III

Business Context and Reporting Period

Company: Information Services Group, Inc. (ISG)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Key Event: On November 16, 2007, ISG, formerly a special purpose acquisition company (SPAC), consummated the acquisition of Technology Partners International, Inc. (TPI), the largest independent sourcing advisory firm globally. Consequently, ISG's 2007 financial results include only six weeks of TPI operations (Nov 17–Dec 31, 2007). Prior to this, ISG had no operating revenue.

Key Financial Metrics

Note: ISG's 2007 Net Income was driven primarily by $10.5 million in interest income from IPO proceeds held prior to the acquisition, offsetting an operating loss.

Material Changes vs. Prior Period

• Revenue: ISG reported $18.9 million in revenue for 2007 compared to $0 in 2006, solely due to the inclusion of TPI's six-week post-acquisition operations.
• Profitability: ISG reported a net income of $4.5 million in 2007 versus a net loss of $55,000 in 2006. This shift is attributable to interest income on cash reserves rather than core operating profitability.
• Debt Structure: ISG incurred $95 million in new term debt to finance the TPI acquisition. TPI's pre-existing debt of approximately $32 million was retired at closing.
• Non-Cash Charges: TPI recorded a $58.2 million non-cash compensation charge related to the vesting of Management Share Units and Profit Participation Shares triggered by the acquisition. Excluding this charge, TPI's operating income for the 46-week period would have been $15.1 million.

Guidance, Outlook, and Risks

Management Commentary & Strategy:

• ISG intends to leverage TPI's proprietary data and global reach to expand into new industry sectors (healthcare, energy) and geographies (Europe, Asia).
• Management plans to implement a "Value Creation Plan" over 12–15 months to achieve cost reductions and productivity improvements, with estimated restructuring charges of $6 million.
• Service governance (post-implementation support) is identified as a key growth driver, currently representing 24% of revenues.

Risks and Contingencies:

• Client Concentration: TPI's top 20 clients accounted for 52% of 2007 revenue. One single client (various business units) accounted for over 10% of revenue.
• Debt Obligations: The $95 million term loan carries significant fixed costs. A 1% increase in interest rates would impact earnings by approximately $552,000 annually.
• Warrant Redemption: ISG may redeem outstanding warrants at $0.01 per share if the stock price exceeds $11.50 for 20 trading days, potentially forcing holders to exercise or sell.
• Internal Controls: Due to the recent acquisition, ISG excluded TPI from its Section 404 internal control assessment for 2007; full compliance is required for 2008.

Investor Verification Checklist

• Acquisition Integration: Verify the progress of the "Value Creation Plan" and whether the projected $6 million in cost savings are being realized.
• Client Retention: Monitor revenue concentration risks, specifically the retention of the single client representing >10% of revenue and the top 20 clients representing >50%.
• Debt Servicing: Assess cash flow sufficiency to meet the $95 million term loan obligations, including mandatory prepayments based on excess cash flow.
• Warrant Impact: Track the stock price relative to the $11.50 redemption trigger and the $9.18 exercise price of acquisition warrants to evaluate dilution risks.
• Internal Controls: Review the 2008 10-K for the first full-year assessment of internal controls over financial reporting for the consolidated entity (including TPI).