Overview
The Company believes it is a leading provider of ongoing survey-based performance measurement, analysis, tracking, improvement services and governance education to the healthcare industry in the United States and Canada. Since 1981, the Company has provided these services using traditional market research methodologies, such as direct mail, telephone-based surveys, focus groups and in-person interviews. Since 2002, the current primary data collection methodology used is direct mail, but the Company still uses other methodologies for certain types of studies. The Company addresses the growing need of healthcare providers and payers to measure the care outcomes, specifically experience and health status of their patients and/or members, and provides information on governance issues. NRC develops tools that enable healthcare organizations to obtain performance measurement information necessary to comply with industry and regulatory standards, and to improve their business practices so that they can maximize new member and/or patient attraction, experience, member retention and profitability. The Company believes that a driver of its growth and the growth of its industry will be the increase in demand for performance measurement, improvement and educational services as a result of more public reporting programs. The Company's primary types of information services are performance tracking services, custom research, subscription-based educational and improvement services, and its Market Guide. Acquisitions
On December 19, 2008, the Company acquired My InnerView, Inc. ("MIV"), a leading provider of quality and performance improvement solutions to the senior care profession. MIV offers resident, family and employee satisfaction measurement and improvement products to the long-term care, assisted and independent living markets in the United States. MIV works with over 8,000 senior care providers throughout the United States, housing what the Company believes is, the largest dataset of senior care satisfaction metrics in the nation. The consideration paid at closing for MIV included payment of $11,500,000 in cash and $440,000 of direct expenses capitalized as purchase price. The merger agreement under which the Company acquired MIV provided for contingent earn-out payments not included in these amounts.
On April 1, 2008, approximately 10 customer contracts were purchased from SQ Strategies for $249,473. The recording of this asset purchase increased customer related intangibles by $260,462 and deferred revenue by $10,989. Critical Accounting Policies and Estimates The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein. The most significant of these areas involving difficult or complex judgments made by management with respect to the preparation of the Company's consolidated financial statements for fiscal year 2008 include:
• Revenue recognition;

• Valuation of long-lived assets;

• Valuation of goodwill and identifiable intangible assets; and

• Income taxes.

Revenue Recognition
The Company derives a majority of its operating revenue from its annually renewable services, which include performance tracking services, subscription-based educational services and Market Guide. The Company provides interim and annual performance tracking to its clients under annual client service contracts, although such contracts are generally cancelable on short or no notice without penalty. The Company provides subscription-based educational services to clients generally under annual service contracts over a twelve-month period and publishes healthcare market information for its clients through its Market Guide. Starting in May 2008, the Company began providing Market Guide subscription-based services to clients on a monthly basis generally over a twelve-month period, however, some Market Guides will continue to be sold and delivered on an annual basis. The Company also derives revenues from its custom and other research projects.
The Company's performance tracking services are performance tracking and improvement tools for gathering and analyzing data from survey respondents. Such services are provided pursuant to contracts which are generally renewable annually, and that provide for a customer-specific study which is conducted via a series of surveys and delivered via a series of updates or reports, the timing and frequency of which vary by contract (such as monthly or weekly). These contracts are generally cancelable on short or no notice without penalty and, since progress on these contracts can be tracked and regular updates and reports are made, clients are entitled to any work-in-process, but are obligated to pay for all services performed through cancellation. Typically, these contracts are fixed-fee arrangements and a portion of the project fee is billed in advance, and the remainder is billed periodically over the duration of the project. The Company conducts custom research which measures and monitors market issues specific to individual healthcare organizations. The majority of the Company's custom research is performed under contracts which provide for advance billing of 65% of the total project fee with the remainder due upon delivery. Revenue and direct expenses for the Company's performance tracking services are recognized under the proportional performance method.
Under the proportional performance method, the Company recognizes revenue based on output measures or key milestones such as survey set up, survey mailings, survey returns and reporting. The Company measures its progress based on the level of completion of these output measures and recognizes revenue accordingly. Management judgments and estimates must be made and used in connection with revenue recognized using the proportional performance method. If management made different judgments and estimates, then the amount and timing of revenue for any period could differ materially from the reported revenue.
The Company recognizes subscription-based educational service revenue over the period of time the service is provided. Generally, the subscription periods are for twelve months, and revenue is recognized equally over the subscription period.
The Market Guide was published by NRC solely on an annual basis from 1996 to September 2008. The Company recognizes revenue on Market Guide contracts upon delivery to the principal customers. Revenue under some annual contracts which do not include monthly updates is fully recognized upon delivery, typically in the third quarter of the year. Starting in May 2008, the Company added subscription-based services the revenue from which is generally recognized on a monthly basis over a twelve-month period. Until September 2008, the Company would defer costs of preparing the survey data for Market Guide and expense these at the time the annual contract revenue was recognized. These costs are primarily incremental external direct costs solely related to fulfilling the Company's obligations under Market Guide contracts. Starting in October 2008, these costs were expensed monthly. The Company generates additional revenue from incidental customers subsequent to the completion of each monthly edition. Revenue and costs for these subsequent services are recognized as the services are performed and completed. Market Guide is generally provided pursuant to contracts that provide for the receipt of survey results that are customized to meet an individual client's specific information needs. Typically, these contracts are not cancelable by clients, clients receive no rights in the comprehensive healthcare database which results from this survey, other than the right to use the customized reports purchased pursuant thereto, and amounts due for Market Guide are billed prior to or at delivery.

As a result of the timing of recognition of revenue and costs associated with Market Guide, the Company's margins vary throughout the year. The Company's revenue recognition policy for Market Guide is not sensitive to significant estimates and judgments.
Valuation of Long-Lived Assets
Under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company monitors events and changes in circumstances that may require the Company to review the carrying value of its long-lived assets. The Company assesses whether an impairment of assets held and used may have occurred using undiscounted future operating cash flows. Impairments, if they occur, are measured using the fair value of the assets. The assessment of the recoverability of long-lived assets may be adversely impacted if estimated future operating cash flows are not achieved.
The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Among others, management believes the following circumstances are important indicators of potential impairment of such assets and, as a result, may trigger an impairment review:
• Significant underperformance in comparison to historical or projected operating results;

• Significant changes in the manner or use of acquired assets or the Company's overall strategy;

• Significant negative trends in the Company's industry or the overall economy;

• A significant decline in the market price for the Company's common stock for a sustained period; and

• The Company's market capitalization falling below the book value of the Company's net assets.

Valuation of Intangible Assets
Intangible assets include customer relationships, trade name and goodwill. Goodwill represents the difference between the purchase price paid in acquisitions, using the purchase method of accounting, and the fair value of the net assets acquired.
The Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, and, as a result, the Company does not amortize goodwill. As of December 31, 2008, the Company had net goodwill of $39.3 million. As of October 1 of each year (or more frequently as changes in circumstances indicate), the Company evaluates the estimated fair value of the Company's goodwill. On these evaluation dates, to the extent that the carrying value of the net assets of the Company's reporting units having goodwill is greater than the estimated fair value, impairment charges will be recorded. The Company's analysis has not resulted in the recognition of an impairment loss on goodwill in 2008, 2007 or 2006.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under that method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances, if any, are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized. Management judgment is required to determine the provision for income taxes and to determine whether deferred income taxes will be realized in full or in part.

Results of Operations
The following table sets forth, for the periods indicated, selected financial information derived from the Company's consolidated financial statements, expressed as a percentage of total revenue and the percentage change in such items versus the prior comparable period. The trends illustrated in the following table may not necessarily be indicative of future results. The discussion that follows the table should be read in conjunction with the Company's consolidated financial statements.

                                           Percentage of Total Revenue             Percentage
                                             Year Ended December 31,                Increase
                                                                                 2008       2007
                                                                                 over       over
                                          2008           2007        2006        2007       2006

 Revenue                                    100.0 %       100.0 %     100.0 %      4.3 %     11.8 %
 Operating expenses:
 Direct expenses                             46.3          44.6        44.4        8.3       12.1
 Selling, general and administrative         25.0          26.9        27.8       (3.4 )      8.4
 Depreciation and amortization                5.3           5.3         5.2        4.0       14.3

 Total operating expenses                    76.5          76.8        77.4        3.9       10.9

 Operating income                            23.5 %        23.2 %      22.6 %      5.5 %     14.7 %

Year Ended December 31, 2008, Compared to Year Ended December 31, 2007 Revenue. Revenue increased 4.3% in 2008 to $51.0 million from $48.9 million in 2007. This was primarily due to increases in the scope of work from existing clients and the addition of new clients.
Direct expenses. Direct expenses increased 8.3% to $23.6 million in 2008 from $21.8 million in 2007. The change was primarily due to an increase in salaries, benefits and travel of $1.2 million, the result of the change in the business model and the allocation of responsibilities related to sales and servicing clients. In 2008, the Company divided its sales force into two groups, one focused only on bringing in prospective new clients and the second focused exclusively on servicing current clients. As a result, salaries, benefits and travel attributable to the group focused on current clients are now classified as direct expenses rather than selling, general and administrative expenses. Direct expenses increased as a percentage of total revenue to 46.3% in 2008 from 44.6% in 2007.
Selling, general and administrative expenses. Selling, general and administrative expenses decreased 3.4% to $12.7 million in 2008 from $13.2 million in 2007. The change was largely due to the 2008 change in the business model and the allocation of responsibilities related to sales and servicing clients. Selling, general and administrative expenses decreased as a percentage of total revenue to 25.0% in 2008 from 26.9% in 2007.
Depreciation and amortization. Depreciation and amortization expenses increased 4.0% to $2.7 million in 2008 from $2.6 million in 2007. Depreciation and amortization as a percentage of revenue remained at 5.3% in 2008 and 2007 respectively.

Provision for income taxes. The provision for income taxes totaled $4.5 million (37.9% effective tax rate) for 2008 compared to $4.3 million (38.5% effective tax rate) for 2007. The effective tax rate was lower in 2008 due to decreases in provincial income tax rates.
Year Ended December 31, 2007, Compared to Year Ended December 31, 2006 Revenue. Revenue increased 11.8% in 2007 to $48.9 million from $43.8 million in 2006. This was primarily due to increases in the scope of work from existing clients, the addition of new clients, and the acquisition of TGI in May 2006, which generated $4.1 million more of revenue in 2007 compared to 2006. Direct expenses. Direct expenses increased 12.1% to $21.8 million in 2007 from $19.4 million in 2006 primarily due to increases in conference costs of $990,000, postage of $421,000, fieldwork of $291,000, and printing of $241,000 to support the increased revenue from TGI, and new clients and growth in the scope of work from existing clients. Direct expenses increased as a percentage of total revenue to 44.6% in 2007 from 44.4% in 2006.
Selling, general and administrative expenses. Selling, general and administrative expenses increased 8.4% to $13.2 million in 2007 from $12.2 million in 2006. The change was primarily due to increases in salary and benefits and contracted services of $1,071,000. The salary increases were primarily attributed to the acquisition of TGI. Selling, general and administrative expenses decreased as a percentage of total revenue to 26.9% in 2007 from 27.8% in 2006.
Depreciation and amortization. Depreciation and amortization expenses increased 14.3% to $2.6 million in 2007 from $2.3 million in 2006. The increase was primarily due to the amortization of intangible assets associated with the acquisition of TGI. Depreciation and amortization as a percentage of revenue increased slightly to 5.3% in 2007 from 5.2% in 2006.
Provision for income taxes. The provision for income taxes totaled $4.3 million (38.5% effective tax rate) for 2007 compared to $3.6 million (38.1% effective tax rate) for 2006. The effective tax rate was lower in 2006 due to differences in state income taxes.
Liquidity and Capital Resources
The Company believes it has adequate capital resources and operating cash flow to meet its projected capital and debt maturity needs for the foreseeable future. Requirements for working capital, capital expenditures, and debt maturities will continue to be funded by operations and the Company's borrowing arrangements.
Working Capital
The Company had a working capital deficiency of $10.7 million on December 31, 2008, as compared to a $2.4 million working capital deficiency on December 31, 2007. The increase in the working capital deficiency was primarily due to billings in excess of revenue earned increasing by $3.0 million, unbilled revenue decreasing by $600,000 and increased debt of $3.5 million to fund the MIV acquisition in December 2008. Cash and cash equivalents also decreased by $2.2 million, as a result of funding 2008 share repurchases and paying off in 2008 the remainder of the term note balance from 2007.
Billings in excess of revenue earned increased primarily due to timing of initial billings on new and renewal contracts. The Company typically invoices clients for performance tracking services and custom research projects before they have been completed. Billed amounts are recorded as billings in excess of revenue earned, or deferred revenue, on the Company's consolidated financial statements, and are recognized as income when earned. In addition, when work is performed in advance of billing, the Company records this work as revenue earned in excess of billings, or unbilled revenue. With the change in Market Guide, billings in excess of revenue earned increased $1.5 million as of December 31, 2008. Substantially all deferred and unbilled revenue will be earned and billed respectively, within 12 months of the respective period ends.

Capital Expenditures
Capital expenditures for the year ended December 31, 2008 were $2.8 million. These expenditures consisted of computer hardware, computer software, and building improvements, and the addition of $846,000 with the acquisition of MIV. The Company has budgeted approximately $2.0 million for capital expenditures in 2009 to be funded through cash generated from operations. The Company expects that these expenditures will be primarily for computer hardware and software, and equipment.
Debt and Equity
On May 26, 2006, the Company entered into a credit facility pursuant to which it borrowed $9.0 million under a term note and $3.5 million under a revolving credit note in order to partially finance the acquisition of TGI. The term note was refinanced on February 25, 2008, for the remaining balance of the term note of $1,602,675. The refinanced term note required payments of principal and interest in 17 monthly installments of $92,821, beginning March 31, 2008, and ending August 31, 2009. Borrowings under the refinanced term note bore interest at an annual rate of 5.14%. The Company made additional payments and paid off the term note in October 2008.
The maximum aggregate amount available under the revolving credit note was originally $3.5 million, but an addendum to the revolving credit note dated March 26, 2008, changed the revolving credit note amount to $6.5 million. The revolving credit note was renewed in July 2008 to extend the term to July 31, 2009. The Company may borrow, repay and re-borrow amounts under the revolving credit note from time to time until its maturity on July 31, 2009. The maximum aggregate amount available under the revolving credit note is $6.5 million, subject to a borrowing base equal to 75% of the Company's eligible accounts receivable. Borrowings under the revolving credit note bear interest at a variable rate equal to (1) prime (as defined in the credit facility) less 0.50% or (2) one-, two-, three-, six- or twelve-month LIBOR. The Company expects to extend the term of the revolving credit note for at least one year beyond the maturity date. As of December 31, 2008, the balance of the revolving credit note was $3.9 million.
On December 19, 2008, the Company borrowed $9.0 million under a term note to partially finance the acquisition of MIV. The term note is payable in 35 equal installments of $96,829, with the balance of principal and interest payable in a balloon payment due on December 31, 2011. Borrowings under the term note bear interest at a rate of 5.2% per year.
The term note is secured by certain of the Company's assets, including the Company's land, building, accounts receivable and intangibles. The term note contains various restrictions and covenants applicable to the Company, including requirements that the Company maintain certain financial ratios at prescribed levels and restrictions on the ability of the Company to consolidate or merge, create liens, incur additional indebtedness or dispose of assets. As of December 31, 2008, the Company was in compliance with these restrictions and covenants.
Debt acquired through the MIV acquisition included $89,741 in capital leases. The capital leases are for production and mailing equipment meeting capitalization requirements where the lease term exceeds more than 75% of the estimated useful life. The equipment is being depreciated over the lease term of 4.25 years ending in 2011.

The Company had obligations to make cash payments in the following amounts in the future as of December 31, 2008:

                             Total          Less than         One to          Three to          After
Contractual Obligations     Payments        One Year       Three Years       Five Years      Five Years

Operating leases          $  2,197,826     $   626,201     $  1,400,867     $    170,758     $         -
Revolving credit note        3,850,000       3,850,000                -                -               -
Other debt                      14,148          14,148                -                -               -
Capital leases                 101,871          37,044           64,827                -               -
Long-term debt              10,274,496       1,161,946        9,112,550                -               -

Total                     $ 16,438,341     $ 5,689,339     $ 10,578,244     $    170,758     $         -

The balance of the Company's revolving credit note as of December 31, 2008, is shown in the contractual obligations table as a cash payment obligation during the year in which the note's term expires. Interest related to the revolving credit note is dependent on the level of borrowing and variable interest rates as more fully described in Note 7 to the Company's consolidated financial statements, and is not shown in this table.
The Company generally does not make unconditional, non-cancelable purchase commitments. The Company enters into purchase orders in the normal course of business, but these purchase obligations do not exceed one year. Shareholders' equity decreased $3.7 million to $38.6 million in 2008 from $42.3 million in 2007. The decrease was primarily due to the purchase of treasury stock, including stock used to pay the exercise price of options exercised, of $10.1 million and payment of cash dividends of $3.8 million. This was partially offset by an increase in net income and the exercise of stock options.
Stock Repurchase Program
In February 2006, the Board of Directors of the Company authorized the repurchase of an additional 750,000 shares of common stock in the open market or in privately negotiated transactions. As of December 31, 2008, the remaining shares that can be purchased are 292,593. Off-Balance Sheet Obligations
The Company has no significant off-balance sheet obligations other than the operating lease commitments disclosed in "Liquidity and Capital Resources." Adoption of New Accounting Pronouncements Effective January 1, 2008, the Company adopted the provisions of SFAS No. 157, Fair Value Measurements ("SFAS 157"), for financial assets and financial liabilities. In accordance with Financial Accounting Standards Board Staff Position No. 157-2, Effective Date of FASB Statement No. 157, the Company delayed application of SFAS 157 for non-financial assets and non-financial liabilities, until January 1, 2009. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The adoption of SFAS 157 for financial assets and financial liabilities has not had a material effect on the consolidated financial statements.
Certain non-financial assets and non-financial liabilities measured at fair value on a recurring basis include reporting units measured at fair value in the first step of a goodwill impairment test. Certain non-financial assets measured at fair value on a non-recurring basis include non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, as well as intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. As stated above, SFAS 157 will be applicable to these fair value measurements beginning January 1, 2009. Management believes that adoption of SFAS 157-2 for non-financial assets and non-financial liabilities will not have a material effect on the consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115 ("No. 159"). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The provisions of SFAS No. 159 were effective as of January 1, 2008. The adoption of SFAS No. 159 has not had a material effect on the consolidated financial statements.
In June 2007, the FASB ratified the consensus reached by the Emerging Issues Task Force ("EITF") in EITF Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities ("EITF 07-3"), which requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and amortized over the period that the goods are delivered or the related services are performed, subject to an assessment of recoverability. EITF 07-3 is effective as of the beginning of a . . .