SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended April 1, 2005

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

For the transition period from to

Commission File Number 0-23651

First Consulting Group, Inc.

(Exact name of registrant as specified in its charter)

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

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

(Address of principal executive offices including zip code)

(562) 624-5200

(Registrant’s telephone number, including area code)

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

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 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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o

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

Common Stock, $.001 par value		24,343,250
(Class)		(Outstanding at April 29, 2005)

First Consulting Group, Inc.

Table of Contents

COVER PAGE

TABLE OF CONTENTS

PART I.			FINANCIAL INFORMATION

	ITEM 1. FINANCIAL STATEMENTS

		Consolidated Balance Sheets

		Consolidated Statements of Operations

		Condensed Consolidated Statements of Cash Flows

		Notes to Consolidated Financial Statements

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

	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

	ITEM 4. CONTROLS AND PROCEDURES

PART II. OTHER INFORMATION

	ITEM 1. LEGAL PROCEEDINGS.

	ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

	ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

	ITEM 5. OTHER INFORMATION.

	ITEM 6. EXHIBITS.

SIGNATURES

EXHIBIT INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

First Consulting Group, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share and per share data)

	April 1, 2005		December 31, 2004
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	14,029	$	15,012
Short-term investments	20,388		25,309
Accounts receivable, less allowance of $1,354 and $1,401 as of April 1, 2005 and December 31, 2004, respectively	24,596		26,266
Unbilled receivables	14,020		11,005
Deferred income taxes	7,869		7,869
Prepaid expenses and other current assets	3,818		2,449
Current assets of discontinued operations	174		561
Total current assets	84,894		88,471

Property and equipment:
Furniture, equipment, and leasehold improvements	4,426		4,144
Information systems equipment	28,064		27,016
	32,490		31,160
Less accumulated depreciation and amortization	20,555		19,331
	11,935		11,829

Other assets:
Executive benefit trust	9,344		9,343
Long-term account receivable	3,353		3,806
Deferred income taxes	4,188		3,220
Goodwill, net	18,159		17,259
Intangibles, net	2,056		2,437
Notes receivable – stockholders	406		407
Long-term investments	325		325
Other	3,097		3,302
	40,928		40,099
Total assets	$	137,757	$	140,399

The accompanying notes are an integral part of these financial statements.

First Consulting Group, Inc. and Subsidiaries

Consolidated Balance Sheets (Continued)

(in thousands, except share and per share data)

	April 1, 2005			December 31, 2004
	(unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,847		$	2,892
Accrued liabilities	10,599			11,104
Accrued restructuring	1,512			1,800
Accrued vacation	7,434			6,682
Accrued incentive compensation	1,387			1,729
Customer advances	7,282			7,458
Current liabilities of discontinued operations	26			105
Total current liabilities	32,087			31,770
Non-current liabilities:
Accrued restructuring	2,861			3,220
Supplemental executive retirement plan	9,350			9,094
Total non-current liabilities	12,211			12,314
Commitments and contingencies	—			—
Stockholders’ equity:
Preferred Stock, $.001 par value; 9,500,000 shares authorized, no shares issued and outstanding	—			—
Series A Junior Participating Preferred Stock, $.001 par value; 500,000 shares authorized, no shares issued and outstanding	—			—
Common Stock, $.001 par value; 50,000,000 shares authorized, 24,335,584 shares issued and outstanding at April 1, 2005 and 24,826,547 shares issued and outstanding at December 31, 2004	24			25
Additional paid-in capital	90,096			91,636
Retained earnings	3,438			4,727
Deferred compensation-stock incentive agreements	(79		)	(107		)
Notes receivable-stockholders	(240		)	(286		)
Accumulated other comprehensive income	220			320
Total stockholders’ equity	93,459			96,315
Total liabilities and stockholders’ equity	$	137,757		$	140,399

The accompanying notes are an integral part of these financial statements.

First Consulting Group, Inc. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share data)

	Three Months Ended
	April 1, 2005			March 26, 2004
	(unaudited)
Revenues before reimbursements	$	68,144		$	65,353
Reimbursements	3,662			3,980
Total revenues	71,806			69,333

Cost of services before reimbursable expenses	48,268			44,531
Reimbursable expenses	3,662			3,980
Total cost of services	51,930			48,511

Gross profit	19,876			20,822

Selling expenses	6,758			7,248
General and administrative expenses	14,739			11,865
Income (loss) from operations	(1,621		)	1,709
Other income (expense):
Interest income, net	230			202
Other expense, net	—			(21		)
Expense for premium on repurchase of stock	—			(1,561		)
Income (loss) from continuing operations before income taxes	(1,391		)	329
Income tax provision (benefit)	(639		)	835
Loss from continuing operations	(752		)	(506		)
Loss on discontinued operations, net of tax benefit	(537		)	(127		)
Net loss	$	(1,289	)	$	(633	)

Basic net loss per share:
Loss from continuing operations, net of tax	$	(0.03	)	$	(0.02	)
Loss on discontinued operations, net of tax	(0.02		)	—
Net loss	$	(0.05	)	$	(0.02	)
Diluted net loss per share:
Loss from continuing operations, net of tax	$	(0.03	)	$	(0.02	)
Loss on discontinued operations, net of tax	(0.02		)	—
Net loss	$	(0.05	)	$	(0.02	)

Weighted average shares used in computing:
Basic net loss per share	24,475			25,422
Diluted net loss per share	24,475			25,422

The accompanying notes are an integral part of these financial statements.

First Consulting Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

	Three Months Ended
	April 1, 2005			March 26, 2004
	(unaudited)
Cash flows from operating activities:
Net loss:	$	(1,289	)	$	(633	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,493			1,109
Premium on capital stock repurchase	—			1,561
Intangible amortization	381			398
Provision for bad debts, net of adjustments	—			116
Loss on sale of assets	2			—
Minority interest in net loss of subsidiary	—			(14		)
Compensation from stock issuances	28			26
Interest income on notes receivable – stockholders	(27		)	(14		)
Changes in assets and liabilities, excluding effect of acquisitions:
Accounts receivable	1,670			3,003
Unbilled receivables	(3,015		)	(3,141		)
Prepaid expenses and other	(1,369		)	(1,034		)
Current assets of discontinued operations	387			—
Long term account receivable	453			613
Other assets	205			(751		)
Accounts payable	955			751
Accrued liabilities	(505		)	(861		)
Current liabilities of discontinued operations	(79		)	—
Accrued restructuring	(647		)	(2,303		)
Accrued vacation	752			244
Accrued incentive compensation	(342		)	116
Customer advances	(176		)	(1,468		)
Deferred income taxes	(968		)	508
Supplemental executive retirement plan	255			227
Other	(11		)	61
Net cash used in operating activities	(1,847		)	(1,486		)
Cash flows from investing activities:
Proceeds from sale/maturity of investments	4,921			8,766
Purchase of property and equipment	(1,619		)	(1,992		)
Acquisition of business, net of cash acquired	—			(2,383		)
Net cash provided by investing activities	3,302			4,391
Cash flows from financing activities:
Proceeds from issuance of capital stock, net	156			729
Proceeds from notes receivable and tax loan payments	7			26
Capital stock repurchase	(2,530		)	(14,773		)
Net cash used in financing activities	(2,367		)	(14,018		)
Effect of exchange rate changes on cash and cash equivalents	(71		)	27
Net change in cash and cash equivalents	(983		)	(11,086		)
Cash and cash equivalents at beginning of period	15,012			26,826
Cash and cash equivalents at end of period	$	14,029		$	15,740

Cash paid during the period for:
Interest	$	42		$	4
Income taxes	$	127		$	310

The accompanying notes are an integral part of these financial statements.

Notes to Consolidated Financial Statements

Note 1 Accounting Policies

Basis of Presentation

The accompanying consolidated balance sheet of First Consulting Group, Inc. (the “Company” or “FCG”) at April 1, 2005 and consolidated statements of operations and condensed consolidated statements of cash flows for the periods ended April 1, 2005 and March 26, 2004 are unaudited. These financial statements reflect all adjustments, consisting of only normal recurring adjustments, which, in the opinion of management, are necessary to fairly present the financial position of the Company at April 1, 2005 and the results of operations and cash flows for the three-month periods ended April 1, 2005 and March 26, 2004. The results of operations and cash flows for the three-month period ended April 1, 2005 are not necessarily indicative of the results to be expected for the year ending December 30, 2005. For more complete financial information, these financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2004 included in the Company’s Annual Report on Form 10-K. Certain reclassifications have been made to the 2004 financial statements to conform to the 2005 presentation.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated.

Stock-Based Compensation

The Company accounts for stock-based employee compensation using the intrinsic value method as prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), and Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS No. 123” (“SFAS No. 148”). SFAS No. 123 requires pro forma disclosures of net income (loss) and net income (loss) per share as if the fair value method of accounting for stock-based awards had been applied. Under the fair value method, compensation cost is recorded based on the value of the award at the grant date and is recognized over the service period.

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

		Three Months Ended
		April 1, 2005			March 26, 2004
Net loss, as reported		$	(1,289	)	$	(633	)
Deduct: Total stock based employee compensation expense determined under fair value method for all awards, net of tax		(241		)	(453		)
Pro forma net loss		$	(1,530	)	$	(1,086	)

Basic and diluted loss per share	As reported	$	(0.05	)	$	(0.02	)
	Pro forma	$	(0.06	)	$	(0.04	)

Basic and Diluted Net Income (Loss) Per Share

Basic net income (loss) per share is based upon the weighted average number of common shares outstanding. Diluted net income per share is based on the assumption that stock options were exercised. Dilution is computed by applying the treasury stock method. Under this method, options are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained by the Company from such exercise were used by the Company to purchase common stock at the average market price during the period. Stock options are not considered when computing diluted net loss per share as they are considered anti-dilutive.

The following represents a reconciliation of basic and diluted net loss per share for the three-month periods ended April 1, 2005 and March 26, 2004 (in thousands, except per share data):

	Three Months Ended
	April 1, 2005			March 26, 2004

Loss from continuing operations	$	(752	)	$	(506	)
Loss on discontinued operations, net of tax benefit	(537		)	(127		)
Net loss	$	(1,289	)	$	(633	)

Basic and diluted weighted average number of shares outstanding	24,475			25,422

	Three Months Ended
	April 1, 2005			March 26, 2004
Basic and diluted per share:
Loss from continuing operations	$	(0.03	)	$	(0.02	)
Loss on discontinued operations, net of tax benefit	(0.02		)	—
Net loss per share	$	(0.05	)	$	(0.02	)

For the three months ended April 1, 2005 and March 26, 2004, there were 5,243,526 and 5,242,036 anti-dilutive outstanding stock options, respectively, excluded from the calculation of diluted loss per share.

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, valuation of goodwill and long-lived and intangible assets, accrued liabilities, income taxes including the amount of tax asset valuation allowance required, restructuring costs, litigation and disputes, and the allowance for doubtful accounts.

The Company uses significant estimates in the calculation of its income tax provision by estimating whether it will have sufficient future taxable income to realize its deferred tax assets. There can be no assurances that the Company’s taxable income will be sufficient to realize such deferred tax assets and the Company will continue to evaluate its valuation allowance on an ongoing basis.

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

Note 2 Investments

At April 1, 2005, the Company had approximately $20.4 million in short-term investments. Such investments were held primarily in commercial paper, money market investments, and tax-exempt government securities. Net unrealized gains and losses on investments were immaterial at April 1, 2005. Additionally, the Company had $0.3 million of non-marketable equity investments, valued at the lower of cost or estimated fair value, which were included in long-term investments.

Note 3 Long-Term Account Receivable

At April 1, 2005, the Company carried a long-term account receivable of approximately $3.4 million from a single client. The receivable is related to an outsourcing contract and is scheduled to be collected over the next 21 months.

Note 4 Business Acquisitions

FCG Infrastructure Services (FCGIS)

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

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

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

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

For the six-month periods ended June 25, 2004 and December 31, 2004, FCGIS met the revenue and profitability targets, and 295,664 contingent shares were released to the former FCGIS stockholders, thus adding $1.8 million to goodwill. In February 2005, the Company negotiated an early conclusion to

its escrow agreement related to shares of common stock issued in the purchase of FCGIS, where half of the remaining 295,664 shares in escrow were released and the other half were forfeited back to the Company. The shares released further increased goodwill by another $900,000 to a total of $6.1 million of goodwill related to the acquisition.

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

Note 5 Goodwill and Intangible Assets

Goodwill is evaluated for impairment annually, pursuant to SFAS 142, or if an event occurs or circumstances change that may reduce the fair value of the reporting unit below its book value. The impairment test is conducted at the reporting unit level by comparing the fair value of the reporting unit with its carrying value. Fair value is determined by using a market approach valuation model based on revenue multiples or a discounted cash flow approach. The Company uses various assumptions in the valuation, such as discount rates, and comparable company analysis in performing these valuations. If the carrying value exceeds the fair value, goodwill may be impaired. If this occurs, the fair value of the reporting unit is then allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. This implied fair value is then compared with the carrying amount of the reporting unit goodwill, and if it is less, the Company would then recognize an impairment loss. In addition, the Company evaluates intangible assets with definite lives pursuant to SFAS 142, to determine whether adjustment to these amounts or estimated useful lives are required based on current events and circumstances.

In the first quarter of 2005, the Company reorganized its business segments. In accordance with SFAS 142, the goodwill formerly attributed to the Meditech Service Center segment was divided between the Health Delivery Services and Health Delivery Outsourcing segments based on the relative fair values of parts of the previous Meditech Service Center being reorganized into those business units, and is shown historically on this restated basis in the following schedule.

The changes in the net carrying amounts of goodwill for the three months ended April 1, 2005 are as follows (in thousands):

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

The $900,000 of additional goodwill in the first quarter of 2005 relates to a final earn out payment to the previous owners of a business which was the substantial portion of the Meditech Service Center segment.

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

	Software and Software Development			Customer Related			Non-Compete Agreements			Total
Balance as of December 26, 2003	$	763		$	2,858		$	179		$	3,800
Acquired	—			300			—			300
Amortization	(543		)	(981		)	(139		)	(1,663		)
Balance as of December 31, 2004		220			2,177			40			2,437
Amortization	(88		)	(264		)	(29		)	(381		)
Balance as of April 1, 2005	$	132		$	1,913		$	11		$	2,056
Amortization Period in Years	2 -3			2 -4			2 -3

The following table summarizes the estimated annual pretax amortization expense for these assets (in thousands):

Fiscal Year
2005 (remainder of year)	$	828
2006	772
2007	456
Total	$	2,056

Note 6 Restructuring, Severance, and Impairment Costs

At April 1, 2005, the Company had approximately $4.4 million in restructuring accrual which related to restructuring, severance, and impairment costs incurred in the prior years, primarily in the Life Sciences segment. The remaining accrual entirely consists of costs related to vacated leases, net of estimated sublease payments.

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

	Facilities/Other Related Costs
Accrual balance at December 31, 2004	$	5,020
Cash payments	(647		)
Accrual balance at April 1, 2005	$	4,373

Note 7 Comprehensive Income (Loss)

Comprehensive income (loss), net of taxes, for the three months ended April 1, 2005 and March 26, 2004, is as follows (in thousands):

	Three Months Ended
	April 1, 2005			March 26, 2004
Net loss	$	(1,289	)	$	(633	)

Foreign currency translation adjustment	(100		)	82
Unrealized gain on investments	—			10
Other comprehensive income (loss), net of tax	(100		)	92

Comprehensive loss	$	(1,389	)	$	(541	)

Note 8 Discontinued Operations

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

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

A summary of results for CCS for the quarter ended April 1, 2005 included revenues of $631,000 and a pre-tax loss of $866,000 which related to the sales, operation, and wind-down of the business. The pre-tax loss, net of a 38% tax benefit, resulted in a net loss of $537,000, compared to a loss of $127,000, net of a 38% tax benefit for the quarter ended March 26, 2004. The current quarter’s net loss included $276,000 related to severance costs for the remaining staff of 37 people. Further, in accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities”, the Company recorded an accrual for the remaining lease payments on the CCS leased property in the amount of $89,000.

Note 9 Disclosure of Segment Information

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

• The Meditech Service Center segment has been split between Health Delivery Services and Health Delivery Outsourcing. An insignificant portion of the Meditech Service Center has also been included in the Software Products segment;

• The Health Delivery Services (previously Health Delivery) and Health Delivery Outsourcing segments, while still reported separately, are now combined with a common sales group, Health Delivery Sales into a total Health Delivery segment;

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

• Software Products (SWP) has been created by adding the Cyberview product that used to be in the Meditech Service Center segment to the existing SWP business line, which used to be included within Other Business, and primarily involves the FirstGateways product.

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

• Health Delivery Services - the delivery of consulting and systems integration services to health delivery clients;

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

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

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

• Government and Technology Services - the delivery of consulting services to government clients, the delivery of blended offshore software development, and the delivery of technology staff augmentation services; and

• Software Products - the delivery of solutions involving the use of software to health delivery clients.

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

The Company evaluates its segments’ performance based on revenues and operating income. Certain selling and general and administrative expenses (including corporate functions, occupancy related costs, depreciation, professional development, recruiting, and marketing), are managed at the corporate level and allocated to each operating segment based on either net revenues and/or actual usage. The Company does not manage or track most assets by segment. As a result, interest and other charges are not included in the tables below.

The following segment information is for the quarters ended April 1, 2005 and March 26, 2004 (in thousands):

For the three months ended April 1, 2005:

(in thousands)

	Health Delivery Services		Health Delivery Sales			Health Delivery Outsourcing		Health Delivery Total		Life Sciences			Health Plan			Government & Technology Services		Software Products			Other			Totals
Revenues before reimbursements	$	16,043	$	—		$	30,762	$	46,805	$	8,715		$	4,010		$	8,077	$	537		$	—		$	68,144
Reimbursements	2,517		—			132		2,649		197			581			214		21			—			3,662
Total revenues	18,560		—			30,894		49,454		8,912			4,591			8,291		558			—			71,806
Cost of services before reimbursable expenses	10,799		—			25,567		36,366		4,480			3,259			4,833		884			(1,554		)	48,268
Reimbursable expenses	2,517		—			132		2,649		197			581			214		21			—			3,662
Total cost of services	13,316		—			25,699		39,015		4,677			3,840			5,047		905			(1,554		)	51,930
Gross profit	5,244		—			5,195		10,439		4,235			751			3,244		(347		)	1,554			19,876
Selling expenses	1,127		1,324			466		2,917		1,905			536			873		142			385			6,758
General & administrative expenses	3,180		—			3,214		6,394		2,580			740			1,702		361			2,962			14,739
Income (loss) from operations	$	937	$	(1,324	)	$	1,515	$	1,128	$	(250	)	$	(525	)	$	669	$	(850	)	$	(1,793	)	$	(1,621	)

For the three months ended March 26, 2004:

(in thousands)

	Health Delivery Services		Health Delivery Sales			Health Delivery Outsourcing		Health Delivery Total		Life Sciences			Health Plan		Government & Technology Services		Software Products			Other			Totals
Revenues before reimbursements	$	17,358	$	—		$	27,119	$	44,477	$	8,867		$	4,248	$	7,361	$	384		$	16		$	65,353
Reimbursements	2,384		—			100		2,484		226			580		145		70			475			3,980
Total revenues	19,742		—			27,219		46,961		9,093			4,828		7,506		454			491			69,333
Cost of services before reimbursable expenses	9,704		—			22,606		32,310		5,054			2,438		4,746		656			(673		)	44,531
Reimbursable expenses	2,384		—			100		2,484		226			580		145		70			475			3,980
Total cost of services	12,088		—			22,706		34,794		5,280			3,018		4,891		726			(198		)	48,511
Gross profit	7,654		—			4,513		12,167		3,813			1,810		2,615		(272		)	689			20,822
Selling expenses	1,101		1,369			585		3,055		2,488			876		667		70			92			7,248
General & administrative expenses	2,570		—			2,571		5,141		2,984			644		1,382		157			1,557			11,865
Income (loss) from operations	$	3,983	$	(1,369	)	$	1,357	$	3,971	$	(1,659	)	$	290	$	566	$	(499	)	$	(960	)	$	1,709

The “other” column consists of unallocated shared service center and support costs. For the quarter ended April 1, 2005, there was a significant net loss in this column due to under utilization of both the infrastructure and integration shared service centers.

Detail of Health Delivery Outsourcing Revenues

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

	Three Months Ended
	April 1, 2005		March 26, 2004
Internally generated revenues	$	25,119	$	21,656
Subcontractor revenues	5,643		5,463
Revenues before reimbursements	$	30,762	$	27,119

Note 10 Line of Credit

The Company has a revolving line of credit expiring on May 1, 2006, under which it is allowed to borrow up to $7.0 million at the prevailing prime rate. There was no outstanding balance under the line of credit at April 1, 2005.

Note 11 Capital Stock Repurchase From Major Stockholder

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

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

In the first quarter of 2004, the Company recorded a charge of $1.6 million without any tax benefit, which charge is based on the premium included in the purchase consideration. From a tax perspective, no amounts of the purchase price are allocable to any of the restrictive covenants agreed to by Mr. Lipson in the repurchase agreement.

Other material terms of the transaction were as follows:

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

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

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

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

• Mr. Lipson also granted to the Board of Directors of the Company an irrevocable proxy for any of the Company’s securities that he owns or acquires after the closing of the Company’s purchase in this transaction.

• The Company and Mr. Lipson executed a mutual release of claims.

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

THE FOLLOWING MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THOSE SET FORTH BELOW UNDER THE CAPTION “RISKS RELATING TO OUR BUSINESS,” AND OTHER REPORTS WE FILE WITH THE SECURITIES AND EXCHANGE COMMISSION. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS.

Overview

We provide services primarily to providers, payors, government agencies, pharmaceutical, biogenetic, and other healthcare organizations in North America, Europe, and Asia. We generate substantially all of our revenues from fees for information technology outsourcing services and professional services.

We typically bill for our services on an hourly or fixed-fee basis as specified by the agreement with a particular client. For services billed on an hourly basis, in our consulting and systems integration businesses (“CSI”), fees are determined by multiplying the amount of time expended on each assignment by the project hourly rate for the consultant(s) assigned to the engagement. Fixed fees, including outsourcing fees, are established on a per-assignment or monthly basis and are based on several factors such as the size, scope, complexity and duration of an assignment, the number of our employees required to complete the assignment, and the volume of transactions or interactions. Revenues are generally recognized related to the level of services performed, the amount of cost incurred on the assignment versus the estimated total cost to complete the assignment, or on a straight-line basis over the period of performance of service. Additionally, we have been licensing an increased amount of our software products, generally in conjunction with the customization and implementation of such software products. Revenues from our software licensing and maintenance were approximately 3% of our total revenues in the first quarter of 2005, and we expect our software licensing revenues to continue to grow incrementally during our 2005 fiscal year. We also expect our services revenues associated with the implementation of our software products to continue to become a more significant part of our overall services revenues.

Provisions are made for estimated uncollectible amounts based on our historical experience. We may obtain payment in advance of providing services. These advances are recorded as customer advances and reflected as a liability on our balance sheet.

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

Cost of services primarily consists of the salaries, bonuses, and related benefits of client-serving consultants and outsourcing associates, and subcontractor expenses. Selling expenses primarily consist of the salaries, benefits, travel, and other costs of our sales force, as well as marketing and market research expenses. General and administrative expenses primarily consist of the costs attributable to the support of our client-serving professionals such as non-billable travel, office space occupancy, information systems and infrastructure, salaries and expenses for executive management, financial accounting and administrative personnel, expenses for firm and business unit governance meetings, recruiting fees, professional development and training, and legal and other professional services. As associate related costs are relatively fixed in the short term, variations in our revenues and operating results in our CSI

business can occur as a result of variations in billing margins and utilization rates of our billable associates.

Our most significant expenses are our human resource and related salary and benefit expenses. As of April 1, 2005, approximately 1,282 of our 2,434 employees are billable consultants. Another 800 employees are part of our outsourcing business. The salaries and benefits of such billable consultants and outsourcing related employees are recognized in our cost of services. Most non-billable employee salaries and benefits are recognized as a component of either selling or general and administrative expenses. Approximately 14% of our workforce, or 352 employees, are classified as non-billable. Our cost of services as a percentage of revenues is directly related to several factors, including, but not limited to:

• Our consultant utilization, which is the ratio of total billable hours to available hours in a given period;

• The amount and timing of cost incurred;

• Our ability to control costs on our outsourcing projects;

• The billed rate on time and material contracts; and

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

In our outsourcing contracts, a significant portion of our revenues are fixed and allocated over the contract on a straight-line basis, as we are required to provide a specified level of services subject to certain performance measurements. Also, certain revenues may fluctuate under the contracts based on the volume of transactions we process or other measurements of service provided. If we incur higher costs to provide the required services or receive less revenue due to reduced transaction volumes or penalties associated with service level failures, our gross profit can be negatively impacted.

In our CSI business, we manage consultant utilization by monitoring assignment requirements and timetables, available and required skills, and available consultant hours per week and per month. Differences in personnel utilization rates can result from variations in the amount of non-billed time, which has historically consisted of training time, vacation time, time lost to illness and inclement weather, and unassigned time. Non-billed time also includes time devoted to other necessary and productive activities such as sales support and interviewing prospective employees. Unassigned time results from differences in the timing of the completion of an existing assignment and the beginning of a new assignment. In order to reduce and limit unassigned time, we actively manage personnel utilization by monitoring and projecting estimated engagement start and completion dates and matching consultant availability with current and projected client requirements. The number of consultants staffed on an assignment will vary according to the size, complexity, duration, and demands of the assignment. Assignment terminations, completions, inclement weather, and scheduling delays may result in periods in which consultants are not optimally utilized. An unanticipated termination of a significant assignment or an overall lengthening of the sales cycle could result in a higher than expected number of unassigned consultants and could cause us to experience lower margins. In addition, entry into new market areas and the hiring of consultants in advance of client assignments have resulted and may continue to result in periods of lower consultant utilization.

In response to competition and continued pricing and rate pressures, we have implemented a global sourcing strategy into our business operations, which includes the deployment of offshore resources as well as resources that perform services remote from the client site. We also incorporate larger numbers of variable cost or per diem staff in some of our projects. We expect these strategies to result in improved cost of services through a combination of lower cost attributable to offshore resources and higher leverage of resources that perform services offsite or on a variable cost basis. To the extent we pass through reduced costs to our clients related to offshore resources, the global sourcing strategy may result in lower revenues on a per engagement basis. However, we expect to offset this potential revenue

impact with improved competitive positioning in our markets, which could result in an increased number of engagements to offset the potential revenue impact. Several of our competitors employ both global sourcing and variable staffing strategies to provide software development and other information technology services to their clients, while at the same time reducing their cost structure and improving the quality of services they provide. If we are unable to realize the perceived cost benefits of our recently implemented strategies or if we are unable to receive high quality services from foreign employees, variable staff employees or subcontractors, our business may be adversely impacted and we may not be able to compete effectively.

Results of Operations for the Three Months Ended April 1, 2005 and March 26, 2004

Revenues. Our net revenues increased to $68.1 million for the quarter ended April 1, 2005, an increase of 4.3% from $65.4 million for the quarter ended March 26, 2004. Our total revenues increased to $71.8 million for the quarter ended April 1, 2005, an increase of 3.6% from $69.3 million for the quarter ended March 26, 2004. The increases were in Health Delivery Outsourcing and Government and Technology Services, offset by decreases in Health Delivery Services, Health Plan and Life Sciences. The Health Delivery Outsourcing segment had the most significant increase, $3.6 million or 13.4%, partly due to the award of a new outsourcing engagement in late 2004. The most significant offsetting decrease was in Health Delivery Services, which declined by $1.3 million or 7.6%, due to delays in closing new contracts involving the adoption of our blended shore delivery model in the Health Delivery Services segment. Overall, we anticipate that our revenues in the near future will grow moderately from those of the first quarter of 2005, exclusive of the potential for growth in the outsourcing market. In outsourcing, we are pursuing several opportunities which, if we are successful, could significantly increase our revenues later in fiscal year 2005 or in future years although there can be no assurances in that regard. Additionally, we have several existing outsourcing contracts up for renewal over the next 12 to 24 months, which we must successfully retain in order to avoid an offsetting decline in our revenues.

Cost of Services. Cost of services before reimbursable expenses increased to $48.3 million for the quarter ended April 1, 2005, an increase of 8.4% from $44.5 million for the quarter ended March 26, 2004. The increase was primarily due to $3.0 million of additional costs in the Health Delivery Outsourcing segment to service the increased revenues noted above. Additionally, we increased costs in Health Delivery Services over the past year to support what had been a growing level of revenues prior to an unexpected decline in the first quarter of fiscal year 2005. We also increased Health Plan costs as an investment in developing new business offerings in both information technology and business process outsourcing.

Gross Profit. Gross profit decreased to $19.9 million, or 29.2% of net revenues, for the quarter ended April 1, 2005, a decrease of 4.5% from $20.8 million, or 31.9% of net revenues, for the quarter ended March 26, 2004. The decrease was primarily due to a reduction in the Health Delivery Services segment gross profit, falling from 44.1% in the first quarter of 2004 to 32.7% in the first quarter of 2005. This decrease was due to the unexpected decline in revenue in the first quarter of fiscal year 2005, while cost of services had increased over the past year in line with what had previously been growing revenues in that segment. In addition, the gross profits of Health Delivery Outsourcing, approximately 16.9% during the first quarter of 2005, is generally lower on a percentage basis than gross profits in our other business segments. While gross profit in this segment has remained steady year over year, the growth we have experienced in our Health Delivery Outsourcing segment has resulted in an overall lower gross profit percentage due to the lower gross profit nature of outsourcing business. Given our current mix of outsourcing and non-outsourcing revenues, our overall gross profit percentage is not expected to change significantly in the near future. However, we expect outsourcing to contribute an increasing proportion of our total revenues, which we expect will result in our gross profit percentage declining incrementally. In addition, a sudden downturn in demand in one or more of our segments or an inability to control costs on our fixed price projects could negatively affect our gross profit percentage.

We have recently extended our agreement with a major outsourcing client. This was originally a 5-year agreement, with just over two years remaining, and was extended for an additional three years to expire on June 30, 2010. As part of the extension, the client has advised us to replace a major infrastructure subcontractor. The related subcontract specifies that we are required to pay the subcontractor a termination fee of up to $900,000. Depending on the timing and outcome of contract negotiations, we may be required to pay such fee and charge some or all of it to expense, without offsetting revenue, in the quarter ending July 1, 2005. We would expect to earn higher margins over the remainder of the contract as a result, however, by reducing our cost of services.

Selling Expenses. Selling expenses decreased to $6.8 million for the quarter ended April 1, 2005, a decrease of 6.8% from $7.2 million for the quarter ended March 26, 2004. This decrease was primarily due to a reduction in our sales force, primarily in the Life Sciences segment. Selling expenses as a percentage of net revenues decreased to 9.9% for the quarter ended April 1, 2005 from 11.1% for the quarter ended March 26, 2004.

General and Administrative Expenses. General and administrative expenses increased to $14.7 million for the quarter ended April 1, 2005, an increase of 24.2% from $11.9 million for the quarter ended March 26, 2004. Almost the entire increase was due to non-salary costs. The most significant increase was in infrastructure costs of approximately $1.1 million related to facilities and equipment needed to directly support our growing outsourcing business. Further, we incurred approximately $500,000 more in travel costs during the first quarter of fiscal year 2005 than in the first quarter of 2004. Finally, we experienced higher costs in a number of other areas including severance, rent in our growing offshore shared service centers, and outside professional services such as audit, legal, and consulting costs. General and administrative expenses as a percentage of net revenues increased to 21.6% for the quarter ended April 1, 2005 from 18.2% for the quarter ended March 26, 2004. After having experienced some significant growth quarter-to-quarter over the past year for the items noted above, we expect the ongoing level of general and administrative expenses to be consistent with their current level in the near future.

Interest Income, Net. Interest income, net of interest expense, remained constant at $0.2 million for the quarters ended April 1, 2005 and March 26, 2004, respectively. Interest income net of interest expense as a percentage of net revenues remained at 0.3% for the quarters ended April 1, 2005 and March 26, 2004, respectively.

Other Expense, Net. Other expense was negligible for the quarters ended April 1, 2005 and March 26, 2004, respectively.

Expense for Premium on Repurchase of Stock. In the first quarter of 2004, we repurchased 1.96 million shares of our stock and certain options from a major stockholder at a premium to the then current market price (see Note 11 of Notes to Consolidated Financial Statements). The aggregate purchase price for the shares and the options represented a premium of approximately 11% to market. As a result, we recorded a pretax charge of approximately $1.6 million (without any tax benefit) for such premium included in the purchase consideration.

Income Taxes. We recorded a $0.6 million tax benefit for the quarter ended April 1, 2005 versus a $0.8 million tax provision for the quarter ended March 26, 2004. The 46% tax benefit in the quarter ended April 1, 2005 is based on an anticipated profit for fiscal year 2005 as a whole, which management expects will incur a tax provision at the 46% rate. The provision for income taxes for the quarter ended March 26, 2004 was $0.8 million despite the existence of a pretax loss, due to the nondeductibility of the premium on the repurchase of stock described above.

Loss on Discontinued Operations. The disposition of our Coactive Call Center Service line has been accounted for as a discontinued operation. During the quarter ended April 1, 2005, we incurred

$866,000 of costs related to the operation and wind-down of the business. These costs, net of a 38% tax benefit, resulted in a net loss of $537,000, compared to a net loss from the operations of this discontinued operation of $127,000 in the first quarter of 2004.

Liquidity and Capital Resources

During the three months ended April 1, 2005, we used cash flow for operations of $1.8 million to fund our operating losses and $2.5 million to repurchase shares of our common stock from the previous owners of FCG Infrastructure Services, Inc. (formerly Codigent Solutions Group, Inc.). Further, we used approximately $1.6 million of cash to purchase property and equipment, primarily information technology and related equipment. Combined billed and unbilled accounts receivables increased by $1.3 million as days sales outstanding increased from 37 days at the end of the fourth quarter of 2004 to 41 days at the end of the first quarter of 2005. At April 1, 2005, we had cash and investments available for sale of $34.4 million compared to $40.3 million at December 31, 2004.

On February 27, 2004, we repurchased all outstanding shares and certain stock options from a major stockholder (see Note 11 of Notes to Consolidated Financial Statements). The aggregate purchase price for the shares and options was $14.8 million in cash, and cancellation of a note owed to us by the stockholder in the amount of $0.3 million. In addition, in the event we were to announce or consummate a change in control transaction prior to the first anniversary of this transaction, or if we were to enter into negotiations regarding a change in control transaction prior to the first anniversary and subsequently announce publicly a definitive agreement for or consummate a change in control transaction within the 18 months following the closing of this repurchase transaction, we would pay to this former stockholder, upon the closing of such change in control, an amount equal to the difference between $7.50 per share and the change in control transaction price per share, if such change in control price per share amount was higher.

On October 1, 2003, we entered into an unsecured loan agreement with White Plains Hospital Center requiring us to provide interest free financing of up to $4.08 million if our system implementation at the hospital results in an increase in the hospital’s accounts receivable balance or days outstanding during a 150-day period following the completion of the system implementation. Any amounts borrowed during this 150-day period are payable 90 days after the borrowing date. There was no outstanding balance under this unsecured loan agreement at April 1, 2005. We do not currently expect to make any loans under this agreement, however, this could require temporary use of cash during fiscal year 2005. Since our loans would be unsecured, we cannot guarantee that the hospital will repay our loans on a timely basis, if at all. If our loans are not repaid or repaid in a timely manner, our financial condition would be impacted negatively.

We have a revolving line of credit, under which we are allowed to borrow up to $7.0 million at an interest rate of the prevailing prime rate with an expiration of May 1, 2006. There was no outstanding balance under the line of credit at April 1, 2005.

As of April 1, 2005, the following table summarizes our contractual and other commitments (in thousands):

	Payments Due by Period
Contractual Obligations	Less than 1 Year		1 -3 Years		3-5 Years		Total
Operating leases, net of subleases	$	4,727	$	8,159	$	1,382	$	14,268
Purchase obligations	310		—		—		310
Total	$	5,037	$	8,159	$	1,382	$	14,578

Management believes that our existing cash and investments, together with funds generated from operations, will be sufficient to meet operating requirements for at least the next twelve months. Our cash and investments are available for capital expenditures (which are projected to be approximately $8.0 million for 2005), strategic investments, mergers and acquisitions, and other potential large-scale cash needs that may arise.

Critical Accounting Policies and Estimates

The foregoing discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, cost to complete client engagements, valuation of goodwill and long-lived and intangible assets, accrued liabilities, income taxes, restructuring costs, idle facilities, litigation and disputes, and the allowance for doubtful accounts. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from our estimates and we do not assume any obligation to update any forward-looking information.

We believe the following critical accounting policies reflect our more significant assumptions and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition and Unbilled Receivables

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

Revenues from time-and-materials arrangements are generally recognized based upon contracted hourly billing rates as the work progresses. Revenues from level-of-effort arrangements are recognized based upon a fixed price for the level of resources provided. Revenues from fixed fee arrangements for consulting and systems integration work are generally recognized on a rate per hour or percentage-of-completion basis. We maintain, for each of our fixed fee contracts, estimates of total revenue and cost over the contract term. For purposes of periodic financial reporting on the fixed price consulting and system integration contracts, we accumulate total actual costs incurred to date under the contract. The ratio of those actual costs to our then-current estimate of total costs for the life of the contract is then applied to our then-current estimate of total revenues for the life of the contract to determine the portion of total estimated revenues that should be recognized. We follow this method because reasonably dependable estimates of the revenues and costs applicable to various stages of a contract can be made.

Revenues recognized on fixed price consulting and system integration contracts are subject to revisions as the contract progresses to completion. If we do not accurately estimate the resources required or the scope of the work to be performed, do not complete our projects within the planned periods of time,

or do not satisfy our obligations under the contracts, then profit may be significantly and negatively affected. Revisions in our contract estimates are reflected in the period in which the determination is made that facts and circumstances dictate a change of estimate. Favorable changes in estimates result in additional revenues recognized, and unfavorable changes in estimates result in a reduction of recognized revenues. Provisions for estimated losses on individual contracts are made in the period in which the loss first becomes known. Some contracts include incentives for achieving either schedule targets, cost targets, or other defined goals. Revenues from incentive type arrangements are recognized when it is probable they will be earned.

We account for certain of our outsourcing contracts using EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables,” which addresses how to account for arrangements that involve the delivery or performance of multiple products, services, and/or rights to use assets. Revenue arrangements with multiple deliverables are divided into separate units of accounting if the deliverables in the arrangement meet the following criteria: (1) the delivered item has value to the customer on a standalone basis; (2) there is objective and reliable evidence of the fair value of undelivered items; and (3) delivery of any undelivered item is probable. Arrangement consideration is allocated among the separate units of accounting based on their relative fair values, with the amount allocated to the delivered item being limited to the amount that is not contingent on the delivery of additional items or meeting other specified performance conditions.

On certain contracts, or elements of contracts, costs are incurred subsequent to the signing of the contract, but prior to the rendering of service and associated recognition of revenue. Where such costs are incurred and realization of those costs is either paid for upfront or guaranteed by the contract, those costs are deferred and later expensed over the period of recognition of the related revenue. At April 1, 2005, we had deferred $1.3 million of unamortized deferred costs.

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

Software license and maintenance revenues comprised approximately 3% of our net revenues in the first quarter of 2005. Additionally, we realized substantial additional revenue from the implementation of our software. We recognize software revenues in accordance with the provisions of the American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2, “Software Revenue Recognition”, as amended by SOP 98-4, “Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition” and SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions”, and in accordance with the Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition”. We license software under non-cancelable license agreements and provide related professional services, including consulting, training, and implementation services, as well as ongoing customer support and maintenance. Most of our software license fee revenues are from arrangements which include implementation services that are

essential to the functionality of our software products, and are recognized using contract accounting, including the percentage-of-completion methodology, over the period of the implementation.

In those more limited cases where our software arrangements do not include services essential to the functionality of the product, license fee revenues are recognized when the software product has been shipped, provided a non-cancelable license agreement has been signed, there are no uncertainties surrounding product acceptance, the fees are fixed or determinable and collection of the related receivable is considered probable. We do not generally offer rights of return or acceptance clauses to our customers. In situations where we do provide rights of return or acceptance clauses, revenue is deferred until the clause expires. Typically, our software license fees are due within a twelve-month period from the date of shipment. If the fee due from the customer is not fixed or determinable, including payment terms greater than twelve months from shipment, revenue is recognized as payments become due and all other conditions for revenue recognition have been satisfied. In software arrangements that include rights to multiple software products, specified upgrades, maintenance or services, we allocate the total arrangement fee among the deliverables using the fair value of each of the deliverables determined using vendor-specific objective evidence. Vendor-specific objective evidence of fair value is determined using the price charged when that element is sold separately. In software arrangements in which we have fair value of all undelivered elements but not of a delivered element, we use the residual method to record revenue. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered element(s) and is recognized as revenue. In software arrangements in which we do not have vendor-specific objective evidence of fair value of all undelivered elements, revenue is deferred until fair value is determined or all elements have been delivered.

Revenues from training and consulting services are recognized as services are provided to customers. Revenues from maintenance contracts are deferred and recognized ratably over the term of the maintenance agreements. Revenues for customer support and maintenance that are bundled with the initial license fee are deferred based on the fair value of the bundled support services and recognized ratably over the term of the agreement; fair value is based on the renewal rate for continued support arrangements.

Unbilled receivables represent revenues recognized for services performed that were not billed at the balance sheet date. The majority of these amounts are billed in the subsequent month. Unbillable amounts arising from contracts occur when revenues recognized exceed allowable billings in accordance with the contractual agreements. Such unbillable amounts most often become billable upon reaching certain project milestones stipulated per the contract, or in accordance with the percentage completion methodology. As of April 1, 2005, we had unbillable revenues included in current unbilled receivables of approximately $5.3 million, which were generally expected to be billed within one year. In addition, we had a long-term account receivable at April 1, 2005, and December 31, 2004 of $3.4 million and $3.8 million, respectively, on a single major outsourcing contract with a term of seven years. The long-term receivable will be billed and collected over the remaining two years of the contract through contractual billings that will exceed the amounts to be earned as revenues.

Customer advances are comprised of payments from customers for which services have not yet been performed or prepayments against work in process. These unearned revenues are deferred and recognized as future contract costs are incurred and as contract services are rendered.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our clients to make required payments. This allowance is based on the amount and aging of our accounts receivable, creditworthiness of our clients, historical collection experience, current economic

trends, and changes in client payment patterns. If the financial condition of our clients was to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required.

Deferred Income Taxes

We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements which differ from our tax returns. We use significant estimates in determining what portion of our deferred tax asset is more likely than not to be realized. Our net deferred tax assets have historically consisted primarily of the tax benefit related to restructuring costs for facility closures, supplemental executive retirement plan contributions, and other accrued liabilities such as accrued vacation pay, which are not deductible for tax purposes until paid. During fiscal year 2003, we generated additional deferred tax assets for net operating loss carryforwards which were created by our pretax losses combined with the fact that we were outside the period it is allowable to carry back losses. Taking into account our then-recent history of cumulative losses, we recorded a valuation allowance of $5.5 million in the fourth quarter of fiscal year 2003. Together with a full valuation allowance of $5.5 million we had already taken against the net operating loss carryforwards of companies we had previously acquired, we had a valuation allowance of $11.0 million against a total deferred tax asset of $21.6 million.

During the fourth quarter of fiscal year 2004, we re-evaluated our requirement for a valuation allowance after having completed a full year in which we recorded taxable income in each quarter. At that time, we determined that it was more likely than not we would realize an additional $3.0 million of our deferred tax assets, of which $11.1 million were left unreserved. During the first quarter of 2005, we incurred a pretax loss from continuing operations of $1.4 million. Based on management’s belief that this loss is due to unanticipated short-term issues, and is not indicative of a change in expected overall trends in our business over the next several years, no adjustment was made to the valuation allowance in the first quarter of 2005. However, there is no guarantee that our taxable income will be sufficient to realize such remaining net deferred tax assets, and we will continue to evaluate the appropriateness for an additional valuation allowance on an ongoing basis, particularly in light of the results in the first quarter of fiscal year 2005. Additionally, if at some point in the future, the realization of a greater amount of our deferred tax assets is considered more likely than not, we will reverse all or a portion of the existing valuation allowance at that time.

Goodwill and Intangible Assets

Under SFAS No 142, we no longer amortize our goodwill and are required to complete an annual impairment testing during the fourth quarter of each year. We believe that the accounting assumptions and estimates related to the annual goodwill impairment testing are critical because these can change from period to period. The impairment test requires us to forecast our future cash flows, which involves significant judgment. Accordingly, if our expectations of future operating results change, or if there are changes to other assumptions, our estimate of the fair value of our reporting units could change significantly resulting in a goodwill impairment charge, which could have a significant impact on our consolidated financial statements. As of April 1, 2005, we have $18.2 million of goodwill and $2.1 million of intangible assets recorded on our balance sheet (see Note 5 of the Notes to Consolidated Financial Statements).

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) enacted Statement of Financial Accounting Standards 123 (revised 2004) (“SFAS 123R”), “Share-Based Payment” which

replaces Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees.” SFAS 123R requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in the consolidated statements of income. The accounting provisions of SFAS 123R were originally planned to be effective for all quarterly reporting periods beginning after June 15, 2005. In April 2005, the Securities and Exchange Commission adopted a revision to SFAS 123R to make the accounting provisions applicable to all fiscal year reporting periods commencing after June 15, 2005. As a result, we are now required to adopt SFAS 123R commencing in the first quarter of 2006.

Upon the adoption of SFAS 123R, the pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. Although we have not yet determined our method of adoption or whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, we are evaluating the requirements under SFAS 123R and we expect that the adoption will have an adverse impact on our reported earnings and net income per share.

Risks Relating to Our Business

Before deciding to invest in us or to maintain or increase your investment, you should carefully consider the risks described below, in addition to the other information contained in this report. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations. If any of these risks are realized, our business, financial condition or results of operations could be seriously harmed. In that event, the market price for our common stock could decline and you may lose all or part of your investment.

Many factors may cause our net revenues, operating results and cash flows to fluctuate and possibly decline.

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

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

• The loss of one or more significant clients in any of our business segments, including any failure to secure renewals for any of our large outsourcing contracts;

• Use of offsite and offshore resources on our engagements;

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

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

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

• Delays or increased expenses in securing and completing client engagements;

• Timing and collection of fees and payments;

• Timing of new client engagements in any of our business segments;

• Increased competition and pricing pressures;

• Our ability to anticipate changing customer demands and preferences;

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

• The loss of key personnel and other employees;

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

• The timing of certain general and administrative expenses;

• Costs associated with integrating acquired operations;

• Costs associated with the disposition of certain assets and the winding down of our call center service business;

• Impairment of goodwill from our acquisitions;

• Variability in the number of billable days in each quarter;

• The write-off of client billings;

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

• Service level credits and penalties associated with our outsourcing engagements;

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

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

• International currency fluctuations;

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

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

One or more of the foregoing factors may cause our operating expenses to be unexpectedly high or result in a decrease in our revenue during any given period. In addition, we bill certain of our services on a fixed-price basis, and any assignment delays or expenditures of time beyond that projected for the assignment could result in write-offs of client receivables (both unbilled and billed). Significant write-offs could materially adversely affect our business, financial condition, and results of operations. Our business also has significant collection risks. If we are unable to collect our receivables in a timely manner, our business and financial condition could also suffer. If these or any other variables or unknowns were to cause a shortfall in revenues or earnings or otherwise cause a failure to meet public market expectations, our business could be adversely affected.

We adopted EITF 00-21 in the first quarter of 2003, which affects the way we recognize revenue on long-term outsourcing agreements. The adoption of EITF 00-21 results in separating our outsourcing contracts into multiple elements and separately accounting for each element, rather than accounting for all elements together as a group. As a result, we now recognize revenue from certain service elements of our outsourcing agreements on a straight-line basis over the life of the contract, rather than on a percentage of completion basis. Since we typically incur greater costs and expenses during the early phase of the service elements (which now have straight-line revenue recognition) than we do in the later years of those elements, we believe our net income is lower during the early stages of our outsourcing engagements. In addition, if we are unable to manage costs as planned in the later stages of an outsourcing engagement, our net income will likewise be negatively impacted. In general, income from our outsourcing contracts will be less stable in the future, since it will be more susceptible to changes in the mix of newer versus older contracts, and to the impact of cost fluctuations from quarter to quarter without a compensating change in revenue. If we fail to meet our public market expectations or otherwise experience a shortfall in our net income due to these fluctuations, our business could be adversely affected and the price of our stock may decline.

Finally, we reported a net loss for the first quarter of 2005. As a result, we cannot assure you that we will achieve or maintain positive earnings in the future. If we are unable to achieve profitability on a quarterly or annual basis, the market price of our common stock could be adversely affected and our financial condition would suffer.

We are dependent on our outsourcing engagements for a significant part of our revenues.

Net revenues from our outsourcing relationships, for the quarter ended April 1, 2005, represented approximately 45.1% of our consolidated net revenues. The substantial majority of these revenues are

received from four large outsourcing accounts that have signed long-term agreements with us. However, the loss of any of our outsourcing relationships, including a failure to gain renewal of any of these contracts (several of which are due to expire in the next 12 to 24 months), could have an adverse impact on our business and results of operations. In each of these engagements, the clients have fully outsourced their information technology staff and functions to us. In all of our outsourcing relationships, we generally enter into detailed service level agreements, which establish performance levels and standards for our services. If we fail to meet these performance levels or standards, our clients may receive monetary service level credits from us or, if we experience persistent failures, our clients may have a right to terminate the outsourcing contract for cause and have no obligation to pay us any termination fees. Our anticipated revenues and profitability from our outsourcing engagements could be significantly reduced if we are unable to satisfy our performance levels or standards, or if we are unable to improve our delivery costs as planned on such engagements. Additionally, our outsourcing contracts can be terminated at the convenience of our clients upon the payment of a termination fee.

In addition, many of our outsourcing agreements require that we invest significant amounts of time and resources in order to win the engagement, transition the client’s information technology department to our management, and complete the initial transformation of our client’s information technology functioning to provide improved service at a lower cost and meet agreed-upon service levels. Often, we recover this investment through payments over the life of the outsourcing agreement. If we are unable to achieve agreed-upon service levels or otherwise breach the terms of our outsourcing agreements, the clients may have rights to terminate our agreements for cause and we may be unable to recover our investments. Any failure by us to recover these investments could reduce our outsourcing revenue, which would have a material adverse effect on our financial condition, results of operations, and price of our common stock.

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

Finally, we are expanding our outsourcing business to perform discrete information technology services for clients. The amount of time and resources required to win client engagements for our outsourcing business is significant, and we may not win the number or type of client engagements that we anticipate. If we fail to meet our objective to secure new outsourcing engagements, or fail to secure new outsourcing engagements on acceptable commercial terms, we will not experience the growth in this business that we have anticipated.

The length of time required to engage a client and to complete an assignment may be unpredictable and could negatively impact our net revenues and operating results.

The timing of securing our client engagements and service fulfillment is difficult to predict with any degree of accuracy. Prior engagement cycles are not necessarily an indication of the timing of future client engagements or revenues. The length of time required to secure a new client engagement or complete an assignment often depends on factors outside our control, including:

• Existing information systems at the client site;

• Changes or the anticipation of changes in the regulatory environment affecting healthcare and pharmaceutical organizations;

• Changes in the management or ownership of the client;

• Budgetary cycles and constraints;

• Changes in the anticipated scope of engagements;

• Availability of personnel and other resources; and

• Consolidation in the healthcare and pharmaceutical industries.

Prior to client engagements, we typically spend a substantial amount of time and resources (1) identifying strategic or business issues facing the client, (2) defining engagement objectives, (3) gathering information, (4) preparing proposals, and (5) negotiating contracts. Our failure to procure an engagement after spending such time and resources could materially adversely affect our business, financial condition, and results of operations. We may also be required to hire new associates before securing a client engagement. If clients defer committing to new assignments for any length of time or for any reason we could be required to maintain a significant number of under-utilized associates which could adversely affect our operating results and financial condition during any given period. Further, our outsourcing business has very long sales and contract lead times, requiring us to spend a substantial amount of time and resources in attempting to secure each outsourcing engagement. We cannot predict whether the investment of time and resources will result in a new outsourcing engagement or, if the engagement is secured, that the engagement will be on terms favorable to us.

We may be negatively impacted if our investments in products and emerging service lines are unsuccessful.

We have publicly announced our strategy to increase our investment in product development, including further investment in FirstDoc^® as well as investment in FirstGateways™. These investments are in addition to continuing our investments in other emerging service lines and products. We typically do not capitalize the cost of our product development activities and do not anticipate capitalizing expected investments this year. As a result, our financial results may be adversely impacted by such increased investment in the short term. If such product development activities or investment in our emerging service lines do not result in relevant offerings, we will not achieve desired levels of return on these investments. As a result, our business and results of operations could be adversely affected.

If we are unable to generate additional revenue from our existing clients, our business may be negatively affected.

Our success depends, to a significant extent, on obtaining additional engagements from our existing clients. A substantial portion of our revenues is derived from additional services provided to our existing clients. The loss of a small number of clients, a reduction in the number of engagements with these clients, or the failure to secure renewals from any of our outsourcing clients may result in a material decline in revenues and cause us to fail to meet public market expectations of our financial performance and operating results. If we fail to generate additional revenues from our existing clients, it may materially adversely affect our business, financial condition, and results of operations.

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

Our services often involve assessing and/or implementing complex information systems and software, which are critical to our clients’ operations. Our failure to meet client expectations in the performance of our services, including the quality, cost and timeliness of our services, may damage our reputation in the healthcare and pharmaceutical industries and adversely affect our ability to attract and retain clients. If a client is not satisfied with our services, we will generally spend additional human and other resources at our own expense to ensure client satisfaction. Such expenditures will typically result in a lower margin on such engagements and could materially adversely affect our business, financial condition, and results of operations.

Further, in the course of providing our services, we will often recommend the use of software and hardware products. These products may not perform as expected or contain defects. If this occurs, our reputation could be damaged and we could be subject to liability. We attempt contractually to limit our exposure to potential liability claims; however, such limitations may not be effective. A successful liability claim brought against us may adversely affect our reputation in the healthcare and pharmaceutical industries and could have a material adverse effect on our business, financial condition, and results of operations. Although we maintain professional liability insurance, such insurance may not provide adequate coverage for successful claims against us.

We may be unable to attract and retain a sufficient number of qualified employees.

Our business is labor-intensive and requires highly skilled employees. Many of our associates possess extensive expertise in the healthcare, insurance, pharmaceutical, information technology and consulting fields. To serve a growing client base, we must continue to recruit and retain qualified personnel with expertise in each of these areas. We must also seek certain employees that are willing to work on a variable or per diem basis. Competition for such personnel is intense and we compete for such personnel with management consulting firms, healthcare and pharmaceutical organizations, software firms, and other businesses. Many of these entities have substantially greater financial and other resources than we do, or can offer more attractive compensation packages to candidates, including salary, bonuses, stock, and stock options. If we are unable to recruit and retain a sufficient number of qualified personnel to serve existing and new clients, our ability to expand our client base or services and to offer our services at competitive rates could be impaired and our business would suffer.

The loss of our key client service employees and executive officers could negatively affect us.

Our performance depends on the continued service of our executive officers, senior managers, and key employees. In particular, we depend on such persons to secure new clients and engagements and to manage our business and affairs. The loss of such persons could result in the disruption of our business, longer or delayed sales cycles, and could have a material adverse effect on our business and results of operations. Generally, we have not entered into long-term employment contracts with any of our employees and do not maintain key employee life insurance.

We could be negatively impacted if we fail to successfully integrate the businesses we acquire.

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

• Distracting management from our business;

• Losing key personnel and other employees;

• Losing clients;

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

• The impairment of acquired assets and goodwill;

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

• Not realizing the intended or expected benefits of the acquisitions.

In addition, acquired businesses may not enhance our services, provide us with increased client opportunities, or result in the growth that we anticipate. Furthermore, integrating acquired operations is a complex, time-consuming, and expensive process. Combining acquired operations with us may result in lower overall operating margins, greater stock price volatility, and quarterly earnings fluctuations. Cultural incompatibilities, career uncertainties, and other factors associated with such acquisitions may

also result in the loss of employees and clients. Failing to acquire and successfully integrate complementary practices, or failing to achieve the business synergies or other anticipated benefits, could materially adversely affect our business and results of operations.

In February 2005, we sold substantially all of the call center service agreements of Coactive Systems Corporation, a company we acquired in 2003. We have incurred costs to dispose of such assets, and we expect to incur additional costs to wind down the call center service operations. This transaction has also involved significant management time and attention. If we are not able to timely and effectively wind down these operations, further management time and attention will continue to be dedicated to this task, and we may incur greater wind down costs that we have anticipated.

Continued or increased employee turnover could negatively affect our business.

We have experienced employee turnover as a result of:

• Dependence on lateral hiring of associates;

• Travel demands imposed on our associates;

• Loss of employees to competitors and clients; and

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

Continued or increased employee turnover could materially adversely affect our business, financial condition, and results of operations. In addition, many of our associates develop strong business relationships with our clients. We depend on these relationships to generate additional assignments and engagements. The loss of a substantial number of associates could erode our client base and decrease our revenues.

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

Our business has historically grown rapidly, and though our overall revenues have remained flat for the past several years, we have experienced growth and increased demand in certain areas of our business. In response to shifts in market demand and in an effort to better align our business with our markets, we restructured our organization and hired persons with appropriate skills, including salespersons, and reduced our workforce in practice areas experiencing less demand. We have also hired employees willing to work on a variable or per diem basis in order to better manage project costs and general and administrative expense associated with underutilized resources. These market conditions and restructuring efforts have placed new and increased demands on our management personnel. It has also placed significant and increasing demands on our financial, technical and operational resources, and on our information systems. If we are unable to manage growth effectively or if we experience business disruptions due to shifts in market demand, or growth or restructuring, our operating results will suffer. To manage any future growth, we must extend our financial reporting and information management systems to our multiple and international office locations and traveling employees, and develop and implement new procedures and controls to accommodate new operations, services and clients. Increasing operational and administrative demands may make it difficult for our senior managers to engage in business development activities and their other day-to-day responsibilities. Further, the addition of new employees and offices to offset any increasing demands may impair our ability to maintain our service delivery standards and corporate culture. In addition, we have in the past changed, and may in the future change, our organizational structure and business strategy. Such changes may result in operational inefficiencies and delays in delivering our services. Such changes could also cause a disruption in our business and could cause a material adverse effect on our financial condition and results of operations.

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

We derive a substantial portion of our revenues from clients in the healthcare industry. As a result, our business, financial condition, and results of operations are influenced by conditions affecting this industry, particularly any trends towards consolidation among healthcare and pharmaceutical organizations. Such consolidation may reduce the number of existing and potential clients for our services. In addition, the resulting organizations could have greater bargaining power, which could erode the current pricing structure for our services and decrease our revenues. The reduction in the size of our target market or our failure to maintain our pricing goals could have a material adverse effect on our business, financial condition, and results of operations. Finally, each of the markets we serve is highly dependent upon the health of the overall economy. Our clients in each of these markets have experienced significant cost increases and pressures in recent years. Our services are targeted at relieving these cost pressures; however, any continuation or acceleration of current market conditions could greatly impact our ability to secure or retain engagements, the loss of which could have a material adverse effect on our business and financial condition.

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

• Continued adverse changes to the industry’s general economic environment;

• Continued consolidation of companies; or

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

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

Our international operations create specialized risks that can negatively affect us.

We are subject to many risks as a result of the services we provide to our international clients or services we may provide through subcontractors or employees that are located outside of the U.S. We have business operations and employees located in India, Vietnam, and throughout Europe. Our international operations are subject to a variety of risks, including:

• Increasing and uncertain labor costs and high turnover rates;

• Difficulties in creating market demand for our offshore services based on perceived quality issues and potential political risk;

• Difficulties in creating international market demand for our other services;

• Unfavorable pricing and price competition;

• Difficulties and costs of tailoring our services to each individual country’s healthcare and pharmaceutical market needs;

• Currency fluctuations;

• Recruiting and hiring employees, and other employment issues unique to international operations, including ability to secure work visas for foreign employees in the U.S.;

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

• Additional costs, including income tax equalization, associated with foreign employees coming to work in the U.S.;

• Longer payment cycles in some countries and difficulties in collecting international accounts receivable;

• Terrorist attacks;

• Difficulties in enforcing contractual obligations and intellectual property rights;

• Adverse tax consequences;

• Increased costs associated with maintaining international marketing efforts and offices;

• Government regulations and restrictions;

• Adverse changes in regulatory requirements; and

• Economic or political instability.

We perform services in Europe for our international pharmaceutical clients. We cannot assure you that we will be able to become profitable in our European operations, which may materially adversely affect our financial condition, results of operations, and price for our common stock.

Our acquisition of Paragon Solutions, Inc. in 2003 provided us a means to implement our global sourcing strategy to provide software development and other information technology services to our clients. If we are unable to realize perceived cost benefits of such a strategy or if we are unable to receive high quality services from foreign employees or subcontractors, our business may be adversely impacted. Further, our international operations in Vietnam and India subject our business to a variety of risks and uncertainties unique to operating businesses in these countries, including the risk factors discussed above.

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

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

The market for healthcare and pharmaceutical information technology consulting is very competitive. We have competitors that provide some or all of the services we provide. For example, in strategic consulting services, we compete with international, regional, and specialty consulting firms such as Bearing Point (formerly KPMG Consulting), the Capgemini Group, IBM Global Consulting Services, Wipro Technologies, and Accenture.

In integration and co-management services, we compete with:

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

• Service groups of computer equipment companies;

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

• Clients’ internal information management departments;

• Other consulting firms such as Accenture, Healthlink, and Computer Sciences Corporation’s consulting division; and

• Other healthcare and pharmaceutical consulting and outsourcing firms, including Superior Consultant, which has recently been acquired by ACS.

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

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

Many of our competitors have significantly greater financial, human, and marketing resources than us. As a result, such competitors may be able to respond more quickly to new or emerging technologies and changes in customer demands, or to devote greater resources to the development, promotion, sale, and support of their products and services than we do. In addition, as healthcare organizations become larger and more complex, our larger competitors may be better able to serve the needs of such organizations. If we do not compete effectively with current and future competitors, we may be unable to secure new and renewed client engagements, or we may be required to reduce our rates in order to compete effectively. This could result in a reduction in our revenues, resulting in lower earnings or operating losses, and otherwise materially adversely affecting our business, financial condition, and results of operations.

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

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

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

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

We may infringe the intellectual property rights of third parties.

Our success depends, in part, on not infringing patents, copyrights, and other intellectual property rights held by others. We do not know whether patents held or patent applications filed by third parties (i.e., in the area of enterprise content management) may force us to alter our methods of business and operation or require us to obtain licenses from third parties. If we attempt to obtain such licenses, we do not know whether we will be granted licenses or whether the terms of those licenses will be fair or acceptable to us. Third parties may assert infringement claims against us in the future. Such claims may result in protracted and costly litigation, penalties, judgments, and fines that could adversely affect our business regardless of the merits of such claims.

Our business is highly dependent on the availability of business travel.

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

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

The healthcare and pharmaceutical industries are subject to regulatory and technological changes that may affect the procurement practices and operations of healthcare and pharmaceutical organizations. During the past several years, the healthcare and pharmaceutical industries have been subject to an increase in governmental regulation and reform proposals. These reforms could increase governmental involvement in the healthcare and pharmaceutical industries, lower reimbursement rates or otherwise change the operating environment of our clients. Also, certain reforms that create potential work for us could be delayed or cancelled. Healthcare and pharmaceutical organizations may react to these situations by curtailing or deferring investments, including those for our services. In addition, if we are unable to maintain our skill and expertise in light of regulatory or technological changes, our services may not be marketable to our clients and we could lose existing clients or future engagements. Finally, government regulations, particularly HIPAA, may require our clients to impose additional contractual responsibilities on us, which may make it more costly to perform certain of our engagements and subject us to increased risk in the performance of these engagements, including immediate termination of an engagement.

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

We may be unable to effectively protect our proprietary information and procedures.

We must protect our proprietary information, including our proprietary methodologies, research, tools, software code, and other information. To do this, we rely on a combination of copyright and trade secret laws and confidentiality procedures to protect our intellectual property. These steps may not protect our proprietary information. In addition, the laws of certain foreign countries do not protect or enforce proprietary rights to the same extent, as do the laws of the United States. We are currently

providing our services to clients in international markets and have business operations in Europe, India and Vietnam. Our proprietary information may not be protected to the same extent as provided under the laws of the United States, if at all. The unauthorized use of our intellectual property could have a material adverse effect on our business, financial condition, or results of operations.

The price of our common stock may be adversely affected by market volatility.

The trading price of our common stock fluctuates significantly. Since our common stock began trading publicly in February 1998, the reported sale price of our common stock on the Nasdaq National Market has been as high as $29.13 and as low as $3.63 per share. This price may be influenced by many factors, including:

• Our performance and prospects;

• The depth and liquidity of the market for our common stock;

• Investor perception of us and the industries in which we operate;

• Changes in earnings estimates or buy/sell recommendations by analysts;

• General financial and other market conditions;

• Domestic and international economic conditions; and

• The other risks related to our business discussed above.

In addition, public stock markets have experienced extreme price and trading volume volatility. This volatility has significantly affected the market prices of securities of many companies for reasons frequently unrelated to or disproportionately impacted by the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our common stock. As a result, we may be unable to raise capital or use our stock to acquire businesses on attractive terms and investors may be unable to resell their shares of our common stock at or above their purchase price. Further, if research analysts stop covering our company or reduce their expectations of us, our stock price could decline or the liquidity of our common stock may be adversely impacted, which could create difficulty for investors to resell their shares of our common stock.

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

If our stock price experiences periods of volatility, our security holders may initiate securities class action litigation against us. If we become involved in this type of litigation it could be very expensive and divert our management’s attention and resources, which could materially and adversely affect our business and financial condition.

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

Our Board of Directors has the authority to issue up to 9,500,000 shares of undesignated preferred stock, to determine the powers, preferences, and rights and the qualifications, limitations, or restrictions granted to or imposed upon any unissued series of undesignated preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. The preferred stock could be issued with voting, liquidation, dividend, and other rights superior to the rights of our common stock. Furthermore, any preferred stock may have other rights, including economic rights, senior to our common stock, and as a result, the issuance of any preferred stock could depress the market price of our common stock.

In addition, our certificate of incorporation eliminates the right of stockholders to act without a meeting and does not provide cumulative voting for the election of directors. Our certificate of incorporation also provides for a classified Board of Directors. The ability of our Board of Directors to issue preferred stock and these other provisions of our certificate of incorporation and bylaws may have the effect of deterring hostile takeovers or delaying changes in control or management.

We are also subject to the provisions of Section 203 of the Delaware General Corporation Law, which could delay or prevent a change in control of us, impede a merger, consolidation, or other business combination involving us or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control. Any of these provisions, which may have the effect of delaying or preventing a change in control, could adversely affect the market value of our common stock.

In 1999, our Board of Directors adopted a rights agreement that is intended to protect our stockholders’ interests in the event we are confronted with coercive takeover tactics. Pursuant to the stockholders rights plan, we distributed “rights” to purchase up to 500,000 shares of our Series A Junior Participating Preferred Stock. Under some circumstances, these rights become the rights to purchase shares of our common stock or securities of an acquiring entity at one-half the market value. The rights are not intended to prevent our takeover, rather they are designed to deal with the possibility of unilateral actions by hostile acquirers that could deprive our Board of Directors and stockholders of their ability to determine our destiny and obtain the highest price for our common stock.

Item 3. Quantitative and Qualitative Disclosures about Market Risks

Our financial instruments include cash and cash equivalents (i.e., short-term and long-term cash investments), accounts receivable, unbilled receivables, accounts payable, and a revolving line of credit. Only the cash and cash equivalents which totaled $34.4 million at April 1, 2005 present us with market risk exposure resulting primarily from changes in interest rates. Based on this balance, a change of one percent in the interest rate would cause a change in interest income for the annual period of approximately $0.3 million. Our objective in maintaining these investments is the flexibility obtained in having cash available for payment of accrued liabilities and acquisitions.

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

Item 4. Controls and Procedures

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

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of

the end of the quarter covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, and were operating at the reasonable assurance level.

There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

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

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

Period	Total number of shares purchased	Average price paid per share		Total shares purchased as part of publicly announced programs	Maximum number of shares that may yet be purchased under the program
Month #1 (January 1, 2005 – January 28, 2005)	0	$	0.00	n/a	n/a
Month #2 (January 29, 2005 – February 25, 2005)	434,167	$	5.97	n/a	n/a
Month #3 (February 26, 2005 – April 1, 2005)	0	$	0.00	n/a	n/a

On February 22, 2005, we repurchased a total of 12,149 shares of common stock from one of our non-Section 16 officer vice presidents, in a private transaction, for a total purchase price of $72,529.53. All shares were purchased at the closing price of our common stock on Nasdaq National Market on the date of purchase, or $5.97 per share. Of the total purchase price, $67,294.20 of such amount was applied to an outstanding loan that such vice president had with us. The remaining amount of the purchase price paid to the applicable vice president was intended to cover the individual’s estimated capital gains tax on the sale. The loan was made in connection with a restricted stock purchase agreement between FCG and this vice president that was entered into prior to December 2000, when we eliminated the requirement that our vice presidents purchase and hold common stock of FCG.

On February 23, 2005, we negotiated an early conclusion to the escrow agreement related to shares of our common stock issued in connection with our purchase of the minority interest in Codigent Solutions Group, Inc. (renamed FCG Infrastructure Services, Inc.) from its five remaining stockholders. In connection with this private transaction, we agreed to repurchase a total of 422,018 shares of common stock from the five individuals for an aggregate purchase price of $2,519,447.46, or $5.97 per share, based on the closing price of FCG common stock on February 22, 2005. In connection with this transaction, the five remaining stockholders also agreed to forgo the release of the remaining 147,830 shares held in the escrow account. We cancelled these shares in February 2005, and they are no longer outstanding.

Item 3. Defaults Upon Senior Securities.

None.

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

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

Item		Description
3.1 (1)		Certificate of Incorporation of the Company
3.2 (2)		Certificate of Designation of Series A Junior Participating Preferred Stock
3.3 (3)		Bylaws of the Company
4.1 (4)		Specimen Common Stock Certificate
11.1 (5)		Statement of computation of per share earnings
31.1		Rule 13a-14(a)/Rule 15d-14(a) Certification of the Chief Executive Officer.
31.2		Rule 13a-14(a)/Rule 15d-14(a) Certification of the Chief Financial Officer.
32.1		Section 1350 Certification of the Chief Executive Officer.
32.2		Section 1350 Certification of the Chief Financial Officer.

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

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

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

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

(5) See Note 1 of Notes to Consolidated Financial Statements, “Basic and Diluted Net Income (Loss) Per Share.”

SIGNATURES

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

	FIRST CONSULTING GROUP, INC.


Date: May 11, 2005	/s/LUTHER J. NUSSBAUM
	Luther J. Nussbaum
	Chairman of the Board and
	Chief Executive Officer


Date: May 11, 2005	/s/THOMAS A WATFORD
	Thomas A. Watford
	Senior Vice President and Interim Chief
	Financial Officer

EXHIBIT INDEX

Item		Description
3.1 (1)		Certificate of Incorporation of the Company
3.2 (2)		Certificate of Designation of Series A Junior Participating Preferred Stock
3.3 (3)		Bylaws of the Company
4.1 (4)		Specimen Common Stock Certificate
11.1 (5)		Statement of computation of per share earnings
31.1		Rule 13a-14(a)/Rule 15d-14(a) Certification of the Chief Executive Officer.
31.2		Rule 13a-14(a)/Rule 15d-14(a) Certification of the Chief Financial Officer.
32.1		Section 1350 Certification of the Chief Executive Officer.
32.2		Section 1350 Certification of the Chief Financial Officer.

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

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

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

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

(5) See Note 1 of Notes to Consolidated Financial Statements, “Basic and Diluted Net Income (Loss) Per Share.”