On April 7, 2008, the Executive Committee of the Board of Directors established the Transformation Committee, the purpose of which is to work with management and effect the transformation of the Company to one that is capable of delivering a higher percentage of its services through outsourcing and off-shoring solutions. In this regard, the Company will explore the appropriateness of moving functions such as recruiting, solutions delivery and finance and administration offshore in an effort to become more price competitive while maintaining high quality services for our clients. Rapid technological advances and the widespread 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 expanded the benefits that users can derive from computer-based information systems and improved 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.
The Company believes that its business, operating results and financial condition have been harmed by the recent economic downturn. A significant portion of the Company's major customers are in the financial services industry and have come under considerable pressure as a result of the recent developments in the financial markets. Spending on IT consulting services is largely discretionary, and the Company has experienced a delay in the start of projects from existing customers and extended lead times in closing new projects, both of which have impacted revenue growth through the third quarter of 2008. Beginning in 2006 and continuing through the fourth quarter of 2007, the Company expanded its sales and recruiting resources in an effort to increase its revenues in both the short and long-term. This effort, however, was unsuccessful through the third quarter of 2008 as indicated by the general decline in the Company's consulting revenue. The Company's effort to increase its revenues has been challenged further by a turnover of senior sales staff that began at the end of the second quarter of 2008 and continued into the third quarter of 2008. For the twelve months ended December 31, 2007 and the three and nine month periods ended September 30, 2008, the Company reported operating losses of approximately ($1.1) million, ($310,000) and ($1.7) million, respectively. While the Company continues to focus on revenue growth and cost reductions, including but not limited to outsourcing and off-shoring solutions, in an attempt to improve its financial condition, there can be no assurance that the Company will be profitable in future periods.
For the nine months ended September 30, 2008, approximately 67% 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, as compared to approximately 60% for the nine months ended September 30, 2007, 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. 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 revenues 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). Due to a continued decline in consulting revenue and consultant utilization, the Company's gross margin for the nine months ended September 30, 2008 was 20.8% as compared to 29.1% for the nine months ended September 30, 2007 which included a significantly higher margin project. 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 averse 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 ("VMOs") who are responsible for monitoring the costs of external service providers. The Company has been challenged by the price compression created by the VMOs, as well as, absorbing the costs associated with the VMOs, both of which have "squeezed" gross margin.

Helios & Matheson actively manages its personnel utilization rates by monitoring project requirements and timetables. Helios & Matheson's utilization rate was approximately 68% and 72% for the three and nine month period ended September 30, 2008 as compared to approximately 84% and 76% for the three and nine month period ended September 30, 2007. As projects are completed, consultants are either re-deployed to new projects at the current client site, re-deployed to new projects at another client site or 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 International Object Technology, Inc. ("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.
The Company had a minority investment in Methoda Computer Ltd. ("Methoda"), a methodology provider and knowledgebase for IT management and software engineering based in Israel. Repeated attempts by the Company to obtain current financial and operational information relating to this investment were unsuccessful. During the first quarter of 2007, the Company wrote off, to Selling, General and Administrative expenses, its investment in Methoda of $87,000.
The Company acquired a 51% ownership interest in T3 Media as a result of several investments in 1998 and 1999. Due to deterioration in performance and market conditions for T3 Media's services, the operations of T3 Media ceased in the second quarter of 2001. T3 Media had entered into a series of capital lease obligations to finance its expansion plans (covering leasehold improvements, furniture and computer-related equipment), which the Company had guaranteed. The balance outstanding under such leases was $291,000 and was included in accounts payable and accrued expenses on the balance sheet as of December 31, 2006. In 2007, the Company reduced this liability ratably over the year, consistent with the decrease in exposure that diminished over time. For the three and nine months ended September 30, 2007, the write down was $47,000 and $120,000, respectively, and is reflected in Selling, General and Administrative expenses. 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
The Company uses the modified prospective application method as specified by Financial Accounting Standards Board Statement 123 (revised 2004), Share Based Payment (Statement 123 (R)), 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. Results of Operations
The following table sets forth the percentage of revenues of certain items included in the Company's Statements of Operations:

                                  Nine Months Ended           Three Months Ended
                                    September 30,                September 30,
                                  2008          2007          2008           2007
         Revenues                   100.0 %      100.0 %        100.0 %       100.0 %
         Cost of revenues            79.2 %       70.9 %         76.2 %        71.9 %

         Gross profit                20.8 %       29.1 %         23.8 %        28.1 %
         Operating expenses          32.4 %       34.2 %         29.9 %        35.4 %

         Loss from operations       (11.6 )%      (5.1 )%        (6.1 )%       (7.3 )%

         Net loss                   (11.4 )%      (4.0 )%        (6.0 )%       (5.2 )%

Comparison of The Three Months Ended September 30, 2008 to The Three Months Ended September 30, 2007
Revenues. Revenues for the three months ended September 30, 2008 remained largely unchanged over the three months ended September 30, 2007 at approximately $5.0 million. The Company believes that its attempts to grow its business have been harmed by the recent economic downturn. A significant portion of the Company's major customers are in the financial services industry and have come under considerable pressure as a result of the recent developments in the financial markets. Spending on IT consulting services is largely discretionary, and the Company has experienced a delay in the start of projects from existing customers and extended lead times in closing new projects, both of which have impacted revenue growth through the third quarter of 2008.
Gross Profit. The gross profit for the three months ended September 30, 2008 was $1.2 million, a decrease of $195,000 from the prior year comparable period. As a percentage of total revenues, gross margin for the three months ended September 30, 2008 was 23.8% compared to 28.1% for the three months ended September 30, 2007. Gross margin has declined primarily as a result of a decrease in higher margin project revenue, increases in costs associated with VMOs and price compression on staffing assignments.
Operating Expenses. Operating expenses are comprised of Selling, General and Administrative ("SG&A") expenses, and depreciation and amortization. SG&A expenses for the three months ended September 30, 2008 were $1.5 million compared to the 2007 comparable period level of $1.7 million. This decrease is attributed to cost reduction initiatives associated with various selling, general and administrative expenses including, but not limited to, employee compensation (due to a reduction in sales and administrative resources), insurance, legal fees and provision for bad debt. Depreciation and amortization expenses decreased $3,000 over the comparable period in 2007. Taxes. Taxes for the three months ended September 30, 2008 were ($2,000) compared to ($70,000) for the three months ended September 30, 2007. The Company recorded a provision for minimum State taxes during the third quarter of 2008 of $4,000 which was offset by ($6,000) related to provision to return adjustments from the filing of state and federal tax returns compared to a provision for minimum State taxes during the third quarter of 2007 of $9,000 which was offset by a similar provision to return adjustments in the amount of ($79,000). Net Loss. As a result of the above, the Company had a net loss of ($301,000) or ($0.13) per basic and diluted share for the three months ended September 30, 2008 compared to a net loss of ($259,000) or ($0.11) per basic and diluted share for the three months ended September 30, 2007.
Comparison of The Nine Months Ended September 30, 2008 to The Nine Months Ended September 30, 2007
Revenues. Revenues for the nine months ended September 30, 2008 were $14.6 million, a $900,000 decrease from the comparable 2007 period. The Company believes that its business, operating results and financial condition have been harmed by the recent economic downturn. A significant portion of the Company's major customers are in the financial services industry and have come under considerable pressure as a result of the recent developments in the financial markets. Spending on IT consulting services is largely discretionary, and the Company has experienced a delay in the start of projects from existing customers and extended lead times in closing new projects, both of which have impacted revenue growth through the third quarter of 2008.
Gross Profit. The gross profit for the nine months ended September 30, 2008 was approximately $3.0 million, a decrease of $1.5 million from the comparable 2007 period. As a percentage of total revenues, gross margin for the nine months ended September 30, 2008 was 20.8% compared to 29.1% for the nine months ended September 30, 2007. Gross margin has declined primarily as a result of a decrease in higher margin project revenue, increases in costs associated with VMOs and price compression on staffing assignments.
Operating Expenses. SG&A expenses were $4.6 million for the nine months ended September 30, 2008 compared to $5.2 million for the nine months ended September 30, 2007. This decrease is attributed to cost reduction initiatives associated with various selling, general and administrative expenses including, but not limited to, employee compensation (due to a reduction in sales and administrative resources), sales commission expenses, insurance, legal fees and other professional fees. Depreciation and amortization expenses decreased $8,000 over the comparable period in 2007.

Taxes. Taxes for the nine months ended September 30, 2008 were $7,000 compared to ($58,000) for the nine months ended September 30, 2007. The Company recorded a provision for minimum State taxes during the nine months ended September 30, 2008 of $13,000 which was offset by ($6,000) related to provision to return adjustments from the filing of state and federal tax returns compared to a provision for minimum State taxes during the nine months ended September 30, 2007 of $34,000 which was offset by a similar provision to return adjustments in the amount of ($92,000).
Net Loss. As a result of the above, the Company had a net loss of ($1.7) million or ($0.70) per basic and diluted share for the nine months ended September 30, 2008 compared to a net loss of ($615,000) or ($0.26) per basic and diluted share for the nine months ended September 30, 2007. Liquidity and Capital Resources
The Company's cash balances were approximately $1.4 million at September 30, 2008 and $3.1 million at December 31, 2007. Net cash used in operating activities for the nine months ended September 30, 2008 was approximately $1.6 million compared to net cash used in operating activities of $685,000 for the nine months ended September 30, 2007. The increase in net cash used is primarily a result of operating losses incurred for the nine months ended September 30, 2008.
The Company had an operating and net loss of approximately ($1.7) million during the nine months ended September 30, 2008. During the nine months ended September 30, 2007, the Company had an operating loss of ($800,000) and a net loss of ($615,000). The Company believes that its business, operating results and financial condition have been harmed by the recent economic downturn. A significant portion of the Company's major customers are in the financial services industry and have come under considerable pressure as a result of the recent developments in the financial markets. Spending on IT consulting services . . .