HACKETT GROUP, INC. - Quarter Report: 2008 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the quarterly period ended June 27, 2008

OR

For the transition period from              to             

Commission File Number 0-24343

The Hackett Group, Inc.

(Exact name of Registrant as specified in its charter)

(305) 375-8005

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether 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. (Check one):

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

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

As of August 1, 2008, there were 40,852,092 shares of common stock outstanding.

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The Hackett Group, Inc.

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PART I-FINANCIAL INFORMATION

The Hackett Group, Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

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

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The Hackett Group, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

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

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The Hackett Group, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

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

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The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation and General Information

Basis of Presentation

The accompanying consolidated financial statements of The Hackett Group, Inc. (“Hackett” or the “Company”) include the Company’s accounts and those of its wholly owned subsidiaries which the Company is required to consolidate. All intercompany transactions and balances have been eliminated in consolidation.

The Company consolidates the assets, liabilities, and results of operations of entities in accordance with Accounting Research Bulletin (“ARB”) No. 51, Consolidated Financial Statements, Statement of Financial Accounting Standards (“SFAS”) No. 94, Consolidation of All Majority-Owned Subsidiaries – an amendment of ARB No. 51, with related amendments of Accounting Principles Board (“APB”) Opinion No. 18 and ARB No. 43, Chapter 12, and the Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46, Consolidation of Variable Interest Entities, as revised.

In the opinion of management, the accompanying consolidated financial statements reflect all normal and recurring adjustments which are necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows as of the dates and for the periods presented. The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, these statements do not include all the disclosures normally required by accounting principles generally accepted in the United States of America for annual financial statements and should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 28, 2007 included in the Annual Report Form 10-K filed by the Company with the Securities and Exchange Commission. The consolidated results of operations for the quarter and six months ended June 27, 2008 are not necessarily indicative of the results to be expected for any future period or for the full fiscal year.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Recently Issued Accounting Standards

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. In accordance with FASB Staff Position FAS No. 157 (“FSP No. 157-2”), Effective Date of FASB Statement No. 157, the FASB has deferred the implementation of the provisions of SFAS No. 157 relating to nonfinancial assets and liabilities which the Company will adopt on January 3, 2009. For all financial assets and liabilities, the Company adopted SFAS No. 157 on December 29, 2007. The adoption of SFAS No. 157 did not have a material impact on the Company’s results of operations, financial position or liquidity.

At June 27, 2008, the Company’s financial instruments were carried at fair value in the consolidated balance sheet. The fair value of the Company’s short-term financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and other liabilities, equaled the respective carrying value due to the short-term nature of these instruments. The fair value of the Company’s investment in the Columbia Strategic Cash Portfolio (“Portfolio”) was based on Portfolio information available to the Company, the market outlook, and the expected timing of the remaining redemptions (see Note 6 for further detail on the Portfolio.)

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. SFAS No. 162 identifies the sources of accounting principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities. SFAS No. 162 is effective 60 days following approval by the Securities and Exchange Commission of the Public Company Accounting Oversight Board’s amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. The Company does not expect SFAS No. 162 to have a material impact on its consolidated financial statements.

2. Net Income (Loss) per Common Share

Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. With regard to common stock subject to vesting requirements or restricted stock units issued to employees, the calculation includes only the vested portion of such stock.

Dilutive net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding, increased by the assumed conversion of other potentially dilutive securities during the period.

Potentially dilutive shares were excluded from the diluted loss per share calculation for the six months ended June 29, 2007 as their effects would have been anti-dilutive to the net loss incurred by the Company.

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The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

2. Net Income (Loss) per Common Share (continued)

The following table reconciles basic and dilutive weighted average shares:

Approximately 1.2 million and 1.6 million stock options were excluded from the computations of diluted net income per common share for the quarters ended June 27, 2008 and June 29, 2007, respectively, as their exercise price was higher than the Company’s average stock price.

3. Comprehensive Gain (Loss)

The Company accounts for comprehensive gain (loss) under SFAS No. 130, Reporting Comprehensive Income. Comprehensive gain (loss) is summarized below (in thousands):

4. Collections from Misappropriation

As described in the Company’s Form 8-K filed on November 1, 2006, in October 2006 the Company learned of a misappropriation by its former UK disbursement agent related to funds earmarked for payroll taxes due to the United Kingdom Inland Revenue. The Company and its former disbursement agent agreed to settlement terms that resulted in the receipt of an initial cash payment of $350 thousand in January 2007 and the receipt of the final cash payment of $2.3 million in October 2007. These receipts were accounted for in collections from misappropriation in the consolidated statements of operations in the period in which they were received.

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The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

5. Restructuring

The Company recorded restructuring costs of $10.9 million and $5.6 million in fiscal years 2002 and 2001, respectively, for reductions in consultants and functional support personnel and for the closure and consolidation of facilities and related exit costs. These actions were taken as a result of the decline in demand for technology services throughout 2001 and 2002. The Company took steps to reduce its costs to better align its overall cost structure and organization with anticipated demand for its services.

In 2004 and 2003, the Company recorded restructuring costs of $3.7 million and $4.9 million, respectively, to increase existing reserves to account for potentially higher estimated losses on the sublease of facilities as a result of lower than expected sublease rates and longer than expected time estimates to sublease excess facilities. The 2004 and 2003 restructuring costs consisted of additions of $1.8 million and $3.1 million to the 2002 restructuring accrual and $1.9 million and $1.8 million to the 2001 restructuring accrual, respectively. Also in 2004, the 2002 restructuring accrual was reduced by $370 thousand relating to the final settlement of a lease obligation which was recorded as income from discontinued operations in the consolidated statement of operations for year ended December 31, 2004.

In 2005, the Company recorded restructuring costs of $2.9 million which related to $1.1 million for the consolidation of additional facilities and related exit costs not included in previously established reserves, primarily as a result of the REL Consultancy Group (“REL”) acquisition on November 29, 2005, and $1.8 million for increases in previously established reserves in 2002 and 2001 for the closure and consolidation of facilities, of which $1.1 million specifically related to the increase of previously established reserves in order to reflect the negotiated buyout of a New York City lease obligation. As a result of the buyout, the Company was fully released from $20.0 million of future lease obligations, assigned two subleases to the lessor, wrote-off a $1.4 million receivable from the lessor, and paid $3.1 million in cash to the lessor. The remaining $700 thousand related to increases in the reserves to account for higher estimated losses on the sublease of facilities as a result of lower than expected sublease rates and longer than expected time estimates to sublease facilities based on current market conditions. The 2005 restructuring costs of $1.8 million related to previously established reserves, which consisted of additions of $1.2 million and $600 thousand to the 2002 and 2001 restructuring accruals, respectively.

In 2006, the Company recorded restructuring costs of $6.3 million, which was comprised of $2.8 million relating to the 2005 restructuring for the consolidation of additional facilities and related exit costs primarily as a result of the REL acquisition, and $3.5 million for increases in previously established reserves in 2002 and 2001 for the closure and consolidation of facilities to account for higher estimated losses on the sublease of facilities as a result of lower than expected sublease rates and longer than expected time estimates to sublease facilities based on current market conditions. Included in the $2.8 million was a further reduction of occupied space in the Company’s technology-focused facility in Philadelphia and related severance costs for a senior executive as the Company’s primary business model shifted to a proprietary best practice and intellectual capital and strategic advisory services firm.

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The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

5. Restructuring (continued)

The following tables set forth the detail and activity in the restructuring expense accruals during the six months ended June 27, 2008 (in thousands):

2001 Restructuring Accrual

2002 Restructuring Accrual

2005 Restructuring Accrual

6. Marketable Investments

As of June 27, 2008 and December 28, 2007, the Company had $3.5 million and $7.0 million, respectively, in Bank of America’s Columbia Strategic Cash Portfolio (“Portfolio”). On December 7, 2007, the Portfolio was closed for redemptions to new investors and is currently under liquidation.

During the quarter ended June 27, 2008, the Company received redemptions from the Portfolio of 1.0 million shares, or 13% of its investment at the date of liquidation, for $1.0 million, or $0.97 per share (par value representing $1.00). During the six months ended June 27, 2008, the Company received redemptions from the Portfolio of 3.6 million shares, or 43% of its investment at the date of liquidation, for $3.5 million, or $0.98 per share. Since the closing of the Portfolio, the Company has received total redemptions of 4.3 million shares, or 52% of its investment at the date of liquidation, for $4.2 million or $0.98 per share. The Portfolio continues to accrue and pay interest which the Company is recording as income once the collection of the interest is certain.

Based on Portfolio information available to the Company, the market outlook, and the expected timing of the remaining redemptions, the Company recorded a realized loss on the marketable investments of $450 thousand in the quarter ended December 28, 2007. No additional impairment was recorded during the six months ended June 27, 2008.

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The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

7. Accounts Receivable and Unbilled Revenue, Net

Accounts receivable and unbilled revenue, net, consisted of the following (in thousands):

Accounts receivable for the periods ending June 27, 2008 and December 28, 2007, is net of uncollected advanced billings. Unbilled revenue for the periods ending June 27, 2008 and December 28, 2007 includes recognized recoverable costs and accrued profits on contracts for which billings had not been presented to clients.

8. Stock Based Compensation

During the quarter and six months ended June 27, 2008, the Company issued 268,985 and 1,174,093 restricted stock units, respectively, at a weighted average grant-date fair value of $4.10 and $3.72, respectively. Additionally, during the quarter and six months ended June 27, 2008, 164,544 and 179,544 restricted stock units and common stock subject to vesting requirements were forfeited at a weighted average grant-date fair value of $3.88 and $3.94, respectively. As of June 27, 2008, the Company had 2,206,541 restricted stock units outstanding at a weighted average grant-date fair value of $3.80. As of June 27, 2008, there was $6.0 million of total restricted stock unit compensation expense related to nonvested awards not yet recognized, which is expected to be recognized over a weighted average period of 1.66 years.

9. Shareholders’ Equity

Treasury Stock

During the quarter ended June 27, 2008, the Board of Directors approved an additional $5.0 million authorization under the Company’s share repurchase program, thereby increasing the total approval to $50.0 million. Under the repurchase plan, the Company may buy back shares of its outstanding stock from time to time either on the open market or through privately negotiated transactions subject to market conditions and trading restrictions. During the quarter ended June 27, 2008, the Company repurchased approximately 675 thousand shares of its common stock at an average price of $4.39, for a total cost of approximately $3.0 million. During the six months ended June 27, 2008, the Company repurchased approximately 2.5 million shares of its common stock at an average price of $3.97, for a total cost of approximately $9.8 million, leaving $6.3 million available under the Company’s buyback program.

Subsequent to June 27, 2008, the Board of Directors approved an additional $5.0 million authorization under the Company’s share repurchase program, thereby increasing the total approval, since inception in 2002, to $55.0 million.

10. Litigation

The Company is involved in legal proceedings, claims, and litigation arising in the ordinary course of business not specifically discussed herein. In the opinion of management, the final disposition of such matters will not have a material adverse effect on the financial position, cash flows or results of operations of the Company.

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The Hackett Group, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

11. Geographic and Group Information

Revenue is primarily based on the country of the contracting entity and was attributed to the following geographic areas (in thousands):

Long-lived assets were attributed to geographic areas as follows (in thousands):

As of June 27, 2008 and December 28, 2007, international assets included $18.5 million and $18.8 million, respectively, of goodwill and intangible assets related to the REL acquisition in November 2005.

The Company’s revenue was derived from the following service groups (in thousands):

12. Reclassifications

Certain prior period amounts in the consolidated financial statements, and notes thereto, have been reclassified to conform to current year presentation.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report and the information incorporated by reference in it include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All statements regarding our expected financial position and operating results, our business strategy, our financing plans and forecasted demographic and economic trends relating to our business and industry are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as “may,” “will,” “anticipate,” “estimate,” “expect,” or “intend” and similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. We cannot promise you that our expectations in such forward-looking statements will turn out to be correct. Factors that impact such forward-looking statements include, among others, our ability to effectively integrate acquisitions into our operations, our ability to attract additional business and retain existing business, the timing of projects and the potential for contract cancellation by our customers, changes in expectations regarding our industry, our ability to attract and retain skilled employees, possible changes in collections of accounts receivable, risks of competition, price and margin trends, foreign currency fluctuations and changes in general economic conditions and interest rates. An additional description of our risk factors is set forth in our Annual Report on Form 10-K for the year ended December 28, 2007. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

OVERVIEW

The Hackett Group, Inc. (“Hackett”), formerly known as Answerthink, Inc. prior to January 1, 2008, is a leading strategic advisory and technology consulting firm that enables companies to achieve world-class business performance. By leveraging the comprehensive Hackett database, the world’s leading repository of enterprise business process performance metrics and best practice intellectual capital, our business and technology solutions help clients improve performance and maximize returns on technology investments.

Hackett, formed on April 23, 1997, is a strategic advisory firm and a world leader in best practice research, benchmarking, business transformation and working capital management services that empirically define and enable world-class enterprise performance. Only Hackett empirically defines world-class performance in sales, general and administrative and supply chain activities with analysis gained through more than 4,000 benchmark studies over 16 years at 2,700 of the world’s leading companies.

Hackett’s combined capabilities include business advisory programs, benchmarking, business transformation, working capital management and technology solutions, with corresponding offshore support.

In the following discussion, “Hackett” represents our total Company, “The Hackett Group” encompasses our Benchmarking, Business Transformation and Executive Advisory groups, and “Hackett Technology Solutions” encompasses our technology groups, including SAP, Oracle and Hyperion.

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Results of Operations

The following table sets forth, for the periods indicated, our results of operations and the percentage relationship to revenue of such results.

Quarter and Six Months Ended June 27, 2008 versus Quarter and Six Months Ended June 29, 2007

Revenue. Revenue for the quarter and six months ended June 27, 2008 increased 8% to $49.1 million and 9% to $92.9 million, respectively, compared to the quarter and six months ended June 29, 2007. The following table summarizes gross revenue (in thousands):

The Hackett Group revenue increased 23%, or $6.1 million, and 26%, or $13.2 million, for the quarter and six months ended June 27, 2008, respectively, compared to the quarter and six months ended June 29, 2007. The increase in The Hackett Group revenue was mostly a result of a change in our go-to-market strategy beginning in early 2007 with the introduction of a new transformational benchmark which integrates a benchmark with a strategic transformation plan and our increased investment in international markets. As a result, we have seen an increase in the number of large multi-national clients and the average size of our engagements since the beginning of 2007 through June 27, 2008. This change is consistent with the expansion and positioning of our global strategic advisory delivery capabilities. During the quarters and six months ended June 27, 2008 and June 29, 2007, no customer accounted for greater than 5% of our total revenue.

As a result of the increase in our engagements with large multi-national clients, The Hackett Group continues to realize strong growth internationally with a 40% and 42% increase in revenue for the quarter and six months ended June 27, 2008, respectively, compared to the quarter and six months ended June 29, 2007. The Hackett Group International revenue, which is primarily based on the country of the contracting entity, accounted for 40% and 39% of The Hackett Group total revenue in the quarter and six months ended June 27, 2008, respectively, compared to 35% for both the quarter and six months ended June 29, 2007, respectively.

Revenue increases in The Hackett Group were offset by revenue decreases in Hackett Technology Solutions of 14%, or $2.6 million, and 16%, or $5.7 million, in the quarter and six months ended June 27, 2008, respectively, compared to the quarter and six months ended June 29, 2007. The decrease in revenue in Hackett Technology Solutions was primarily due to lower revenue from our Oracle group.

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Reimbursements as a percentage of revenue during the quarters ended June 27, 2008 and June 29, 2007 were 9% and 11%, respectively, comparable to 10% for the six months ended June 27, 2008 and June 29, 2007, respectively.

Cost of Service. Cost of service primarily consists of salaries, benefits and incentive compensation for consultants and reimbursable expenses associated with projects. Cost of service before reimbursable expenses increased 6%, or $1.4 million, and 4%, or $1.8 million, for the quarter and six months ended June 27, 2008, respectively, compared to the quarter and six months ended June 29, 2007. The increase in total cost of service was primarily due to The Hackett Group’s higher headcount and cost per professional, which was consistent with its revenue growth, partially offset by headcount reductions in Hackett Technology Solutions.

Total cost of service as a percentage of revenue decreased to 61% for the quarter ended June 27, 2008 from 64% for the quarter ended June 29, 2007, and decreased to 62% for the six months ended June 27, 2008 from 65% for the six months ended June 29, 2007, mostly due to the increase in The Hackett Group’s revenue. The growth in The Hackett Group revenue has resulted in a favorable impact to net income, as The Hackett Group revenue realized gross margins of 46% and 45% for the quarter and six months ended June 27, 2008, respectively, compared to Hackett Technology Solutions which realized gross margins of 29% and 26%, respectively, for the same periods. On a net revenue basis, The Hackett Group realized gross margins as a percentage of revenue of 50% and 49% for the quarter and six months ended June 27, 2008, respectively, compared to Hackett Technology Solutions which realized gross margins as a percentage of net revenues of 33% and 30%, respectively, for the same periods.

Selling, General and Administrative. Selling, general and administrative costs increased by 1%, or $0.2 million, and decreased by 12%, or $3.7 million, for the quarter and six months ended June 27, 2008, respectively, compared to the quarter and six months ended June 29, 2007. The decrease in the six months ended June 27, 2008, compared to the six months ended June 29, 2007, was primarily due to cost containment incentives initiated in early 2007 resulting in the re-alignment of our sales force, revised incentive compensation plans, and other general and administrative headcount reductions, combined with higher gains on foreign currency translations. Selling, general and administrative costs as a percentage of revenue decreased to 31% and 30% for the quarter and six months ended June 27, 2008, respectively, from 33% and 37% for the quarter and six months ended June 29, 2007, respectively.

Collections from Misappropriation. Collections from misappropriation of $350 thousand for the six months ended June 29, 2007 related to collections received on funds that were misappropriated by our former UK disbursement agent. We learned of a misappropriation by our former UK disbursement agent in 2006, which related to funds earmarked for payroll taxes due to the United Kingdom Inland Revenue.

We agreed to settlement terms with our former disbursement agent that resulted in the receipt of an initial cash payment of $350 thousand in January 2007 and the receipt of the final cash payment of $2.3 million in October 2007. These receipts were accounted for in collections from misappropriation, in the consolidated statements of operations in the period in which they were received.

Income Taxes. We recorded income taxes of $23 thousand and $130 thousand for the quarter and six months ended June 27, 2008, respectively, which reflected estimated annual tax rates of 1% and 2%, respectively, for certain federal and state taxes. For the quarter and six months ended June 29, 2007, we recorded income taxes of $68 thousand and $135 thousand, respectively, which reflected estimated annual tax rates of 1% and 18% for certain U.S. federal and state taxes.

Liquidity and Capital Resources

We have funded our operations primarily with cash flows generated from operations and the proceeds from our initial public offering. At June 27, 2008 and December 28, 2007, we had $16.2 million and $20.1 million, respectively, classified in cash and cash equivalents in the accompanying consolidated balance sheets, and we had $600 thousand at June 27, 2008 and December 28, 2007 on deposit with a financial institution as collateral for letters of credit classified as restricted cash in the accompanying consolidated balance sheets. At June 27, 2008 and December 28, 2007, we had $3.5 million and $7.0 million, respectively, in Bank of America’s Columbia Strategic Cash Portfolio (“Portfolio”). Prior to December 28, 2007, the Portfolio was classified as cash and cash equivalents and was reclassified as marketable investments at December 28, 2007 and in prior periods due to the liquidation of the Portfolio and suspension of all redemptions (see Note 6 to the consolidated financial statements for further detail).

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The following table summarizes our cash flow activity (in thousands):

Net cash provided by operating activities was $3.2 million for the six months ended June 27, 2008, compared to $3.9 million for the six months ended June 29, 2007. During the six months ended June 27, 2008, net cash provided by operating activities was primarily attributable to earnings net of non-cash items including foreign currency gains, depreciation and amortization expense and non-cash stock compensation. The increases were mostly offset by higher accounts receivable and unbilled revenue due to an increase in revenue which resulted in an increase of five days in Days Sales Outstanding from December 28, 2007.

Net cash provided by operating activities during the six months ended June 29, 2007 was primarily attributable to earnings net of non-cash items including foreign currency gains, depreciation and amortization expense and non-cash stock compensation. Additionally, accounts receivable and unbilled revenue decreased primarily as a result of a decrease in Days Sales Outstanding from December 29, 2006, as well as an increase in accrued expenses and other liabilities.

Net cash provided by investing activities was $2.4 million for the six months ended June 27, 2008, compared to net cash used in investing activities of $1.7 million for the six months ended June 29, 2007. Cash provided by investing activities in the six months ended June 27, 2008 was primarily attributable to $3.5 million of redemptions of marketable investments at $0.97 per share, partially offset by $1.1 million in capital expenditures.

Net cash used in investing activities during the six months ended June 29, 2007 was primarily attributable to $1.1 million of capital expenditures and $0.7 million net redemptions of marketable investments.

Net cash used in financing activities was $9.5 million for the six months ended June 27, 2008, compared to $1.6 million for the six months ended June 29, 2007. Cash used in financing activities in the six months ended June 27, 2008 was primarily attributable to the repurchase of 2.5 million shares of our common stock at an average price of $3.97 per share, for a total cost of $9.8 million. Partially offsetting the 2008 share buybacks were proceeds from the sale of stock as a result of exercises of stock sold through our Employee Stock Purchase Plan of $143 thousand and exercises of stock options of $132 thousand.

Net cash used in financing activities in the six months ended June 29, 2007 was primarily attributable to the buyback of 509 thousand shares of our common stock at an average price of $3.44 per share, for a total cost of $1.8 million. Partially offsetting the 2007 share buybacks were proceeds from the sale of stock as a result of exercises of stock sold through our Employee Stock Purchase Plan of $170 thousand and exercises of stock options of $26 thousand.

During the quarter ended June 27, 2008, the Board of Directors approved an additional $5.0 million authorization under the Company’s share repurchase program, thereby increasing the total approval to $50.0 million. Under the repurchase plan, we may buy back shares from time to time either on the open market or through privately negotiated transactions subject to market conditions and trading restrictions. During the quarter ended June 27, 2008, we repurchased approximately 675 thousand shares at an average price of $4.39, for a total cost of approximately $3.0 million, leaving $6.3 million available under our share buyback program. Subsequent to June 27, 2008, the Board of Directors approved an additional $5.0 million authorization under the Company’s share repurchase program, thereby increasing the total approval, since inception in 2002, to $55.0 million.

We currently believe that available funds and cash flows generated by operations, if any, will be sufficient to fund our working capital and capital expenditure requirements for at least the next 12 months. We may decide to raise additional funds in order to fund expansion, to develop new or further enhance products and services, to respond to competitive pressures, or to acquire complementary businesses or technologies. There is no assurance, however, that additional financing will be available when needed or desired.

Recently Issued Accounting Standards

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. In accordance with FASB Staff Position FAS No. 157 (“FSP No. 157-2”), Effective Date of FASB Statement No. 157, the FASB has deferred the implementation of the provisions of SFAS No. 157 relating to nonfinancial assets and liabilities which we will adopt on January 3, 2009. For all financial assets and liabilities, we adopted SFAS No. 157 on December 29, 2007. The adoption of SFAS No. 157 did not have a material impact on our results of operations, financial position or liquidity.

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At June 27, 2008, our financial instruments were carried at fair value in the consolidated balance sheet. The fair value of our short-term financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and other liabilities, equaled the respective carrying value due to the short-term nature of these instruments. The fair value of our investment in the Portfolio was based on Portfolio information available to us, the market outlook, and the expected timing of the remaining redemptions (see Note 6 in the notes to the consolidated financial statements for further detail on the Portfolio.)

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. SFAS No. 162 identifies the sources of accounting principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities. SFAS No. 162 is effective 60 days following approval by the Securities and Exchange Commission of the Public Company Accounting Oversight Board’s amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. We do not expect SFAS No. 162 to have a material impact on our consolidated financial statements.

At June 27, 2008, our exposure to market risk related primarily to changes in interest rates and foreign currency exchange rate risks.

Interest Rate Risk

We invest only with high credit quality issuers and do not use derivative financial instruments in our investment portfolio. At June 27, 2008, we had $3.5 million in Bank of America’s Columbia Strategic Cash Portfolio (“Portfolio”) which was closed to redemptions and to new investors effective December 7, 2007, and which is currently under liquidation. We have recorded the Portfolio at fair market value in the accompanying consolidated balance sheets which includes an estimated realized loss of $450 thousand which we recorded in 2007. Based on the market outlook and information relating to the Portfolio, there may be further declines in the fair value of the Portfolio. To the extent we determine there is a further decline in fair value, we will recognize additional losses in future periods up to the aggregate amount of our investment (see Note 6 in the consolidated financial statements for further detail). No additional impairment was recorded for the six months ended June 27, 2008.

Exchange Rate Sensitivity

We face exposure to adverse movements in foreign currency exchange rates, as a portion of our revenue, expenses, assets and liabilities are denominated in currencies other than the U.S. Dollar, primarily the British Pound and the Euro. These exposures may change over time as business practices evolve. Currently, we do not hold any derivative contracts that hedge our foreign currency risk, but we may adopt such strategies in the future.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls”) pursuant to Rule 13a-14(c) and Rule 15d-14(c) under the Securities Exchange Act of 1934. Based upon that evaluation, the CEO and CFO concluded that our disclosure controls are effective in timely alerting them to material information required to be included in our periodic SEC filings.

Limitations on the Effectiveness of Controls

Our management, including our CEO and CFO, does not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

Changes in Internal Controls

There were no changes in our internal controls over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II-OTHER INFORMATION

The Company is involved in legal proceedings, claims, and litigation arising in the ordinary course of business not specifically discussed herein. In the opinion of management, the final disposition of such matters will not have a material adverse effect on the Company’s financial position cash flows or results of operations.

During the quarter ended June 27, 2008, the Company repurchased 674,835 shares of its common stock at a cost of approximately $3.0 million under the Company’s share repurchase program approved by the Board of Directors in 2002. All repurchases were made in the open market or through privately negotiated transactions, subject to market conditions and trading restrictions. There is no expiration date on the current authorization during the period covered by the table, nor was any determination made by the Company to suspend or cancel purchases under the program.

Issuer Purchases of Equity Securities

At the Company’s Annual Meeting of Stockholders held on May 14, 2008, the following proposals were voted on by the Company’s security holders:

None.

See Index to Exhibits on page 19, which is incorporated herein by reference.

The Exhibits listed in the accompanying Index to Exhibits are filed as part of this report.

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SIGNATURES

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.

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INDEX TO EXHIBITS

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