants and the promotion of our employees during the year, including ten to the managing director level effective January 1, 2008, and their related compensation and benefit costs. Additionally, $1.6 million of the increase in direct costs was attributable to an increased usage of independent contractors. Share-based compensation expense associated with our revenue-generating professionals increased $2.7 million, or 49.1%, to $8.2 million in the first half of 2008 from $5.5 million in the comparable period last year.

Total direct costs for the six months ended June 30, 2007 included $4.5 million of intangible assets amortization expense, primarily attributable to customer contracts acquired in connection with the acquisitions of Wellspring and Glass and that were fully amortized during 2007.

Operating Expenses
Selling, general and administrative expenses increased $12.5 million, or 25.3%, to $61.9 million in the first half of 2008 from $49.4 million in the first half of 2007. Of the $12.5 million increase, $3.4 million was due to higher marketing spending, $2.5 million was attributable to higher salaries and related benefit costs, another $2.5 million was attributable to increased facilities costs, and $1.3 million was due to an increase in company and team meetings. Share-based compensation expense associated with our non-revenue-generating professionals increased $1.7 million, or 47.2%, to $5.3 million in the first half of 2008 from $3.6 million in the comparable period last year.

Depreciation expense increased $2.0 million, or 39.2%, to $7.1 million in the six months ended June 30, 2008 from $5.1 million in the six months ended June 30, 2007 as computers, network equipment, furniture and fixtures, and leasehold improvements were added to support our increase in employees. Non-direct intangible assets amortization expense increased slightly to $3.4 million for the six months ended June 30, 2008 from $3.1 million for the comparable period last year. Non-direct intangible assets amortization relates to customer relationships, non-competition agreements and a tradename acquired in connection with our acquisitions.

Operating Income
Operating income increased $2.2 million, or 5.6%, to $40.9 million in the first half of 2008 from $38.7 million in the first half of 2007. Operating margin decreased to 14.4% in the six months ended June 30, 2008 from 16.5% in the six months ended June 30, 2007.

Net Income
Net income increased slightly to $20.0 million for the six months ended June 30, 2008 from $19.9 million for the

 
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comparable period last year. Diluted earnings per share for the first half of 2008 was $1.10 compared to $1.11 for the first half of 2007.

Segment Results

Health and Education Consulting

Revenues
Health and Education Consulting segment revenues increased $26.1 million, or 32.0%, to $107.8 million for the first half of 2008 from $81.7 million for the first half of 2007. Revenues from time-and-expense engagements, fixed-fee engagements and performance-based engagements represented 54.1%, 44.7% and 1.2% of this segment’s revenues during the six months ended June 30, 2008, respectively, compared  to 53.2%, 45.5% and 1.3%, respectively, for the comparable period in 2007.

Of the overall $26.1 million increase in revenues, $30.5 million was attributable to our full-time billable consultants, partially offset by a decrease of $4.4 million attributable to our full-time equivalents. The $30.5 million increase in full-time billable consultant revenues reflected an increase in the number of consultants and an increase in the average billing rate per hour for this segment.

Operating Income
Health and Education Consulting segment operating income increased $18.6 million, or 70.9%, to $44.8 million in the six months ended June 30, 2008 from $26.2 million in the six months ended June 30, 2007. Segment operating margin increased to 41.6% for the first half of 2008 from 32.1% in the same period last year. The increase in this segment’s operating margin reflects lower total compensation cost as a percentage of revenues, coupled with lower total compensation cost per consultant, as well as the absence of amortization expense.

Financial Consulting

Revenues
Financial Consulting segment revenues increased $4.3 million, or 6.2%, to $73.6 million for the first half of 2008 from $69.3 million for the first half of 2007. Revenues for the first half of 2008 included revenues generated by Callaway, which we acquired in July 2007. For the first half of 2008 and 2007, most of this segment’s revenues were from time-and-expense engagements.

Of the overall $4.3 million increase in revenues, $24.2 million was attributable to our full-time equivalents, which was largely offset by a decrease of $19.9 million attributable to our full-time billable consultants. The $19.9 million decrease in full-time billable consultant revenues was primarily due to a decline in this segment’s utilization rate as we added a significant number of consultants during the second half of 2007, coupled with several large engagements during the first half of 2007 that have since wound down. The $24.2 million increase in full-time equivalent revenues resulted from our acquisition of Callaway, which heavily utilizes variable, on-demand consultants.

Operating Income
Financial Consulting segment operating income decreased $13.9 million, or 44.1%, to $17.6 million in the six months ended June 30, 2008 from $31.5 million in the six months ended June 30, 2007. Segment operating margin declined to 23.9% for the first half of 2008 from 45.4% in the same period last year. The decline was attributable to lower utilization of this segment’s full-time billable consultants as discussed above.

Legal Consulting

Revenues
Legal Consulting segment revenues increased $9.6 million, or 21.0%, to $55.7 million for the first half of 2008 from $46.1 million for the first half of 2007. Revenues from time-and-expense engagements, fixed-fee engagements and performance-based engagements represented 90.0%, 8.5% and 1.5% of this segment’s revenues during the six months ended June 30, 2008, respectively, compared to 93.6%, 5.4% and 1.0%, respectively, for the comparable period in 2007.

 
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Of the overall $9.6 million increase in revenues, $2.8 million was attributable to our full-time billable consultants and $6.8 million was attributable to our full-time equivalents. The $2.8 million increase in full-time billable consultant revenues reflected an increase in the number of consultants, partially offset by a decline in the utilization rate of our consultants, as well as a decrease in the average billing rate per hour for this segment. The $6.8 million increase in full-time equivalent revenues reflected a greater demand for our document review services.

Operating Income
Legal Consulting segment operating income increased $1.5 million, or 9.8%, to $16.7 million in the six months ended June 30, 2008 from $15.2 million in the six months ended June 30, 2007. Segment operating margin decreased to 29.9% for the first half of 2008 from 32.9% in the same period last year due to higher total compensation cost as a percentage of revenues.

Corporate Consulting

Revenues
Corporate Consulting segment revenues increased $8.4 million, or 22.6%, to $45.7 million for the first half of 2008 from $37.3 million for the first half of 2007. Revenues from time-and-expense engagements, fixed-fee engagements and performance-based engagements represented 47.0%, 49.8% and 3.2% of this segment’s revenues during the six months ended June 30, 2008, respectively, compared to 51.6%, 45.1% and 3.3%, respectively, for the comparable period in 2007.

The $8.4 million increase in revenues was primarily attributable to our full-time billable consultants. This increase in full-time billable consultant revenues reflected an increase in the number of consultants and an increase in the average billing rate per hour for this segment, partially offset by a decline in the utilization rate of our consultants.

Operating Income
Corporate Consulting segment operating income increased $5.9 million, or 58.1%, to $16.0 million in the six months ended June 30, 2008 from $10.1 million in the six months ended June 30, 2007. Segment operating margin increased to 35.0% for the first half of 2008 from 27.1% for the comparable period last year. The increase in this segment’s operating margin reflects lower total compensation cost as a percentage of revenues and the absence of amortization expense.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents increased $11.3 million, from $3.0 million at December 31, 2007 to $14.3 million at June 30, 2008. Our primary sources of liquidity are cash flows from operations and debt capacity available under our credit facility.

Cash flows provided by operating activities totaled $4.8 million for the six months ended June 30, 2008, compared to cash flows used in operating activities of $5.2 million for the same period last year. Our operating assets and liabilities consist primarily of receivables from billed and unbilled services, accounts payable and accrued expenses, and accrued payroll and related benefits. The volume of billings and timing of collections and payments affect these account balances. The increase in cash provided by operations during the first half of 2008 was attributable to growth in our client receivables moderating. Receivables from clients and unbilled services increased $19.5 million during the six months ended June 30, 2008 as compared to $32.4 million during the same period last year.  This was partially offset by cash paid for bonuses, payroll and related benefits that were accrued for at December 31, 2007.

Cash used in investing activities was $49.1 million for the six months ended June 30, 2008 and $108.1 million for the same period last year. The use of cash in the first half of 2008 primarily related to payments of additional purchase consideration earned by the selling shareholders of Galt, Glass and Wellspring, all of which were businesses that we acquired, as well as the purchases of property and equipment. The use of cash in the first half of 2007 primarily related to the acquisitions of Wellspring and Glass.

At June 30, 2008, we had a credit agreement with various financial institutions under which we may borrow up to $240.0 million. Borrowings under the credit agreement are limited by any outstanding letters of credit, which totaled

 
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$5.9 million at June 30, 2008. Fees and interest on borrowings vary based on our total debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio as set forth in the credit agreement.  Interest is based on a spread, ranging from 0.875% to 2.000%, over the London Interbank Offered Rate (“LIBOR”) or a spread, ranging from 0.0% to 0.75%, over the base rate (which is the greater of the Federal Funds Rate plus 0.50% or the Prime Rate, as selected by us). All outstanding principal is due upon expiration of the credit agreement on February 23, 2012. The credit agreement includes quarterly financial covenants that require us to maintain certain interest coverage and total debt to EBITDA ratios, and net worth levels. In addition, certain acquisitions and similar transactions will need to be approved by the lenders.

During the first six months of 2008, we made borrowings to pay bonuses and additional purchase consideration earned by selling shareholders of businesses that we acquired that were accrued for at December 31, 2007. We also made borrowings to fund our daily operations. During the six months ended June 30, 2008, the average daily outstanding balance under our credit facility was $168.9 million. Borrowings outstanding under this credit facility at June 30, 2008 totaled $179.5 million and carried a weighted-average interest rate of 4.2%. Borrowings outstanding at December 31, 2007 totaled $123.5 million and carried a weighted-average interest rate of 6.1%. At both June 30, 2008 and December 31, 2007, the Company was in compliance with its financial debt covenants.

In July 2008, we amended the credit agreement as described below under “Subsequent Events.”

On April 4, 2008, we entered into an amendment to the Callaway Asset Purchase Agreement dated as of July 28, 2007, whereby we settled the earn-out provision under Section 3.3 of the agreement in consideration for $23.0 million, payable in the form of a promissory note (the “Note”), and the waiver of certain indemnity obligations.  However, the non-compete obligations of the selling shareholders were not modified. Upon delivery of the Note to the selling shareholders, Sections 3.3, 3.4 and 3.5 of the agreement were terminated in their entirety. The Note matures on August 31, 2008 and bears an initial interest rate of 5.0% per annum and increases to 8.0% per annum on July 1, 2008. We may elect to extend the maturity date of the Note until January 31, 2009, in which case the interest rate increases to 14.0% per annum beginning on September 1, 2008.

Future Needs
Our primary financing need has been to fund our growth.  Our growth strategy is to expand our service offerings, which will require investment in new hires, acquisitions of complementary businesses, expansion into other geographic areas, and capital expenditures for information technology, office space, furniture and fixtures, as well as leasehold improvements. In connection with our past business acquisitions, we may be required under earn-out provisions to pay additional purchase consideration to the sellers if specific performance targets are met. We also have other cash commitments as presented below in contractual obligations. Further, with the amended credit agreement as described below under “Subsequent Events,” we will have future cash needs to repay our term loan. Because we expect that our future annual growth rate in revenues and related percentage increases in working capital balances will moderate, we believe our internally generated liquidity, together with the borrowing capacity available under our revolving credit facility and access to external capital resources, will be adequate to fund our long-term growth and capital needs arising from earn-out provisions, cash commitments and debt service obligations. Our ability to secure short-term and long-term financing in the future will depend on several factors, including our future profitability, the quality of our accounts receivable and unbilled services, our relative levels of debt and equity and the overall condition of the credit markets, which have been unstable recently.

CONTRACTUAL OBLIGATIONS

The following table represents our obligations and commitments to make future payments under contracts, such as lease agreements, and under contingent commitments as of December 31, 2007 (in thousands).

 
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Less than
 1 Year
(2008)
   
1 to 3
Years
(2009 to 2010)
   
4 to 5
Years
(2011 to 2013)
   
More than 5 Years
(2013 and thereafter)
   
Total
 
Additional purchase consideration
  $ 32,422     $     $     $     $ 32,422  
Note payable                                                  
    1,000                         1,000  
Interest on note payable                                                  
    40                         40