III

Business Context and Reporting Period

Company: Information Services Group, Inc. (ISG)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: ISG operates as a fact-based sourcing advisory firm specializing in the assessment, evaluation, negotiation, and management of service contracts for IT infrastructure, software applications, and IT-enabled business processes. The company serves primarily Forbes Global 2000 corporations across the Americas, Europe, and Asia Pacific.

Key Financial Metrics

(Amounts in thousands, except per share data)

Liquidity: As of June 30, 2010, cash and cash equivalents totaled $40.4 million. The company maintains a $10.0 million revolving credit facility with no borrowings outstanding during the period.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 6% ($1.9 million) for the quarter and 4% ($2.4 million) for the six months compared to the prior year periods.
• Geographic Performance:
  • Americas: Revenue increased 11% (quarter) and 8% (six months) due to higher sourcing activity in IT and business process services.
  • Asia Pacific: Revenue surged 52% (quarter) and 36% (six months), driven by increased engagement volumes.
  • Europe: Revenue declined 13% (quarter) and 11% (six months) due to lower engagement volumes and unfavorable foreign currency translation.
• Operating Expenses: Total operating expenses rose 7% for the quarter, primarily driven by a 21% increase in Selling, General, and Administrative (SG&A) expenses. This increase was attributed to higher outside professional services, share-based compensation, and client industry events not held in the prior year due to the global economic crisis.
• Interest Expense: Interest expense decreased significantly (35% for the quarter, 37% for six months) due to reduced debt levels and lower interest rates.

Guidance, Outlook, and Risks

Management Commentary: Management attributes revenue growth to higher levels of sourcing activity, particularly in the U.S. and Asia Pacific. The company notes that operating results for the interim periods are not necessarily indicative of full-year results.

Outlook: The filing contains forward-looking statements regarding 2010 revenue growth rates and capital expenditures, subject to risks and uncertainties.

Risks and Contingencies:

• Client Concentration: The 20 largest clients accounted for approximately 44% of 2009 revenue. The automotive sector collectively represented 15% of 2009 revenue, with General Motors Corporation individually exceeding 10%.
• Foreign Currency: The company is exposed to significant foreign currency exchange rate risk, with 42% of 2009 revenue generated outside the U.S. No derivative instruments were outstanding as of June 30, 2010.
• Interest Rate Risk: A 100 basis point change in interest rates would result in an annual pre-tax change of $0.7 million. The company holds an interest rate cap for 40% of the term loan value.

Investor Verification Checklist

• Debt Maturity: Verify the remaining mandatory term loan principal repayment due on November 16, 2014, and the current outstanding balance of $69.8 million.
• Client Concentration: Assess the current exposure to the automotive sector and the top 20 clients, given the historical concentration risks.
• Europe Performance: Monitor the trend in European revenue, which has declined for two consecutive periods due to volume and currency issues.
• SG&A Trends: Evaluate the sustainability of SG&A expense levels, which increased significantly due to one-time event costs and share-based compensation.
• Cash Flow: Review the net cash provided by operating activities ($0.8 million for six months) against the payout of bonuses and tax payments to ensure liquidity stability.