III

Business Context and Reporting Period

Company: Information Services Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: The Company operates as a fact-based sourcing advisory firm specializing in the assessment, negotiation, and management of service contracts for IT infrastructure, software applications, and business processes. Clients are primarily Forbes Global 2000 corporations. The Company operates in a single segment across the Americas, Europe, and Asia Pacific.

Key Financial Metrics

Note: Operating cash flow for the three-month period is not explicitly provided in the cash flow statement, which reports nine-month data.

Material Changes vs. Prior Period

• Revenue Decline: Revenues decreased 21% year-over-year for the quarter and 29% for the nine-month period. This was driven by a global economic downturn reducing sourcing activity, particularly in the U.S. and Europe, and unfavorable foreign currency translation.
• Impairment Charge: The Company recorded a non-cash impairment charge of $6.8 million related to indefinite-lived intangible assets (trademarks and trade names) in the third quarter of 2009 due to challenging macro-economic factors.
• Profitability: The Company reported a net loss of $3.6 million for the quarter, compared to a net income of $1.5 million in the same period in 2008. Operating income turned negative ($4.2 million loss) from a positive $3.8 million in the prior year.
• Cost Reductions: Direct costs decreased 26% and SG&A expenses decreased 12% year-over-year, attributed to reduced advisory staff levels, lower bonus provisions, and cost productivity initiatives.
• Debt Reduction: The Company made voluntary principal prepayments totaling $17.0 million during the nine-month period, reducing the term loan balance to $76.8 million.

Guidance, Outlook, and Risks

Management Commentary: Management attributes the decline in revenue to delayed client decision-making and reduced IT sourcing activity caused by the prolonged worldwide economic downturn. The Company has implemented cost productivity plans to reduce fixed and variable compensation and discretionary expenses.

Debt Covenants and Liquidity: On September 11, 2009, lenders amended the total leverage ratio to provide financing flexibility in exchange for additional debt repayments. Mandatory principal payments of $5.0 million and $2.0 million are due on December 31, 2009, and March 31, 2010, respectively.

Risks and Contingencies:

• Client Concentration: The 20 largest clients accounted for approximately 48% of 2008 revenues. The automobile sector (including General Motors, GMAC, and Chrysler) accounted for 14% of 2008 revenues. While GM's bankruptcy is not expected to materially change the revenue profile, the loss of large clients poses a risk.
• Foreign Currency: Significant international revenue exposure creates risk from exchange rate fluctuations, particularly the weakening of the Euro, British Pound, and Australian dollar.
• Forward-Looking Statements: The filing includes standard disclaimers that actual results may differ materially from expectations due to economic conditions and other unanticipated factors.

Investor Verification Checklist

• Intangible Asset Valuation: Verify the assumptions used in the $6.8 million impairment charge and the scheduled re-evaluation in Q4 2009.
• Debt Service Capacity: Confirm the Company's ability to meet mandatory principal payments of $7.0 million due in late 2009 and early 2010 given the current cash burn and operating losses.
• Client Concentration: Assess the current status of engagements with the automobile sector (GM, GMAC, Chrysler) and the impact of their financial distress on receivables and future bookings.
• Revenue Recovery: Monitor leading indicators of IT sourcing activity to determine if the 29% year-over-year revenue decline is stabilizing.
• Restructuring Accruals: Review the completion of the 2009 cost productivity plan and the accuracy of remaining severance accruals.