The following discussion and analysis of significant factors affecting the Company's operating results and liquidity and capital resources should be read in conjunction with the accompanying Consolidated Financial Statements and related Notes.

Overview

Since 1983, Helios & Matheson has provided IT services and solutions to Fortune 1000 companies and other large organizations. In 1997, Helios & Matheson became a public company headquartered in New York, New York. In addition, the Company has offices in Clark, New Jersey and Bangalore, India.

The Company's common stock is currently listed on The NASDAQ Capital MarketCM under the symbol ''HMNA''. Prior to January 30, 2007, the Company's name was The A Consulting Team, Inc.

Helios & Matheson provides a wide range of high quality, software and consulting solutions, through an integrated suite of market driven Service Lines in the areas of Application Value Management, Application Development and Integration, Independent Validation, Infrastructure, Information Management and IT Advisory Services for Fortune 1000 companies and other large organizations. These services account for over 90% of the Company's revenues. The Company's solutions are based on an understanding of each client's enterprise model. The Company's accumulated knowledge may be applied to new projects such as planning, designing and implementing enterprise-wide information systems, database management services, performance optimization, migrations and conversions, strategic sourcing, outsourcing and systems integration.

Helios & Matheson delivers its IT solutions through Solution Teams composed of Client Partners, Solution Partners, Project Managers, and Technical Specialists. These professionals possess the industry experience, project management skills and technical expertise to identify and effectively address a particular client's needs in relation to its business objectives. Helios & Matheson's focus on providing highly qualified IT professionals allows the Company to identify additional areas of the client's business which could benefit from the Company's IT solutions, thereby facilitating the cross-marketing of multiple Company services. The Company keeps its Solution Teams at the forefront of emerging technologies and business trends through close interaction with Helios & Matheson research personnel who identify innovative IT trends, tools and technologies and market driven solutions. As a result, management believes that Helios & Matheson Solution Teams are prepared to anticipate client needs, develop appropriate strategies and deliver comprehensive IT services, thereby allowing the Company to deliver the highest quality IT services in a timely fashion.

Helios & Matheson markets and distributes a number of software products developed by independent software developers. The Company believes its relationships with over 60 software clients throughout the country provide opportunities for the delivery of additional Company consulting and training services. The software products offered by Helios & Matheson are developed in the United States, England and Finland and marketed primarily through trade shows, direct mail, telemarketing, client presentations and referrals. Revenue from the sale of software is ancillary to the Company's total revenues, but in the future the Company hopes to use such sales as a means of introducing itself to potential clients.

The Company is dedicated to providing cost efficient competitive services to its clients through its Flexible Delivery Model which allows for dynamically configurable Onsite, Onshore or Offshore service delivery based on the needs of the clients. This capability is made possible by the Company's investment in HMGS, the Company's subsidiary operating in Bangalore, India. The Company's ability to blend more offshore work into its pricing should allow it to be more price competitive.

Rapid technological advances and the wide acceptance and use of the Internet as a driving force in commerce, accelerated the growth of the IT industry. These advances, including more powerful and less expensive computer technology, fueled the transition from predominantly centralized mainframe computer systems to open and distributed computing environments and the advent of capabilities such as relational databases, imaging, software development productivity tools, and web-enabled software. These advances expand the benefits that users can derive from computer-based information systems and improve the price-to-performance ratios of such systems. As a result, an increasing number of companies are employing IT in new ways, often to gain competitive advantages in the marketplace, and IT services have become an essential component of many company's long-term growth strategies. The same advances that have enhanced the benefits of computer systems rendered the development and implementation of such systems increasingly complex, popularizing the outsourcing of IT development and services to third party IT service providers like the Company. Many companies outsource such work because their internal personnel lack the qualifications for certain projects or they have an insufficient number of internal staff to address all of the projects being undertaken. Outsourcing also enables companies to realize cost efficiencies through reduced personnel costs. Accordingly, organizations turn to external IT services organizations such as Helios & Matheson to develop, support and enhance their internal IT systems. Beginning in 2006 and continuing through the fourth quarter of 2007, the Company continued to expand

its sales and recruiting resources in its effort to increase its revenues in both the short and long-term, but the Company was unsuccessful in increasing revenue in 2007. Beginning in 2006 and continuing through 2007, the Company experienced a delay in the start of projects from existing customers and extended lead times in closing new projects, both of which continued to impact revenue growth through the fourth quarter of 2007. As compared to 2006, consulting revenues continued to decline through the fourth quarter of 2007 primarily due to the termination of a number of assignments that were not replaced.

For the three and twelve months ending December 31, 2007, approximately 57% and 59% respectively, of the Company's consulting services revenues were generated from the hourly billing of its consultants' services to its clients under time and materials engagements, with the remainder generated under fixed-price engagements. The Company has established standard-billing guidelines for consulting services based on the types of services offered. Actual billing rates are established on a project-by-project basis and may vary from the standard guidelines. The Company typically bills its clients for time and materials services on a semi-monthly basis. Arrangements for fixed-price engagements are made on a case-by-case basis. Consulting services revenues generated under time and materials engagements are recognized as those services are provided. Revenues from fixed fee contracts are recorded when work is performed on the basis of the proportionate performance method, which is based on costs incurred to date relative to total estimated costs.

The Company has also generated revenues by selling software licenses. In addition to initial software license fees, the Company also derives revenues from the annual renewal of software licenses. Because future obligations associated with such revenue are insignificant, revenues from the sale of software licenses are recognized upon delivery of the software to a customer. The Company views software sales as ancillary to its core consulting services business. Revenue generated from software sales will vary from period to period.

The Company's most significant operating cost is its personnel cost, which is included in cost of revenues. As a result, the Company's operating performance is primarily based upon billing margins (billable hourly rate less the consultant's hourly cost) and consultant utilization rates (number of days worked by a consultant during a semi-monthly billing cycle divided by the number of billing days in that cycle). Despite a continued decline in consulting revenue and consultant utilization since 2005, the Company has sustained a relatively constant gross margin. For the twelve months ended December 31, 2005, 2006, and 2007, gross margin was 29.5%, 29.2% and 29.5%, respectively. The relatively constant gross margin was maintained primarily due to lower consultant costs as well as a change in the mix of time and material work compared to higher margin fixed price projects. Large portions of the Company's engagements are on a time and materials basis. While most of the Company's engagements allow for periodic price adjustments to address, among other things, increases in consultant costs, to date clients have been adverse to accepting cost increases. In addition, an increasing number of the Company's clients are outsourcing the management of their time and material engagements to external Vendor Management Organizations (''VMO's'') who are responsible for monitoring the costs of external service providers. The Company has been challenged with absorbing the costs associated with the VMO's.

Helios & Matheson actively manages its personnel utilization rates by monitoring project requirements and timetables. Helios & Matheson's utilization rate for the three and twelve months ending December 31, 2007, was approximately 79% and 75%, respectively as compared to 87% and 88% for the three and twelve months ending December 31, 2006, respectively. The decrease in employee utilization is consistent with the completion of a number of projects during the first half of 2007 that have not been replaced. As projects are completed, consultants either are re-deployed to new projects at the current client site or to new projects at another client site or are encouraged to participate in Helios & Matheson's training programs in order to expand their technical skill sets. The Company carefully monitors consultants that are not utilized. While the Company has established guidelines for the amount of non-billing time that it allows before a consultant is terminated, actual terminations vary as circumstances warrant.

On July 19, 2002, the Company acquired all of the common stock of IOT. The purchase price of the acquisition exceeded the fair market value of the net assets acquired, resulting in the recording of goodwill currently stated at $1,140,964 on the balance sheet. IOT provided data management and business

intelligence solutions, technology consulting and project management services. During the first quarter of 2006, IOT's operations were fully integrated into Helios & Matheson.

On April 11, 2005, the Company completed an investment in HMGS, an offshore joint venture, in the amount of $250,000, which represented approximately a 68% ownership. A minority partner invested $100,000 for the remaining 32% ownership. From April 11, 2005 to September 2005, the Company recorded its proportionate ownership share of the results of HMGS. In September 2005, the Company increased its ownership to 100% by purchasing the minority partners investment for $100,000. From September 2005 to December 31, 2007, the Company has consolidated the results of HMGS in its financial statements.

On January 21, 2005, the Company entered into a Share Exchange Agreement (the ''Share Exchange Agreement'') with Vanguard, a New Jersey corporation, the Vanguard shareholders and the authorized representative of the Vanguard shareholders named therein providing for an exchange of 7,312,796 shares of the Company's common stock for all of the issued and outstanding shares of capital stock of Vanguard (the ''Share Exchange''). Additionally, on January 21, 2005, the Company entered into a Stock Purchase Agreement (the ''Stock Purchase Agreement'') with Oak Finance Investments Limited (''Oak''), a British Virgin Islands company, providing for the sale of between 625,000 and 1,250,000 shares of the Company's common stock to Oak at a cash purchase price of $8.00 per share (the ''Share Issuance''). The Company's Chairman, Chief Executive Officer and President, Mr. Shmuel BenTov had also entered into an agreement under which he agreed to sell all of his shares of Company capital stock to Oak in a separate transaction at $10.25 per share. On August 4, 2005, the Company terminated the Share Exchange Agreement with Vanguard and its shareholders and the Stock Purchase Agreement with Oak, pursuant to the terms of each agreement. During the twelve months ended December 31, 2005, the Company incurred approximately $1.2 million of expenses related to the Vanguard transaction.

As of June 1, 2006, the Company and Mr. BenTov (the ''Helios & Matheson Releasors'') entered into and delivered general releases and covenants not to sue, pursuant to which the Helios & Matheson Releasors released and covenanted not to sue Vanguard and certain Vanguard-related persons, including (without limitation) its directors, officers, agents and certain advisors of Vanguard (the ''Vanguard Released Parties''), in connection with any and all claims existing as of the date of such releases and covenants, including, without limitation, any claims that were related to the terminated Vanguard transaction. In connection therewith, the Company received an aggregate of $1,100,000 (without giving affect to the Company's payment of $219,000 for fees and costs incurred in connection with this recovery), and the Company and certain related persons, including (without limitation) Mr. BenTov, received general releases and covenants not to sue from certain of the Vanguard Released Parties.

Selling, General and Administrative expenses have been reduced by net proceeds of $881,000 from the release of claims relating to the terminated Vanguard transaction for the twelve months ended December 31, 2006.

On March 30, 2006, Helios & Matheson Parent, an IT services organization with its corporate headquarters in Chennai, India, purchased 1,024,697 share of the Company's common stock from Mr. BenTov and his family members, which represented approximately 43% of the Company's outstanding common stock. On September 5, 2006 Helios & Matheson Parent increased their ownership to approximately 52%. Helios & Matheson Parent is a publicly listed company on three stock exchanges in India, the National Stock Exchange (NSE), the Stock Exchange, Mumbai (BSE) and Madras Stock Exchange (MSE) and is included in the Bombay Stock Exchange 500 Stock Index.

Critical Accounting Policies

The methods, estimates and judgments the Company uses in applying its most critical accounting polices have a significant impact on the results the Company reports in its consolidated financial statements. The Company evaluates its estimates and judgments on an on-going basis. Estimates are based on historical experience and on assumptions that the Company believes to be reasonable under the circumstances. The Company's experience and assumptions form the basis for its judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what is anticipated and different assumptions or estimates about the future could change

reported results. The Company believes the following accounting policies are the most critical to it, in that they are important to the portrayal of its financial statements and they require the most difficult, subjective or complex judgments in the preparation of the consolidated financial statements.

Goodwill and Intangible Assets

Goodwill acquired in a purchase and determined to have an indefinite useful life is not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. If it is determined by the Company that goodwill has been impaired it will be written down at that time.

Revenue Recognition

Consulting revenues are recognized as services are provided. The Company primarily provides consulting services under time and material contracts, whereby revenue is recognized as hours and costs are incurred. Customers for consulting revenues are billed on a weekly, semi-monthly or monthly basis. Revenues from fixed fee contracts are recorded when work is performed on the basis of the proportionate performance method, which is based on costs incurred to date relative to total estimated costs. Any anticipated contract losses are estimated and accrued at the time they become known and estimable. Unbilled accounts receivables represent amounts recognized as revenue based on services performed in advance of customer billings. Revenue from sales of software licenses is recognized upon delivery of the software to a customer because future obligations associated with such revenue are insignificant.

Allowance for Doubtful Accounts

The Company monitors its accounts receivable balances on a monthly basis to ensure that they are collectible. On a quarterly basis, the Company uses its historical experience to accurately determine its accounts receivable reserve. The Company's allowance for doubtful accounts is an estimate based on specifically identified accounts as well as general reserves. The Company evaluates specific accounts where it has information that the customer may have an inability to meet its financial obligations. In these cases, management uses its judgment, based on the best available facts and circumstances, and records a specific reserve for that customer, against amounts due, to reduce the receivable to the amount that is expected to be collected. These specific reserves are reevaluated and adjusted as additional information is received that impacts the amount reserved. The Company also establishes a general reserve for all customers based on a range of percentages applied to aging categories. These percentages are based on historical collection and write-off experience. If circumstances change, the Company's estimate of the recoverability of amounts due the Company could be reduced or increased by a material amount. Such a change in estimated recoverability would be accounted for in the period in which the facts that give rise to the change become known.

Valuation of Deferred Tax Assets

Deferred tax assets are reduced by a valuation allowance when, in the opinion of the Company, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company assesses the recoverability of deferred tax assets at least annually based upon the Company's ability to generate sufficient future taxable income and the availability of effective tax planning strategies.

Stock Based Compensation

Effective January 1, 2006, the Company adopted the modified prospective application method whereby compensation cost for the portion of awards for which the requisite service has not yet been rendered that are outstanding as of the adoption date of Statement 123(R) will be recognized over the remaining service period. The compensation cost for that portion of awards is based on the grant-date fair value of those awards as calculated for pro forma disclosures under Statement 123, as originally issued. All new awards and awards that are modified, repurchased, or cancelled after the adoption date will be accounted for under the provisions of Statement 123(R) and recognized as compensation cost over the applicable service period of each award.

Results of Operations

The following table sets forth the percentage of revenues of certain items included in the Company's Statements of Operations:

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                  [[Image Removed]] [[Image Removed]]                                                                                                                                     Year Ended December 31,
                  [[Image Removed]] [[Image Removed]]                                  2007                                   [[Image Removed]] [[Image Removed]]                                  2006                                   [[Image Removed]] [[Image Removed]]                                  2005
Revenues          [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]]             100.0 %                 [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]]             100.0 %                 [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]]             100.0 %
Cost of revenues  [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]]              70.5 %                 [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]]              70.8 %                 [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]]              70.5 %
Gross profit      [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]]              29.5 %                 [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]]              29.2 %                 [[Image Removed]] [[Image Removed]] [[Image Removed]] [[Image Removed]]              29.5 %
Operating         [[Image Removed]] [[Image Removed]] [[Image Removed]]                                                       [[Image Removed]] [[Image Removed]] [[Image Removed]]                                                       [[Image Removed]] [[Image Removed]] [[Image Removed]]
expenses                                                                [[Image Removed]]              35.0 %                                                                       [[Image Removed]]              25.5 %                                                                       [[Image Removed]]              31.3 %
(Loss)/Income     [[Image Removed]] [[Image Removed]] [[Image Removed]]                                                       [[Image Removed]] [[Image Removed]] [[Image Removed]]                                                       [[Image Removed]] [[Image Removed]] [[Image Removed]]
from operations                                                         [[Image Removed]]              (5.5 )%                                                                      [[Image Removed]]               3.6 %                                                                       [[Image Removed]]              (1.8 )%

Comparison of Year Ended December 31, 2007 to Year Ended December 31, 2006

Revenues. Revenues of the Company decreased by $4.1 million or 16.5% from $24.9 million for the twelve months ended December 31, 2006 to $20.8 million for the twelve months ended December 31, 2007. The decrease is primarily attributable to a decline in consulting revenue due to extended lead times in replacing completed projects.

Gross Profit. The resulting gross profit for the twelve months ended December 31, 2007 was $6.1 million, a decrease of $1.1 million or 15.5% from the 2006 comparable period amount of $7.3 million. As a percentage of total revenue, gross margin for the twelve months ended December 31, 2007 was 29.5%, relatively unchanged from the 2006 level of 29.2%.

Operating Expenses. Operating expenses are comprised of Selling, General and Administrative (''SG&A'') expenses, and depreciation and amortization. SG&A expenses increased by $881,000, or 14.2% from $6.2 million for the twelve months ended December 31, 2006 to $7.1 million for the twelve months ended December 31, 2007. SG&A for the twelve months ended December 31, 2006 was reduced by $881,000 of net settlement proceeds received in connection with the release of claims related to the terminated Vanguard transaction. Excluding the Vanguard settlement proceeds, SG&A remained unchanged at $7.1 million for the twelve months ended December 31, 2007 as cost reduction initiatives offset inflationary increases and increases in selling expenses. Depreciation and amortization expenses increased $36,000, from $151,000 for the twelve months ended December 31, 2006 to $188,000 for the twelve months ended December 31, 2007 primarily as a result of upgrades to systems and servers.

Taxes. Taxes decreased $264,000 from $117,000 for the twelve months ended December 31, 2006 to ($147,000) for the twelve months ended December 31, 2007. The Company recorded tax benefits of $76,000 and $86,000 for federal net operating loss carrybacks and provision to return adjustments from the filing of state and federal tax returns, respectively, which was partially offset by $15,000 for minimum state taxes. In addition, deferred taxes were not impacted by the pre-tax income since such amounts are fully reserved as of December 31, 2007 and 2006, respectively.

Net (Loss)/Income. As a result of the above, the Company had a net loss of ($838,000) or ($0.35) per basic and diluted share for the twelve months ended December 31, 2007 compared to net income of $852,000 or $0.36 per basic and $0.35 per diluted share for the twelve months ended December 31, 2006.

Comparison of Year Ended December 31, 2006 to Year Ended December 31, 2005

Revenues. Revenues of the Company decreased by $1.5 million or 5.6% from $26.4 million for the twelve months ended December 31, 2005 to $24.9 million for the twelve months ended December 31, 2006. The decrease was primarily attributable to a decrease in project revenue associated with the timing of replacing a number of long term projects that were completed in the fourth quarter of 2005.

Gross Profit. The resulting gross profit for the twelve months ended December 31, 2006 decreased by $529,000 or 6.8% from $7.8 million for the twelve months ended December 31, 2005 to $7.3 million for the twelve months ended December 31, 2006. As a percentage of total revenue, gross margin for the twelve months ended December 31, 2006 remained relatively unchanged at 29.2%.

Operating Expenses. Operating expenses are comprised of Selling, General and Administrative (''SG&A'') expenses and depreciation and amortization. SG&A expenses decreased by $1.8 million, or 22.8% from $8.1 million for the twelve months ended December 31, 2005 to $6.2 million for the twelve months ended December 31, 2006. SG&A expenses for the twelve months ended December 31, 2006 included an offset of $881,000 of net proceeds received in connection with the release of claims relating to the terminated Vanguard transaction while SG&A expenses for the twelve months ended December 31, 2005 included $1.2 million in pretax costs associated with the transaction. Excluding the proceeds received in 2006 and the costs incurred in 2005 in connection with the terminated transaction, SG&A expenses increased by $205,000 or 3% from $6.9 million for the twelve months ended December 31, 2005 to $7.3 million for the twelve months . . .