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EX-31.2 - EX-31.2 - HARRIS INTERACTIVE INCl41743exv31w2.htm
EX-31.1 - EX-31.1 - HARRIS INTERACTIVE INCl41743exv31w1.htm
EX-10.5 - EX-10.5 - HARRIS INTERACTIVE INCl41743exv10w5.htm
EX-32.2 - EX-32.2 - HARRIS INTERACTIVE INCl41743exv32w2.htm
EX-10.3 - EX-10.3 - HARRIS INTERACTIVE INCl41743exv10w3.htm
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED DECEMBER 31, 2010
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                      TO                     
COMMISSION FILE NUMBER: 000-27577
(HARRIS INTERACTIVE LOGO)
HARRIS INTERACTIVE INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
     
DELAWARE
(State or Other Jurisdiction of
Incorporation or Organization)
  16-1538028
(I.R.S. Employer
Identification No.)
161 Sixth Avenue, New York, New York 10013
(Address of principal executive offices)
(212) 539-9600
(Registrant’s telephone number, including area code)
N/A
(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 for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ      No o
     Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o      No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o  Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company þ
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o       No þ
     On January 31, 2011, 54,755,865 shares of the Registrant’s Common Stock, $.001 par value, were outstanding.
 
 

 


 

HARRIS INTERACTIVE INC.
FORM 10-Q
QUARTER ENDED DECEMBER 31, 2010
INDEX
         
    Page  
       
 
       
       
    3  
    4  
    5  
    6  
    16  
    25  
    26  
 
       
       
 
       
    26  
    26  
    26  
    26  
    26  
    26  
 
       
    28  
 EX-10.3
 EX-10.4
 EX-10.5
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

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Part I: Financial Information
Item 1 — Financial Statements
HARRIS INTERACTIVE INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
                 
    December 31,     June 30,  
    2010     2010  
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 13,499     $ 14,158  
Accounts receivable, net
    28,463       23,735  
Unbilled receivables
    7,400       7,566  
Prepaid expenses and other current assets
    4,235       3,722  
Deferred tax assets
    430       375  
 
           
Total current assets
    54,027       49,556  
 
               
Property, plant and equipment, net
    4,392       5,626  
Other intangibles, net
    15,644       16,382  
Other assets
    1,435       1,566  
 
           
Total assets
  $ 75,498     $ 73,130  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
 
               
Current liabilities:
               
Accounts payable
  $ 7,616     $ 8,952  
Accrued expenses
    16,841       16,768  
Current portion of long-term debt
    4,794       4,794  
Deferred revenue
    16,474       11,612  
 
           
Total current liabilities
    45,725       42,126  
 
               
Long-term debt
    8,390       10,787  
Deferred tax liabilities
    2,238       2,391  
Other long-term liabilities
    1,687       1,792  
Commitments and contingencies (Note 14)
               
Stockholders’ equity:
               
Preferred stock, $.001 par value, 5,000,000 shares authorized; 0 shares issued and outstanding at December 31, 2010 and June 30, 2010
           
Common stock, $.001 par value, 100,000,000 shares authorized; 54,755,865 shares issued and outstanding at December 31, 2010 and 54,465,449 shares issued and outstanding at June 30, 2010
    55       54  
Additional paid-in capital
    186,208       185,726  
Accumulated other comprehensive income
    4,493       2,558  
Accumulated deficit
    (173,298 )     (172,304 )
 
           
Total stockholders’ equity
    17,458       16,034  
 
           
Total liabilities and stockholders’ equity
  $ 75,498     $ 73,130  
 
           
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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HARRIS INTERACTIVE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
                                 
    Three Months Ended     Six Months Ended  
    December 31,     December 31,  
    2010     2009     2010     2009  
Revenue from services
  $ 44,940     $ 44,629     $ 81,954     $ 83,564  
 
                               
Operating expenses:
                               
Cost of services
    29,560       28,085       53,753       52,514  
Selling, general and administrative
    12,312       13,849       24,876       26,811  
Depreciation and amortization
    1,515       1,718       3,043       3,474  
Restructuring and other charges
    679       383       679       531  
 
                       
Total operating expenses
    44,066       44,035       82,351       83,330  
 
                       
Operating income (loss)
    874       594       (397 )     234  
Interest and other income
    (8 )     (12 )     (23 )     (27 )
Interest expense
    316       499       785       1,036  
 
                       
Income (loss) from operations before income taxes
    566       107       (1,159 )     (775 )
 
                       
Provision (benefit) for income taxes
    223       (1,227 )     (165 )     (1,476 )
 
                       
Net income (loss)
  $ 343     $ 1,334     $ (994 )   $ 701  
 
                       
 
                               
Basic net income (loss) per share
  $ 0.01     $ 0.02     $ (0.02 )   $ 0.01  
 
                       
Diluted net income (loss) per share
  $ 0.01     $ 0.02     $ (0.02 )   $ 0.01  
 
                       
 
                               
Weighted-average shares outstanding — basic
    54,472,556       53,939,876       54,447,673       53,919,859  
 
                       
Weighted-average shares outstanding — diluted
    54,542,596       54,060,635       54,447,673       54,050,397  
 
                       
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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HARRIS INTERACTIVE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
                 
    For the Six Months  
    Ended December 31,  
    2010     2009  
Cash flows from operating activities:
               
Net income (loss)
  $ (994 )   $ 701  
Adjustments to reconcile net income (loss) to net cash provided by operating activities —
               
Depreciation and amortization
    3,895       4,214  
Deferred taxes
    (146 )     (380 )
Stock-based compensation
    350       321  
Amortization of deferred financing costs
    34       221  
Amortization of premium on marketable securities
          1  
(Increase) decrease in assets —
               
Accounts receivable
    (3,935 )     (997 )
Unbilled receivables
    456       (1,821 )
Prepaid expenses and other current assets
    (1,319 )     1,069  
Other assets
    130       116  
(Decrease) increase in liabilities —
               
Accounts payable
    (1,492 )     (255 )
Accrued expenses
    (478 )     (3,368 )
Deferred revenue
    4,641       1,985  
Other liabilities
    (107 )     (720 )
 
           
Net cash provided by operating activities
    1,035       1,087  
 
           
Cash flows from investing activities:
               
Proceeds from maturities and sales of marketable securities
          505  
Capital expenditures
    (280 )     (254 )
 
           
Net cash provided by (used in) investing activities
    (280 )     251  
 
           
Cash flows from financing activities:
               
Repayment of borrowings
    (2,397 )     (3,463 )
Proceeds from employee stock purchases and stock option exercises
    134       81  
 
           
Net cash used in financing activities
    (2,263 )     (3,382 )
 
           
Effect of exchange rate changes on cash and cash equivalents
    849       (74 )
 
           
Net decrease in cash and cash equivalents
    (659 )     (2,118 )
Cash and cash equivalents at beginning of period
    14,158       16,752  
 
           
Cash and cash equivalents at end of period
  $ 13,499     $ 14,634  
 
           
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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HARRIS INTERACTIVE INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)
1. Financial Statements
     The unaudited consolidated financial statements included herein reflect, in the opinion of the management of Harris Interactive Inc. and its subsidiaries (collectively, the “Company”), all normal recurring adjustments necessary for a fair statement of the Company’s financial position, operating results and cash flows for the interim periods presented herein.
2. Basis of Presentation
     The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The consolidated balance sheet as of June 30, 2010 has been derived from the audited consolidated financial statements of the Company.
     These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2010, filed by the Company with the Securities and Exchange Commission (“SEC”) on August 31, 2010.
3. Recent Accounting Pronouncements
Fair Value Disclosures
     In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 provides amendments to subtopic 820-10 that require separate disclosure of significant transfers in and out of Level 1 and Level 2 fair value measurements, in addition to the presentation of purchases, sales, issuances and settlements for Level 3 fair value measurements. ASU 2010-06 also provides amendments to subtopic 820-10 that clarify existing disclosures about the level of disaggregation and inputs and valuation techniques. The new disclosure requirements are effective for interim and annual periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements of Level 3 fair value measurements. Those disclosures are effective for interim and annual periods beginning after December 15, 2010. The Company adopted the disclosures involving Level 1 and Level 2 fair value measurements on January 1, 2010, and on January 1, 2011, adopted the disclosures involving Level 3 fair value measurements. Adoption did not have a material effect on the Company’s consolidated financial statements.
4. Restructuring and Other Charges
Restructuring Charges
     The following table summarizes activity during the six months ended December 31, 2010 with respect to the Company’s remaining reserves for the restructuring activities undertaken in prior fiscal years:
                                                 
    Balance,             Changes                     Balance,  
    July 1,     Costs     in     Cash     Non-Cash     December 31,  
    2010     Incurred     Estimate     Payments     Settlements     2010  
Lease commitments
  $ 408     $     $ 45     $ (77 )   $     $ 376  
 
                                   
Remaining reserve
  $ 408     $     $ 45     $ (77 )   $     $ 376  
 
                                   

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Other Charges
     For the three and six months ended December 31, 2010, other charges reflected in the “Restructuring and other charges” line shown on the Company’s unaudited consolidated statements of operations included the following:
    Statutorily mandated severance costs incurred in connection with headcount reductions involving 15 employees undertaken by the Company’s U.K. operations, and
 
    Costs associated with reorganizing the operational structure of the Company’s Canadian operations.
     For the three and six months ended December 31, 2009, other charges reflected in the “Restructuring and other charges” line included the following:
    Additional legal fees associated with the fiscal 2009 amendment of the Company’s credit agreement,
 
    Costs incurred to close the Company’s telephone-based data collection center in Brentford, United Kingdom, and
 
    Costs associated with reorganizing the operational structure of the Company’s Asian operations.
5. Fair Value Measurements
     The hierarchy for inputs used in measuring fair value for financial assets and liabilities is designed to maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels:
    Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
 
    Level 2 inputs include data points that are observable such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) such as interest rates and yield curves that are observable for the asset and liability, either directly or indirectly.
 
    Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.
     The following table presents the fair value hierarchy for the Company’s financial assets and liabilities measured at fair value on a recurring basis:
                                 
    Quoted   Significant        
    Prices in   Other   Significant    
    Active   Observable   Unobservable    
    Markets   Inputs   Inputs    
    (Level 1)   (Level 2)   (Level 3)   Total
At December 31, 2010
                               
Financial liabilities:
                               
Interest rate swap contract
  $     $ 706     $     $ 706  
 
                               
At June 30, 2010
                               
Financial liabilities:
                               
Interest rate swap contract
  $  —     $ 889     $  —     $ 889  
     The fair value of the Company’s interest rate swap was based on quotes from the respective counterparty, which are corroborated by the Company using discounted cash flow calculations based upon forward interest-rate yield curves obtained from independent pricing services.

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6. Derivative Financial Instruments
     As discussed in Note 8, “Borrowings”, the Company uses an interest rate swap to manage the economic effect of the variable interest obligation on its outstanding debt under its credit facilities so that the interest payable on the outstanding debt effectively becomes fixed at a certain rate, thereby reducing the impact of future interest rate changes on the Company’s future interest expense. The critical terms of the interest rate swap match those of the outstanding debt, including the notional amounts, interest rate reset dates, maturity dates and underlying market indices. Accordingly, the Company has designated its interest rate swap as a qualifying instrument. The unrealized losses on the interest rate swap are included in accumulated other comprehensive loss and the corresponding fair value payables are included in other liabilities in the Company’s unaudited consolidated balance sheet. The periodic interest settlements, which occur at the same interval as the outstanding debt, are recorded as interest expense.
                 
    December 31,   June 30,
Balance Sheet Location   2010   2010
Derivative instruments designated as hedging instruments:
               
Interest rate swap contracts
               
Other liabilities
  $ 706     $ 889  
Effects of Derivative Instruments on Income and Accumulated Other Comprehensive Income (OCI)
                         
    Amount of Gain        
    (Loss) Recognized in   Amount and Location of   Amount and Location of Gain (Loss)
    Accumulated OCI on   Gain (Loss) Reclassified   Recognized in Income on Derivative
    Derivative (Effective   from Accumulated OCI into   (Ineffective Portion and Amount
    Portion)   Income (Effective Portion)   Excluded from Effectiveness Testing)
    Three Months Ended   Three Months Ended   Three Months Ended
    December 31, 2010   December 31, 2010   December 31, 2010
Cash flow hedges:
                       
Interest rate swap
  $ 42     $76 Interest expense   $ — Interest and other income
                         
    Amount of Gain        
    (Loss) Recognized in   Amount and Location of   Amount and Location of Gain (Loss)
    Accumulated OCI on   Gain (Loss) Reclassified   Recognized in Income on Derivative
    Derivative (Effective   from Accumulated OCI into   (Ineffective Portion and Amount
    Portion)   Income (Effective Portion)   Excluded from Effectiveness Testing)
    Three Months Ended   Three Months Ended   Three Months Ended
    December 31, 2009   December 31, 2009   December 31, 2009
Cash flow hedges:
                       
Interest rate swap
  $ 37     $255 Interest expense   $ — Interest and other income
                         
    Amount of Gain        
    (Loss) Recognized in   Amount and Location of   Amount and Location of Gain (Loss)
    Accumulated OCI on   Gain (Loss) Reclassified   Recognized in Income on Derivative
    Derivative (Effective   from Accumulated OCI into   (Ineffective Portion and Amount
    Portion)   Income (Effective Portion)   Excluded from Effectiveness Testing)
    Six Months Ended   Six Months Ended   Six Months Ended
    December 31, 2010   December 31, 2010   December 31, 2010
Cash flow hedges:
                       
Interest rate swap
  $ 42     $161 Interest expense   $ — Interest and other income
                         
    Amount of Gain        
    (Loss) Recognized in   Amount and Location of   Amount and Location of Gain (Loss)
    Accumulated OCI on   Gain (Loss) Reclassified   Recognized in Income on Derivative
    Derivative (Effective   from Accumulated OCI into   (Ineffective Portion and Amount
    Portion)   Income (Effective Portion)   Excluded from Effectiveness Testing)
    Six Months Ended   Six Months Ended   Six Months Ended
    December 31, 2009   December 31, 2009   December 31, 2009
Cash flow hedges:
                       
Interest rate swap
  $ 223     $512 Interest expense   $ — Interest and other income

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7. Acquired Intangible Assets Subject to Amortization
     At December 31, 2010 and June 30, 2010, acquired intangible assets subject to amortization consisted of the following:
                                 
    December 31, 2010  
    Weighted-                      
    Average                      
    Useful                      
    Amortization     Gross             Net  
    Period (in     Carrying     Accumulated     Book  
    years)     Amount     Amortization     Value  
Contract-based intangibles
    3     $ 1,768     $ 1,768     $  
Internet respondent database
    7       3,227       2,521       706  
Customer relationships
    10       22,019       10,161       11,858  
Trade names
    16       5,321       2,241       3,080  
 
                         
Total
          $ 32,335     $ 16,691     $ 15,644  
 
                         
                                 
    June 30, 2010  
    Weighted-                      
    Average                      
    Useful                      
    Amortization     Gross             Net  
    Period (in     Carrying     Accumulated     Book  
    years)     Amount     Amortization     Value  
Contract-based intangibles
    3     $ 1,768     $ 1,768     $  
Internet respondent database
    7       3,000       2,187       813  
Customer relationships
    10       21,039       8,677       12,362  
Trade names
    16       5,283       2,076       3,207  
 
                         
Total
          $ 31,090     $ 14,708     $ 16,382  
 
                         
     The gross carrying amount and accumulated amortization of the Company’s acquired intangible assets for the six months ended December 31, 2010, as well as the related amortization expense, reflect the impact of foreign currency exchange rate fluctuations during the period.
                                 
    For the Three     For the Six  
    Months Ended     Months Ended  
    December 31,     December 31,  
    2010     2009     2010     2009  
Amortization expense
  $ 710     $ 706     $ 1,405     $ 1,405  
 
                       
 
Estimated amortization expense for the fiscal years ending June 30:
               
2011
  $ 2,650                          
 
                             
2012
  $ 2,837                          
 
                             
2013
  $ 2,676                          
 
                             
2014
  $ 2,259                          
 
                             
2015
  $ 1,681                          
 
                             
Thereafter
  $ 4,946                          
 
                             
8. Borrowings
     On June 30, 2010, the Company entered into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMC”), as Administrative Agent (the “Administrative Agent”) and Issuing Bank (the “Issuing Bank”), and the Lenders party thereto (the “Lenders”). The Amended and Restated Credit Agreement supersedes and replaces the Credit Agreement, dated September 21, 2007, as amended on December 31, 2008, March 6, 2009 and May 6, 2009 (the “Original Credit Agreement”), by and among the Company, JPMC, as Administrative Agent, and the Lenders party thereto. Pursuant to the Amended and Restated Credit Agreement, the Lenders made available certain credit facilities (the “Credit Facilities”) as more fully described below. The Credit Facilities replace existing credit arrangements under the Original Credit Agreement. In accordance with ASC Topic 470, the Company evaluated the change in cash flows, determined that there was a greater than 10% change, and concluded that treatment of the amendment and restatement of its credit agreement as an extinguishment of debt was appropriate.
     On August 27, 2010, the Company entered into Amendment Agreement No. 1 to the Amended and Restated Credit Agreement (the “Amendment”), dated as of August 26, 2010, among the Company, JPMC, as Administrative Agent for itself and the Lenders, and the Lenders parties thereto. The Amendment provides that certain banking services furnished to the Company and its subsidiaries by JPMC and its affiliates, including among others corporate credit cards and treasury management services, constitute obligations under the Amended and Restated Credit Agreement and are collateralized by the security interests in the assets, including among others patents and trademarks, of the Company and its domestic subsidiaries, and the pledges of the outstanding stock and membership interests in the Company’s domestic subsidiaries (but not the pledges of 66% of the outstanding stock and membership interests in first tier foreign subsidiaries of the Company and its domestic subsidiaries).

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     The principal terms of the Original Credit Agreement and Amended and Restated Credit Agreement are described below:
     
Original Credit Agreement   Amended and Restated Credit Agreement
     
 Availability:
   
 
   
$5,000 Revolving Line
  $5,000 Revolving Line
 
   
   Until certain leverage ratios are achieved, advances require minimum cash balances and no outstanding balance may exist at least 5 consecutive days in every 30-day period
 
   The Revolving Line may be used to back Letters of Credit.
 
   
   The Revolving Line may be used to back Letters of Credit
 
   Requires the Company to maintain a minimum cash balance of the greater of $5,000 and 1.2 times the outstanding amount under the Revolving Line (including outstanding letters of credit)
 
   
Term Loan A — original principal, $12,000
  New Term Loan — original principal, $15,581
 
   
Term Loan B, as consolidated with Term Loan C — original principal $22,625
   
 
   
Pricing Grid:
   
 
   
Not applicable
  See below
Interest:
   
 
   
Company option:
  Company option:
 
   
   Base Rate (greater of Federal Funds Rate plus 0.5%, LIBOR plus 1%, or Prime) plus 4%
 
   Base Rate (greater of Federal Funds Rate plus 0.5%, LIBOR plus 1%, or Prime) plus an Applicable Rate based on the pricing grid tied to the Company’s Consolidated Total Leverage Ratio, as described below (the “Pricing Grid”)
 
   
OR
  OR
 
   
   LIBOR plus 5%
 
   LIBOR plus an Applicable Rate based on the Pricing Grid
 
   
The Company elected LIBOR and the interest swap agreement, which fixed the LIBOR-based portion of the rate at 5.08%, remained unchanged. With the spread, the effective rate on the Term Loans was 10.08%.
  The Company elected LIBOR and the interest swap agreement fixes the LIBOR-based portion of the rate at 4.32%. At December 31, 2010, with the spread at 4.50%, the effective rate on the New Term Loan was 8.82%.
 
   
Interest payments are due at end of LIBOR interest periods, but at least quarterly in arrears
  Interest payments are due at end of LIBOR interest periods, but at least quarterly in arrears
 
   
Letter of credit participation fees equal to 5% of outstanding face amounts
  Letter of credit fees equal to 5% of outstanding face amounts until the first quarterly adjustment pursuant to the Pricing Grid, and are set under the Pricing Grid thereafter
 
   
 Interest Rate Swap:
   
 
   
Fixes the floating LIBOR interest portion of the rates on the amounts outstanding under the Term Loans at 5.08% through September 21, 2012
  Fixes the floating LIBOR interest portion of the rates on the amounts outstanding under the New Term Loan (reflecting the consolidation of Term Loans A and B into a single New Term Loan) at 4.32% through September 30, 2013

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Original Credit Agreement       Amended and Restated Credit Agreement
         
Three-month LIBOR rate received on the swap matches the LIBOR base rate paid on the Term Loans
      Three-month LIBOR rate received on the swap matches the LIBOR base rate paid on the New Term Loan
 
       
Notional amount equal to outstanding amount of the Term Loans
      Notional amount of $13,184 at December 31, 2010, equal to outstanding amount of the New Term Loan
 
       
         
 Unused Facility Fees:
       
 
       
Fee fixed at 1.0% of unused Revolving Line amount
      Fee fixed at 0.75% of unused Revolving Line amount
 
       
         
 Principal Payments:
       
 
       
Term Loans — September 21, 2012
      New Term Loan Maturity — September 30, 2013
 
       
Revolving Line Maturity — July 15, 2010
      Revolving Line Maturity — September 30, 2013
 
       
Revolving Line — payable at maturity
      Revolving Line — payable at maturity
 
       
Quarterly Term Loan Payments — $1,731
      Quarterly New Term Loan Payments — $1,199
 
       
         
 Financial Covenants:
       
 
       
Minimum Consolidated Interest Coverage Ratio ranging over various quarters between 3.00:1.00 and 1.75:1.00
      Minimum Consolidated Interest Coverage Ratio of at least 3.00:1.00
 
       
Maximum Consolidated Leverage Ratio ranging over various quarters between 6.40:1.00 and 2.00:1.00
      Maximum Consolidated Leverage Ratio of 2.90:1.00 for quarterly periods ending through December 31, 2010, 2.70:1.00 for the quarterly period ending March 31, 2011, and 2.50:1.00 for quarterly periods ending thereafter.
 
       
Minimum Consolidated Revenue (trailing 3 months) ranging over various quarters between $33,200 and $45,400
      Minimum cash balance of the greater of $5,000 and 1.2 times the outstanding amount under the Revolving Line (including outstanding letters of credit)
 
       
         
 Collateral:
       
 
       
Secured by all domestic assets and 66% of equity interests in first tier foreign subsidiaries
      Secured by all domestic assets and 66% of equity interests in first tier foreign subsidiaries
         
     The Pricing Grid provides for quarterly adjustment of rates and fees, and is as follows:
                                         
            ABR                   Commitment
    Consolidated Total   Applicable   Adjusted LIBO   Letter of Credit   Fee
Pricing Level   Leverage Ratio   Rate   Applicable Rate   Applicable Rate   Rate
1
  < 1.0     2.50 %     3.50 %     3.50 %     0.50 %
2
  ≥ 1.0 but < 1.5     3.25 %     4.25 %     4.25 %     0.75 %
3
  ≥ 1.5 but < 2.0     3.50 %     4.50 %     4.50 %     0.75 %
4
  ≥ 2.0 but < 2.5     3.75 %     4.75 %     4.75 %     0.75 %
5
  ≥ 2.5     4.00 %     5.00 %     5.00 %     1.00 %
     The Amended and Restated Credit Agreement contains customary representations, default provisions, and affirmative and negative covenants, including among others prohibitions of dividends, sales of certain assets and mergers, and restrictions related to acquisitions, indebtedness, liens, investments, share repurchases and capital expenditures. Among others, the Company may freely transfer assets and incur obligations among its domestic subsidiaries, but limitations apply to transfers of assets and loans to foreign subsidiaries.
     At December 31, 2010, the Company was in compliance with all of the covenants under the Amended and Restated Credit Agreement.
     At December 31, 2010, the required principal repayments of the term loan under the Amended and Restated Credit Agreement (the “New Term Loan”) for the remaining six months of the fiscal year ending June 30, 2011 and the three succeeding fiscal years are as follows:

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    Total  
2011
  $ 2,397  
2012
    4,794  
2013
    4,794  
2014
    1,199  
 
     
 
  $ 13,184  
 
     
     At December 31, 2010, the Company had no outstanding borrowings under its revolving line of credit and $347 in outstanding letters of credit. The letters of credit reduce the remaining undrawn portion of the revolving line of credit that is available for future borrowings.
Interest Rate Swap
     Effective September 21, 2007, the Company entered into an interest rate swap agreement with JPMC, which effectively fixed the floating LIBOR interest portion of the rates on the term loans outstanding under the Original Credit Agreement at 5.08% through September 21, 2012. The three-month LIBOR rate received on the swap matched the LIBOR base rate paid on the term loans since both used three-month LIBOR. The swap had an initial notional value of $34,625, which declined as payments were made on the term loans so that the amount outstanding under those term loans and the notional amount of the swap were always equal.
     As a result of the Amended and Restated Credit Agreement, the Company modified the terms of its interest rate swap to ensure that the notional amount of the swap matches the outstanding amount of the New Term Loan and the three-month LIBOR rate received on the swap matches the LIBOR base rate on the New Term Loan. The term of the interest rate swap was extended through September 30, 2013 to be consistent with the maturity date of the New Term Loan. As a result of these modifications, the Company re-designated its interest rate swap as a cash flow hedge and determined it to be highly effective at that time.
     The interest rate swap had a notional amount of $13,184 at December 31, 2010, which was the same as the outstanding amount of the New Term Loan. The applicable spread referenced in the Pricing Grid is added to the 4.32% rate fixed by the interest rate swap.
     At December 31, 2010, the Company recorded a liability of $706 in the “Other liabilities” line item of its unaudited consolidated balance sheet to reflect the fair value of the interest rate swap. As the interest rate swap was effective at December 31, 2010, changes in the fair value of the interest rate swap continue to be recorded through other comprehensive income, with any ineffectiveness recorded through interest expense.
9. Stock-Based Compensation
     The following table illustrates the stock-based compensation expense for stock options and restricted stock issued under the Company’s Long-Term Incentive Plans (the “Incentive Plans”), stock options issued to new employees outside the Incentive Plans and shares issued under the Company’s Employee Stock Purchase Plans (“ESPPs”) included in the Company’s unaudited consolidated statements of operations for the three and six months ended December 31:
                                 
    Three Months Ended     Six Months Ended  
    December 31,     December 31,  
    2010     2009     2010     2009  
Cost of services
  $ 4     $ 4     $ 9     $ 8  
Selling, general and administrative
    167       158       341       313  
 
                       
 
  $ 171     $ 162     $ 350     $ 321  
 
                       
The Company did not capitalize stock-based compensation expense as part of the cost of an asset for any periods presented.

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     The following table provides a summary of the status of the Company’s employee and director stock options (including options issued under the Incentive Plans and options issued outside the Incentive Plans to new employees) for the six months ended December 31, 2010:
                 
            Weighted-  
            Average  
            Exercise  
    Shares     Price  
Options outstanding at July 1
    3,873,452     $ 2.38  
Granted
    968,500       0.82  
Forfeited
    (484,859 )     2.68  
Exercised
    (39,583 )     0.45  
 
             
Options outstanding at December 31
    4,317,510       2.01  
 
             
     The following table provides a summary of the status of the Company’s employee and director restricted stock awards for the six months ended December 31, 2010:
                 
            Weighted-  
            Average  
            Fair Value at  
    Shares     Date of Grant  
Restricted shares outstanding at July 1
    73,751     $ 2.09  
Granted
    117,274       0.90  
Forfeited
    (2,813 )     2.31  
Vested
    (68,131 )     1.59  
 
             
Restricted shares outstanding at December 31
    120,081       1.39  
 
             
     At December 31, 2010, there was $1,287 of total unrecognized stock-based compensation expense related to non-vested stock-based compensation arrangements granted under the Incentive Plans, outside the Incentive Plans and under the ESPPs. That expense is expected to be recognized over a weighted-average period of 3.1 years.
10. Income Taxes
     For the three months ended December 31, 2010, the Company recorded an income tax provision of $223, compared with an income tax benefit of $1,227 for the same prior year period. The tax provision for the three months ended December 31, 2010 was comprised primarily of tax expense related to pre-tax income in certain of the Company’s international jurisdictions, partially offset by an additional tax benefit of $188 in France related to research credits applied for and refunded during the quarter. The tax benefit for the three months ended December 31, 2009 was principally impacted by tax benefits related to pre-tax losses in certain of the Company’s foreign jurisdictions and a tax law change which resulted in an additional tax benefit of $1,103.
     For the six months ended December 31, 2010, the Company recorded an income tax benefit of $165, compared with an income tax benefit of $1,476 for the same prior year period. The tax benefit for the six months ended December 31, 2010 was driven primarily by the additional tax benefit of $188 in France discussed above. The tax benefit for the six months ended December 31, 2009 was principally impacted by tax benefits related to pre-tax losses in certain of the Company’s foreign jurisdictions and the additional tax benefit of $1,103 noted above.
     A full valuation allowance continues to be recorded at December 31, 2010 against the Company’s deferred tax assets in the U.S., U.K., and Asia. The Company will continue to assess the realizability of its deferred tax assets in accordance with the FASB guidance for income taxes and will adjust the valuation allowances should all or a portion of the deferred tax assets become realizable in the future.
11. Comprehensive Income
     The following table sets forth the components of the Company’s total comprehensive income for the three and six months ended December 31:

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    Three Months Ended     Six Months Ended  
    December 31,     December 31,  
    2010     2009     2010     2009  
Net income (loss), as reported
  $ 343     $ 1,334     $ (994 )   $ 701  
Foreign currency translation adjustments
    303       138       1,875       1,278  
Change in fair value of interest rate swap
    91       96       163       (27 )
Change in postretirement obligation
    (51 )           (102 )      
Unrealized loss on marketable securities
          (4 )     (1 )     (7 )
 
                       
Total comprehensive income
  $ 686     $ 1,564     $ 941     $ 1,945  
 
                       
12. Net Income (Loss) Per Share
     Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares outstanding for the period. Diluted net income (loss) per share reflects the potential dilution of securities that could share in earnings. When the impact of stock options or other stock-based compensation is anti-dilutive, they are excluded from the calculation.
     The following table sets forth the reconciliation of the basic and diluted net income (loss) per share computations for the three and six months ended December 31:
                                 
    Three Months Ended     Six Months Ended  
    December 31,     December 31,  
    2010     2009     2010     2009  
Numerator:
                               
Net income (loss) used for calculating basic and diluted net income (loss) per share of stock
  $ 343     $ 1,334     $ (994 )   $ 701  
 
                       
 
                               
Denominator:
                               
Weighted average number of shares used in the calculation of basic net income (loss) per share
    54,472,556       53,939,876       54,447,673       53,919,859  
Dilutive effect of outstanding stock options and restricted stock
    70,040       120,759             130,538  
 
                       
Shares used in the calculation of diluted net income (loss) per share
    54,542,596       54,060,635       54,447,673       54,050,397  
 
                       
 
                               
Net income (loss) per share:
                               
Basic
  $ 0.01     $ 0.02     $ (0.02 )   $ 0.01  
 
                       
Diluted
  $ 0.01     $ 0.02     $ (0.02 )   $ 0.01  
 
                       
     Unexercised stock options to purchase 2,993,018 and 3,293,350 shares of the Company’s stock for the three months ended December 31, 2010 and 2009, respectively, at weighted-average prices per share of $2.60 and $3.17, respectively, were not included in the computations of diluted net income per share because their impact was anti-dilutive during the respective periods.
     Unvested restricted stock and unexercised stock options to purchase 4,437,591 and 3,293,350 shares of the Company’s common stock for the six months ended December 31, 2010 and 2009, respectively, at weighted-average prices per share of $1.99 and $3.17, respectively, were not included in the computations of diluted net income (loss) per share because their impact was anti-dilutive during the respective periods.
13. Enterprise-Wide Disclosures
     The Company is comprised principally of operations in North America, Europe, and Asia. Non-U.S. market research is comprised of operations in United Kingdom, Canada, France, Germany, Hong Kong, and Singapore. The Company also maintains a representative office in mainland China. There were no intercompany transactions that materially affected the financial statements, and all intercompany sales have been eliminated upon consolidation.

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     The Company’s business model for offering custom market research is consistent across the geographic regions in which it operates. Geographic management facilitates local execution of the Company’s global strategies. The Company maintains global leaders with responsibility across all geographic regions for the majority of its critical business processes, and the most significant performance evaluations and resource allocations made by the Company’s chief operating decision-maker are made on a global basis. Accordingly, the Company has concluded that it has one reportable segment.
     The Company has prepared the financial results for geographic information on a basis that is consistent with the manner in which management internally disaggregates information to assist in making internal operating decisions. The Company has allocated common expenses among these geographic regions differently than it would for stand-alone information prepared in accordance with GAAP. Geographic operating income (loss) may not be consistent with measures used by other companies.
     Geographic information for the periods presented herein is as follows:
                                 
    Three Months Ended     Six Months Ended  
    December 31,     December 31,  
    2010     2009     2010     2009  
Revenue from services
                               
United States
  $ 24,672     $ 26,798     $ 46,581     $ 49,630  
United Kingdom
    7,443       6,641       12,841       13,356  
Canada
    5,978       5,142       10,685       9,669  
Other European countries
    5,409       4,925       9,390       8,883  
Asia
    1,438       1,123       2,457       2,026  
 
                       
Total revenue from services
  $ 44,940     $ 44,629     $ 81,954     $ 83,564  
 
                       
 
                               
Operating income (loss)
                               
United States
  $ 1,097     $ 1,750     $ 1,418     $ 2,536  
United Kingdom
    (158 )     46       (1,130 )     (305 )
Canada
    (479 )     (727 )     (1,394 )     (1,517 )
Other European countries
    242       117       676       484  
Asia
    172       (592 )     33       (964 )
 
                       
Total operating income (loss)
  $ 874     $ 594     $ (397 )   $ 234  
 
                       
                 
    At
December 31,
    At
June 30,
 
    2010     2010  
Long-lived assets
               
United States
  $ 2,025     $ 2,964  
United Kingdom
    1,206       1,300  
Canada
    769       1,093  
Other European countries
    237       210  
Asia
    155       59  
 
           
Total long-lived assets
  $ 4,392     $ 5,626  
 
           
 
               
Deferred tax assets
               
United States
  $     $  
United Kingdom
           
Canada
    (1,549 )     (1,709 )
Other European countries
    (259 )     (307 )
Asia
           
 
           
Total deferred tax assets
  $ (1,808 )   $ (2,016 )
 
           

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14. Commitments and Contingencies
     The Company has several non-cancelable operating leases for office space and equipment. There were no material changes to the financial obligations for such leases during the six months ended December 31, 2010 from those disclosed in Note 19, “Commitments and Contingencies,” to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010.
15. Legal Proceedings
     In the normal course of business, the Company is at times subject to pending and threatened legal actions and proceedings. After reviewing any pending and threatened actions and proceedings with legal counsel, management does not expect the outcome of such actions or proceedings to have a material adverse effect on the Company’s business, financial condition or results of operations.
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
     The discussion in this Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding expectations, beliefs, plans, objectives, intentions or strategies regarding the future. In some cases, you can identify forward-looking statements by terminology such as, “may”, “should”, “expects”, “plans”, “anticipates”, “feel”, “believes”, “estimates”, “predicts”, “potential”, “continue”, “consider”, “possibility”, or the negative of these terms or other comparable terminology. All forward-looking statements included in this document are based on the information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statement. Actual results could differ materially from the results discussed herein. Factors that might cause or contribute to such differences include but are not limited to, those discussed in the Risk Factors section set forth in reports or documents the Company files from time to time with the Securities and Exchange Commission (“SEC”), such as its Annual Report on Form 10-K for the fiscal year ended June 30, 2010, filed by the Company with the SEC on August 31, 2010. Risks and uncertainties also include the Company’s ability to sustain and grow its revenue base, the Company’s ability to maintain and improve cost efficient operations, quarterly variations in financial results, actions of competitors, the Company’s ability to develop and maintain products and services attractive to the market, and uncertainties surrounding continued compliance with certain Nasdaq listing requirements.
Note: Amounts shown below are in thousands of U.S. Dollars, unless otherwise noted. Also, references herein to “we”, “our”, “us”, “its”, the “Company” or “Harris Interactive” refer to Harris Interactive Inc. and its subsidiaries, unless the context specifically requires otherwise.
Overview
     Harris Interactive Inc. is a leading global custom market research firm that uses web-based, telephone and other research methodologies to provide clients with information about the views, behaviors and attitudes of people worldwide.
     For the three months ended December 31, 2010, financial highlights include:
    Revenue from services was $44,940, up 0.7% from the same prior year period. Excluding foreign currency exchange rate differences, revenue was up 1.7% over last fiscal year’s second quarter. The increase was primarily due to revenue increases in the U.K., Canada, France, Germany, and Asia.
 
    Bookings were up 4.3% compared with the same prior year period, excluding foreign exchange rate differences. This growth was driven by increased bookings in Canada, France, and Germany.
 
    Operating income was $874, compared with operating income of $594 for the same prior year period. Operating income for the three months ended December 31, 2010 included $679 in restructuring and other charges,

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      compared with $383 for the same prior year period. The improvement in operating income was driven mainly by the revenue increase for the quarter.
 
    We had $13,499 in cash at December 31, 2010, down from $14,158 at June 30, 2010. Cash now exceeds our outstanding debt by $315.
Critical Accounting Policies and Estimates
     The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein. The most significant of these areas involving difficult or complex judgments made by management with respect to the preparation of our consolidated financial statements in fiscal 2011 include:
    Revenue recognition,
 
    Impairment of other intangible assets,
 
    Income taxes,
 
    Stock-based compensation,
 
    HIpoints loyalty program, and
 
    Contingencies and other accruals.
     In each situation, management is required to make estimates about the effects of events that are inherently uncertain.
     During the six months ended December 31, 2010, there were no changes to the items that we disclosed as our critical accounting policies and estimates in management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010, filed by us with the SEC on August 31, 2010.
Results of Operations
Three Months Ended December 31, 2010 Versus Three Months Ended December 31, 2009
     The following table sets forth the results of our operations, expressed both as a dollar amount and as a percentage of revenue from services, for the three months ended December 31, 2010 and 2009, respectively:
                                 
    2010     %     2009     %  
Revenue from services
  $ 44,940       100.0 %   $ 44,629       100.0 %
 
                               
Operating expenses:
                               
Cost of services
    29,560       65.8       28,085       62.9  
Selling, general and administrative
    12,312       27.4       13,849       31.0  
Depreciation and amortization
    1,515       3.4       1,718       3.8  
Restructuring and other charges
    679       1.5       383       0.9  
 
                       
Operating income
    874       1.9       594       1.3  
Interest and other income
    (8 )     (0.0 )     (12 )     (0.0 )
Interest expense
    316       0.7       499       1.1  
 
                       
Income from operations before taxes
    566       1.3       107       0.2  
 
                       
Provision (benefit) for income taxes
    223       0.5       (1,227 )     (2.7 )
 
                       
Net income
  $ 343       0.8     $ 1,334       3.0  
 
                       

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     Revenue from services. Revenue from services increased by $311, or 0.7%, to $44,940 for the three months ended December 31, 2010 compared with the same prior year period. Excluding foreign currency exchange rate differences, revenue from services for the three months ended December 31, 2010 increased by 1.7% compared with the same prior year period. As more fully described below, revenue from services was impacted by several factors.
     North American revenue decreased by $1,290 to $30,650 for the three months ended December 31, 2010 compared with the same prior year period, a decrease of 4.0%. By country, North American revenue for the three months ended December 31, 2010 was comprised of:
    Revenue from U.S. operations of $24,672, down 7.9% compared with $26,798 for the same prior year period. This decline was driven mainly by a 17.3% decline in our Healthcare sector and a 24.7% decline in our Financial Services sector. The decline in our Healthcare sector was primarily due to the continued revenue impact of bookings decreases experienced during the second half of fiscal 2010 and at the beginning of the first quarter of fiscal 2011. The decline in our Financial Services sector was primarily due to the loss of a large tracking study in the prior year. These declines were offset partially by a 12.6% increase in our Technology, Media & Telecom sector and a 30.0% increase in our Service Bureau Research business.
 
    Revenue from Canadian operations of $5,978, up 16.3% compared with $5,142 for the same prior year period. In local currency (Canadian Dollar), Canadian revenue for the three months ended December 31, 2010 increased by 10.6% compared with the same prior year period. The increase was driven mainly by revenue from work on a large tracking study that was won during the quarter.
     European revenue increased by $1,286 to $12,852 for the three months ended December 31, 2010 compared with the same prior year period, an increase of 11.1%. By country, European revenue for the three months ended December 31, 2010 was comprised of:
    Revenue from U.K. operations of $7,443, up 12.1% compared with $6,641 for the same prior year period. In local currency (British Pound), U.K. revenue for the three months ended December 31, 2010 increased by 16.1% compared with the same prior year period. The increase was driven primarily by revenue from work on a large tracking study that was deferred from Q1 into Q2, along with revenue generated from projects won with new clients across several industry sectors.
 
    Revenue from French operations of $3,099, down 3.6% compared with $3,216 for the same prior year period. In local currency (Euro), French revenue for the three months ended December 31, 2010 increased by 5.3% compared with the same prior year period. The increase was primarily due to continued success in selling to new and existing clients across several industry sectors.
 
    Revenue from German operations of $2,310, up 35.2% compared with $1,709 for the same prior year period. In local currency (Euro), German revenue for the three months ended December 31, 2010 increased by 46.8% compared with the same prior year period. Similar to our French operations, the increase was driven primarily by continued success in selling to new and existing clients across several industry sectors.
     Asian revenue increased by $315 to $1,438 for the three months ended December 31, 2010, an increase of 28.1% compared with the same prior year period. The impact of the foreign exchange rate on Asian revenue for the three months ended December 31, 2010 was inconsequential compared with the same prior year period. The increase in Asian revenue was driven primarily by revenue from work on a large tracking study sold during the fourth quarter of fiscal 2010.
     Cost of services. Cost of services was $29,560 or 65.8% of total revenue for the three months ended December 31, 2010, compared with 28,085 or 62.9% of total revenue for the same prior year period. The increase in cost of services for the three months ended December 31, 2010 was impacted by the differing types of custom research projects performed during the quarter when compared with the same prior year period.
     Selling, general and administrative. Selling, general and administrative expense for the three months ended December 31, 2010 was $12,312 or 27.4% of total revenue, compared with $13,849 or 31.0% of total revenue for the same prior year period. The decrease in selling, general and administrative expense was principally impacted by the following:

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    a $600 decrease in payroll-related expense, driven primarily by our continued focus on managing headcount relative to the needs of our business;
 
    a $289 decrease in facilities-related expense, driven primarily by space reductions taken during fiscal 2010; and
 
    a $191 decrease in legal expenses, driven primarily by improving the operational efficiency of our legal function.
     The remainder of the decrease in selling, general and administrative expense was the result of decreases across a number of other operating expense categories because of our continued focus on ensuring appropriate alignment of our cost structure relative to the needs of our business.
     Depreciation and amortization. Depreciation and amortization was $1,515 or 3.4% of total revenue for the three months ended December 31, 2010, compared with $1,718 or 3.8% of total revenue for the same prior year period. The decrease in depreciation and amortization expense for the three months ended December 31, 2010 when compared with the same prior year period is the result of fixed and intangible assets that became fully depreciated or amortized during fiscal 2010 and the first six months of fiscal 2011, combined with decreased capital spending as part of our overall focus on controlling costs.
     Restructuring and other charges. Restructuring and other charges were $679 or 1.5% of total revenue for the three months ended December 31, 2010, compared with $383 or less than 1% of total revenue for the same prior year period. Other charges for the three months ended December 31, 2010 consisted primarily of statutorily mandated severance costs incurred in connection with headcount reductions undertaken by our U.K. operations and costs associated with reorganizing the operational structure of our Canadian operations. Other charges for the three months ended December 31, 2009 consisted primarily of costs associated with reorganizing the operational structure of our Asian operations. There were no restructuring activities during the three months ended December 31, 2010 or 2009.
     Interest and other income. Interest and other income was $8 or less than 1% of total revenue for the three months ended December 31, 2010, compared with $12 or less than 1% of total revenue for the same prior year period. The decrease in interest and other income was principally the result of a lower average cash balance during the three months ended December 31, 2010 when compared with the same prior year period.
     Interest expense. Interest expense was $316 or less than 1% of total revenue for the three months ended December 31, 2010, compared with $499 or 1.1% of total revenue for the same prior year period. Interest expense for the three months ended December 31, 2010 reflects the impact of the decline in our outstanding debt as we continue to make required principal payments, as well as the decline in our effective interest rate as a result of amending our credit agreement in June 2010.
     Income taxes. We recorded an income tax provision of $223 for the three months ended December 31, 2010, compared with an income tax benefit of $1,227 for the same prior year period. The tax provision for the three months ended December 31, 2010 was comprised primarily of tax expense related to pre-tax income in certain of our international jurisdictions, partially offset by an additional tax benefit of $188 in France applied for and refunded during the quarter. The tax benefit for the three months ended December 31, 2009 was principally impacted by the tax benefits related to pre-tax losses in certain of our foreign jurisdictions and a tax law change which resulted in an additional tax benefit of $1,103. Based upon management’s assessment of the realizability of the Company’s deferred tax assets in the U.S., U.K., and Asia, a full valuation allowance continued to be recorded at December 31, 2010.

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Six Months Ended December 31, 2010 Versus Six Months Ended December 31, 2009
     The following table sets forth the results of our operations, expressed both as a dollar amount and as a percentage of revenue from services, for the six months ended December 31, 2010 and 2009, respectively:
                                 
    2010     %     2009     %  
Revenue from services
  $ 81,954       100.0 %   $ 83,564       100.0 %
 
                               
Operating expenses:
                               
Cost of services
    53,753       65.6       52,514       62.8  
Selling, general and administrative
    24,876       30.4       26,811       32.1  
Depreciation and amortization
    3,043       3.7       3,474       4.2  
Restructuring and other charges
    679       0.8       531       0.6  
 
                       
Operating income (loss)
    (397 )     (0.5 )     234       0.3  
Interest and other income
    (23 )     (0.0 )     (27 )     (0.0 )
Interest expense
    785       1.0       1,036       1.2  
 
                       
Loss from operations before taxes
    (1,159 )     (1.4 )     (775 )     (0.9 )
 
                       
Provision (benefit) for income taxes
    (165 )     (0.2 )     (1,476 )     (1.8 )
 
                       
Net income (loss)
  $ (994 )     (1.2 )   $ 701       0.8  
 
                       
     Revenue from services. Revenue from services decreased by $1,610, or 1.9%, to $81,954 for the six months ended December 31, 2010 compared with the same prior year. Excluding foreign currency exchange rate differences, revenue from services for the six months ended December 31, 2010 decreased by 0.8% compared with the same prior year period. As more fully described below, revenue from services was impacted by several factors.
     North American revenue decreased by $2,033 to $57,266 for the six months ended December 31, 2010 compared with the same prior year period, a decrease of 3.4%. By country, North American revenue for the six months ended December 31, 2010 was comprised of:
    Revenue from U.S. operations of $46,581, down 6.1% compared with $49,630 for the same prior year period. This decline was driven mainly by a 13.8% decline in our Healthcare sector and a 9.7% decline in our Financial Services sector. The decline in our Healthcare sector was primarily due to the continued revenue impact of bookings decreases experienced during the second half of fiscal 2010 and at the beginning of the first quarter of fiscal 2011. The decline in our Financial Services sector was primarily due to the loss of a large tracking study in the prior year. These declines were offset partially by a 12.9% increase in our Technology, Media & Telecom sector and a 17.5% increase in our Service Bureau Research business.
 
    Revenue from Canadian operations of $10,685, up 10.5% compared with $9,669 for the same prior year period. On a local currency basis (Canadian Dollar), Canadian revenue for the six months ended December 31, 2010 increased by 5.2% compared with the same prior year period. The increase was driven mainly by revenue from work on a large tracking study that was won during the second quarter of fiscal 2011.
     European revenue for the six months ended December 31, 2010 of $22,231 was essentially flat compared with the same prior year period. By country, European revenue for the six months ended December 31, 2010 was comprised of:
    Revenue from U.K. operations of $12,841, down 3.9% compared with $13,356 for the same prior year period. In local currency (British Pound), U.K. revenue for the six months ended December 31, 2010 was essentially flat compared with the same prior year period.
 
    Revenue from French operations of $5,577, down 3.9% compared with $5,806 for the same prior year period. In local currency (Euro), French revenue for the six months ended December 31, 2010 increased by 5.4% compared with the same prior year period. The increase was due primarily to continued success in selling to new and existing clients across several sectors.

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    Revenue from German operations of $3,813, up 23.9% compared with $3,077 for the same prior year period. In local currency (Euro), German revenue for the six months ended December 31, 2010 increased by 35.3% compared with the same prior year period. Similar to our French operations, the increase was driven by continued success in selling to new and existing clients across several industry sectors.
     Asian revenue increased by $430 to $2,457 for the six months ended December 31, 2010, an increase of 21.2% compared with the same prior year period. The impact of the foreign exchange rate on Asian revenue for the six months ended December 31, 2010 was inconsequential compared with the same prior year period. The increase in Asian revenue was driven primarily by revenue from work on a large tracking study sold during the fourth quarter of fiscal 2010.
     Cost of services. Cost of services was $53,753 or 65.6% of total revenue for the six months ended December 31, 2010, compared with $52,514 or 62.8% of total revenue for the same prior year period. The increase in cost of services for the six months ended December 31, 2010 was impacted by the differing types of custom research projects performed during the first six months of fiscal 2011 when compared with the same prior year period.
     Selling, general and administrative. Selling, general and administrative expense for the six months ended December 31, 2010 was $24,876 or 30.4% of total revenue, compared with $26,811 or 32.1% of total revenue for the same prior year period. The decrease in selling, general and administrative expense was principally impacted by the following:
    a $473 decrease in facilities-related expense, driven primarily by space reductions taken during fiscal 2010;
 
    a $294 decrease in payroll-related expense, driven primarily by our continued focus on managing headcount relative to the needs of our business;
 
    a $284 decrease in legal expenses, driven primarily by improving the operational efficiency of our legal function; and
 
    a $205 decrease in travel expense, driven primarily by our continued focus on controlling these costs.
     The remainder of the decrease in selling, general and administrative expense was the result of decreases across a number of other operating expense categories because of our continued focus on ensuring appropriate alignment of our cost structure relative to the needs of our business.
     Depreciation and amortization. Depreciation and amortization was $3,043 or 3.7% of total revenue for the six months ended December 31, 2010, compared with $3,474 or 4.2% of total revenue for the same prior year period. The decrease in depreciation and amortization expense for the six months ended December 31, 2010 when compared with the same prior year period is the result of fixed and intangible assets that became fully depreciated or amortized during fiscal 2010 and the first six months of fiscal 2011 combined with decreased capital spending as part of our overall focus on controlling costs.
     Restructuring and other charges. Restructuring and other charges were $679 or less than 1% of total revenue for the six months ended December 31, 2010, compared with $531 or less than 1% of total revenue for the same prior year period. Other charges for the six months ended December 31, 2010 consisted primarily of statutorily mandated severance costs incurred in connection with headcount reductions undertaken by our U.K. operations and costs associated with reorganizing the operational structure of our Canadian operations. Other charges for the six months ended December 31, 2009 included additional legal fees associated with the amendment of our credit agreement during fiscal 2009, costs incurred to close our telephone-based data collection center in Brentford, United Kingdom, and costs associated with reorganizing the operational structure of our Asian operations. There were no restructuring activities during the six months ended December 31, 2010 or 2009.
     Interest and other income. Interest and other income was $23 or less than 1% of total revenue for the six months ended December 31, 2010, compared with $27 or less than 1% of total revenue for the same prior year period. The decrease in interest and other income was principally the result of a lower average cash balance during the six months ended December 31, 2010 when compared with the same prior year period.

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     Interest expense. Interest expense was $785 or 1.0% of total revenue for the six months ended December 31, 2010, compared with $1,036 or 1.2% of total revenue for the same prior year period. Interest expense for the six months ended December 31, 2010 reflects the impact of the decline in our outstanding debt as we continue to make required principal payments, as well as the decline in our effective interest rate as a result of amending our credit agreement in June 2010.
     Income taxes. We recorded an income tax benefit of $165 for the six months ended December 31, 2010, compared with an income tax benefit of $1,476 for the same prior year period. The tax benefit for the six months ended December 31, 2010 was driven primarily by an additional tax benefit of $188 in France applied for and refunded during the second quarter. The tax benefit for the six months ended December 31, 2009 was principally impacted by tax benefits related to pre-tax losses in certain of our foreign jurisdictions and a tax law change which resulted in an additional tax benefit of $1,103. Based upon management’s assessment of the realizability of our deferred tax assets in the U.S., U.K., and Asia, a full valuation allowance continued to be recorded at December 31, 2010.
Significant Factors Affecting our Performance
Key Operating Metrics
     We closely track certain key operating metrics, specifically bookings and secured revenue. These key operating metrics enable us to measure the current and forecasted performance of our business relative to historical trends.
     Key operating metrics for the three months ended December 31, 2010 and the four preceding fiscal quarters were as follows (U.S. Dollar amounts in millions):
                                         
    Q2   Q3   Q4   Q1   Q2
    FY2010   FY2010   FY2010   FY2011   FY2011
Bookings
  $ 53.2     $ 44.7     $ 35.7     $ 35.4     $ 55.3  
Secured revenue
  $ 51.1     $ 54.6     $ 46.6     $ 45.0     $ 55.4  
     Additional information regarding each of the key operating metrics noted above is as follows:
     Bookings are defined as the contract value of revenue-generating projects that are anticipated to take place during the next four fiscal quarters for which a firm client commitment was received during the current period, less any adjustments to prior period bookings due to contract value adjustments or project cancellations during the current period.
     Bookings for the three months ended December 31, 2010 were $55.3 million, an increase of 4.0% compared with $53.2 million for the same prior year period. Excluding foreign currency exchange rate differences, bookings were up 4.3% compared with the same prior year period. Bookings in local currency for the three months ended December 31, 2010 compared with the same prior year period were principally impacted by the following:
    U.S. bookings decreased 3.8%, driven mainly by a 9.7% decline in our Healthcare sector.
 
    U.K. bookings decreased 43.6%, driven primarily by the loss of a large tracking study.
 
    French bookings increased 10.5%, due primarily to continued success in maintaining and growing tracking studies with existing clients while also selling increased levels of ad-hoc work to both new and existing clients.
 
    German bookings increased 91.9%, due primarily to increased sales to an existing client and a large tracking study won with a new client.

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    Canadian bookings were up 110.9%, driven primarily by a large tracking study won with a client in the financial services sector and the early booking of two large tracking studies that were not booked until last fiscal year’s third quarter. Excluding the two large tracking studies that booked early, Canadian bookings were up 65.0%.
 
    Asian bookings decreased 24.4%, driven primarily by our need to rebuild the Asian sales team during the first six months of fiscal 2011.
     Monitoring bookings enhances our ability to forecast long-term revenue and to measure the effectiveness of our marketing and sales initiatives. However, we also are mindful that bookings often vary significantly from quarter to quarter. Information concerning our new bookings is not comparable to, nor should it be substituted for, an analysis of our revenue over time. There are no third-party standards or requirements governing the calculation of bookings. New bookings involve estimates and judgments regarding new contracts and renewals, as well as extensions and additions to existing contracts. Subsequent cancellations, suspensions and other matters may affect the amount of bookings previously reported.
     Secured Revenue (formerly referred to as ending sales backlog) is defined as prior period secured revenue plus current period bookings, less revenue recognized on outstanding projects as of the end of the period.
     Secured revenue helps us manage our future staffing levels more accurately and is also an indicator of the effectiveness of our marketing and sales initiatives. Based on our experience from prior years, projects included in secured revenue at the end of a fiscal period generally convert to revenue from services during the following twelve months, based on our experience from prior years.
     Secured revenue for the three months ended December 31, 2010 was $55.4 million, compared with $51.1 million for the same prior year period. The increase in secured revenue was due primarily to the increase in bookings discussed above.
Financial Condition, Liquidity and Capital Resources
Liquidity and Capital Resources
     At December 31, 2010, we had cash of $13,499, compared with $14,158 at June 30, 2010. Available sources of cash to support known or reasonably likely cash requirements over the next 12 months include cash on hand, additional cash that may be generated from our operations, and funds to the extent available through our credit facilities discussed in Note 8, “Borrowings,” to our unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q. Under our credit agreement, we must maintain a minimum cash balance of the greater of $5,000 and 1.2 times the amount of borrowings we make under the revolving line that is part of our credit facilities (including outstanding letters of credit). While we believe that our available sources of cash, including funds available through our revolving line, will support known or reasonably likely cash requirements over the next 12 months, including quarterly principal payments of $1,199 and interest payments due under our credit agreement, our ability to generate cash from our operations is dependent upon our ability to profitably generate revenue, which requires that we continually develop new business, both for growth and to replace completed projects. Although work for no one client constitutes more than 10% of our revenue, we have had to find significant amounts of replacement and additional revenue as client relationships and work for continuing clients change and will likely have to continue to do so in the future. Our ability to profitably generate revenue depends not only on execution of our business plans, but also on general market factors outside of our control. As many of our clients treat all or a portion of their market research expenditures as discretionary, our ability to profitably generate revenue is adversely impacted whenever there are adverse macroeconomic conditions in the markets we serve.
     Our capital requirements depend on numerous factors, including but not limited to, market acceptance of our products and services, the resources we allocate to the continuing development of new products and services, our technology infrastructure and online panel, and the marketing and selling of our products and services. We are able to control or defer certain capital and other expenditures in order to help preserve cash if necessary. We expect to incur capital expenditures of between $2,500 and $3,500 during the fiscal year ending June 30, 2011.

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     The following table sets forth net cash provided by operating activities, net cash provided by (used in) investing activities, and net cash used in financing activities, for the six months ended December 31:
                 
    2010   2009
Net cash provided by operating activities
  $ 1,035     $ 1,087  
Net cash provided by (used in) investing activities
    (280 )     251  
Net cash used in financing activities
    (2,263 )     (3,382 )
     Net cash provided by operating activities. Net cash provided by operating activities was $1,035 for the six months ended December 31, 2010, essentially flat compared with $1,087 provided by operating activities for the same prior year period.
     Net cash provided by (used in) investing activities. Net cash used in investing activities was $280 for the six months ended December 31, 2010, compared with $251 provided by investing activities for the same prior year period. Investing activities for the six months ended December 31, 2009 included capital expenditures, which were offset by $505 in proceeds from the sale and maturities of marketable securities. Investing activities for the six months ended December 31, 2010 consisted solely of capital expenditures.
     Net cash used in financing activities. Net cash used in financing activities was $2,263 for the six months ended December 31, 2010, compared with $3,382 for the same prior year period. Cash used during both periods was for required principal payments on our outstanding debt, offset by cash received from the purchase of shares by employees through our Employee Stock Purchase Plan. The required quarterly principal payments on our outstanding debt decreased from $1,731 to $1,199 as a result of amending our credit agreement in June 2010.
Credit Facilities
     The principal terms of our credit agreement are described in Note 8, “Borrowings,” to our unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q.
     At December 31, 2010, we were in compliance with all of the covenants under our credit agreement. For the three months ended December 31, 2010, our financial covenants were:
                 
Covenant   Required   Actual
Minimum Consolidated Interest Coverage Ratio
    3.00:1.00       4.43:1.00  
Maximum Consolidated Leverage Ratio
    2.90:1.00       1.81:1.00  
Interest Rate Swap
     The principal terms of our interest rate swap are described in Note 8, “Borrowings,” to our unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements and Contractual Obligations
     At December 31, 2010, we did not have any transaction, agreement, or other contractual arrangement constituting an “off-balance sheet arrangement” as defined in Item 303(a)(4) of Regulation S-K.
     There have been no material changes outside the ordinary course of business during the three months ended December 31, 2010 to our contractual obligations as disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010, filed by us with the SEC on August 31, 2010.

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Recent Accounting Pronouncements
     See Note 3, “Recent Accounting Pronouncements”, to our unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q for a discussion of the impact of recently issued accounting pronouncements on our unaudited consolidated financial statements at December 31, 2010 and for the six months then ended, as well as the expected impact on our consolidated financial statements for future periods.
Item 3 — Quantitative and Qualitative Disclosures about Market Risk
     We have two kinds of market risk exposures, interest rate exposure and foreign currency exposure. We have no market risk sensitive instruments entered into for trading purposes.
     We continuously review any cash equivalents and marketable securities held by us and do not believe that our holdings have a material liquidity risk under current market conditions.
Interest Rate Exposure
     At December 31, 2010, we had outstanding debt under our credit facilities of $13,184. The debt matures September 30, 2013 and bears interest at the floating adjusted LIBOR plus an applicable margin. Our interest rate swap fixes the floating adjusted LIBOR portion of the interest rate at 4.32% through September 30, 2013. The additional applicable margin is determined quarterly using a pricing grid based on our consolidated total leverage ratio. At December 31, 2010, the additional applicable margin was 4.50%, resulting in an effective interest rate of 8.82% on our outstanding debt.
     Using a sensitivity analysis based on a hypothetical 1% increase in prevailing interest rates over a 12-month period, each 1% increase from prevailing interest rates at December 31, 2010 would have increased the fair value of the interest rate swap by $169 and each 1% decrease from prevailing interest rates at December 31, 2010 would have decreased the fair value of the interest rate swap by $185.
Foreign Currency Exposure
     As a result of operating in foreign markets, our financial results could be affected by significant changes in foreign currency exchange rates. We have international sales and operations in North America, Europe, and Asia. Therefore, we are subject to foreign currency rate exposure. Non-U.S. transactions are denominated in the functional currencies of the respective countries in which our foreign subsidiaries reside. Our consolidated assets and liabilities are translated into U.S. Dollars at the applicable exchange rates in effect as of the balance sheet date. Consolidated income and expense items are translated into U.S. Dollars at the average exchange rates for each period presented. Accumulated net translation adjustments are recorded in the accumulated other comprehensive income component of stockholders’ equity. We measure our risk related to foreign currency rate exposure on two levels, the first being the impact of operating results on the consolidation of foreign subsidiaries that are denominated in the functional currencies of their home countries, and the second being the extent to which we have instruments denominated in foreign currencies.
     Foreign exchange translation gains and losses are included in our results of operations since we consolidate the results of our international operations, which are denominated in each country’s functional currency, with our U.S. results. The impact of translation gains or losses on net income from consolidating foreign subsidiaries was not material for the periods presented. We have historically had low exposure to changes in foreign currency exchange rates upon consolidating the results of our foreign subsidiaries with our U.S. results due to the size of our foreign operations in comparison to our consolidated operations. However, if the operating profits of our international operations increase as a percentage of our consolidated operations, our exposure to the appreciation or depreciation in the U.S. Dollar could have a more significant impact on our net income and cash flows. Thus, we evaluate our exposure to foreign currency fluctuation risk on an ongoing basis.
     Since our foreign operations are conducted using foreign currencies, we bear additional risk of fluctuations in exchange rates because of instruments denominated in foreign currencies. We have historically had low exposure to changes in foreign currency exchange rates with regard to instruments denominated in foreign currencies, given the amount and

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short-term nature of the maturity of these instruments. The carrying values of financial instruments denominated in foreign currencies, including cash, cash equivalents, accounts receivable and accounts payable, approximate fair value because of the short-term nature of the maturity of these instruments.
     We performed a sensitivity analysis at December 31, 2010. Holding all other variables constant, we have determined that the impact of a near-term 10% appreciation or depreciation of the U.S. Dollar would have an insignificant effect on our financial condition, results of operations and cash flows.
Item 4 — Controls and Procedures
     Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of December 31, 2010 (the end of the period covered by this Quarterly Report on Form 10-Q) were effective. Further, there have been no changes in our internal control over financial reporting identified in connection with management’s evaluation thereof during the quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II: Other Information
Item 1 — Legal Proceedings
     In the normal course of business, we are at times subject to pending and threatened legal actions and proceedings. After reviewing with legal counsel any pending and threatened actions and proceedings, management does not expect the outcome of such actions or proceedings to have a material adverse effect on our business, financial condition or results of operations.
Item 1A — Risk Factors
     There are no material changes from the risk factors related to our business as disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010, filed by us with the SEC on August 31, 2010.
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds
     None.
Item 3 — Defaults Upon Senior Securities
     None.
Item 5 — Other Information
     None.
Item 6 — Exhibits
10.1*     Employment Agreement Amendment 1 dated December 20, 2010 between the Company and Kimberly Till (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 21, 2010 and incorporated herein by reference).
 
10.2*     Employment Agreement Amendment 1 dated December 20, 2010 between the Company and Pavan Bhalla (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed December 21, 2010 and incorporated herein by reference).

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10.3   Lease Agreement for Pepper Road, Hazel Grove, Stockport (UK), between Meggitt Properties and Harris Interactive UK Limited, dated November 29, 2010 (filed herewith).
 
10.4   Second Addendum to Agreement of Sublease for 161 Avenue of the Americas, New York, between the Company and McCann Erickson Inc., dated December 20, 2010 (filed herewith).
 
10.5*     Letter Agreement between the Company and Michael de Vere, dated January 3, 2011 (filed herewith).
 
31.1   Certificate of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2   Certificate of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1   Certificate of the Chief Executive Officer pursuant to 18 U.S.C. §1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
 
32.2   Certificate of the Chief Financial Officer pursuant to 18 U.S.C. §1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
 
*   Denotes management contract or arrangement

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SIGNATURE
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
February 4, 2011   Harris Interactive Inc.
 
 
  By:   /s/ Eric W. Narowski    
    Eric W. Narowski   
    Principal Accounting Officer and Senior Vice President, Global Controller
(On Behalf of the Registrant and as
Principal Accounting Officer) 
 

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Exhibit Index
10.1*     Employment Agreement Amendment 1 dated December 20, 2010 between the Company and Kimberly Till (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 21, 2010 and incorporated herein by reference).
 
10.2*     Employment Agreement Amendment 1 dated December 20, 2010 between the Company and Pavan Bhalla (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed December 21, 2010 and incorporated herein by reference).
 
10.3   Lease Agreement for Pepper Road, Hazel Grove, Stockport (UK), between Meggitt Properties and Harris Interactive UK Limited, dated November 29, 2010 (filed herewith).
 
10.4   Second Addendum to Agreement of Sublease for 161 Avenue of the Americas, New York, between the Company and McCann Erickson Inc., dated December 20, 2010 (filed herewith).
 
10.5*     Letter Agreement between the Company and Michael de Vere, dated January 3, 2011 (filed herewith).
 
31.1   Certificate of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2   Certificate of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1   Certificate of the Chief Executive Officer pursuant to 18 U.S.C. §1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
 
32.2   Certificate of the Chief Financial Officer pursuant to 18 U.S.C. §1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
 
*   Denotes management contract or arrangement

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