Forward-Looking Statements

This management's discussion and analysis of financial condition and results of operations contains forward-looking statements by management and Computer Task Group, Incorporated ("CTG" or "the Company") that are subject to a number of risks and uncertainties. These forward-looking statements are based on information as of the date of this report. The Company assumes no obligation to update these statements based on information from and after the date of this report. Generally, forward-looking statements include words or phrases such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "projects," "could," "may," "might," "should," "will" and words and phrases of similar impact. The forward-looking statements include, but are not limited to, statements regarding future operations, industry trends or conditions and the business environment, and statements regarding future levels of, or trends in, revenue, operating expenses, capital expenditures, and financing. The forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Numerous factors could cause actual results to differ materially from those in the forward-looking statements, including, among other factors, the following: (i) industry and economic conditions, including fluctuations in demand for information technology (IT) services and the further deterioration in market conditions, (ii) the availability to us of qualified professional staff, (iii) domestic and foreign industry competition for customers and talent, (iv) rate and wage inflation or deflation, (v) risks associated with operating in foreign jurisdictions,
(vi) the impact of current and future laws and government regulation, as well as repeal or modification of same, affecting the IT solutions and staffing industry, taxes and the Company's operations in particular,
(vii) renegotiations, nullification, or breaches of contracts with customers, vendors, subcontractors or other parties, (viii) consolidation among the Company's competitors or customers, (ix) the partial or complete loss of the revenue the Company generates from IBM, (x) the need to change our IT services in response to new service offerings in the industry, and (xi) the risks described in Item 1A of the Company's most recent annual report on Form 10-K filed with the Securities and Exchange Commission (SEC) and from time to time in the Company's other reports filed with the SEC.

Industry Trends

The market demand for the Company's services is heavily dependent on IT spending by major corporations, organizations and government entities in the markets and regions that it serves. The pace of technological change and changes in business requirements and practices of our clients all have a significant impact on the demand for the services that we provide. Competition for new engagements and pricing pressure has been, and management believes, will continue to be strong. The Company has responded to these challenging business conditions by focusing on two main services, which are providing IT solutions and IT staffing to its clients. IT solutions and IT staffing revenue as a percentage of total revenue for the quarter and three quarters ended October 2, 2009 and September 26, 2008 is as follows:

                                                            For the Three
                           For the Quarter Ended            Quarters Ended
                          Oct. 2,        Sept. 26,      Oct. 2,      Sept. 26,
                            2009           2008          2009          2008
           IT solutions         35 %            31 %         34 %           32 %
           IT staffing          65 %            69 %         66 %           68 %

           Total               100 %           100 %        100 %          100 %

The Company's revenue and operating results are significantly affected by changes in demand for its services. During 2008, the U.S. economy, where the Company performed greater than 77% of its total business based upon revenue, significantly deteriorated primarily due to subprime mortgage issues, financial market conditions, and other economic concerns. In the second half of 2008, these economic pressures extended to the European markets where the Company also operates. These negative pressures on the

During the 2008 fourth quarter, the Company was informed by a significant customer of a reduction in their need for approximately 250 of CTG's staff, or approximately $21 million of annual revenue. Ultimately, this customer reduced its need for the Company's personnel by an aggregate of 425 billable staff or approximately $36 million in annualized revenue, beginning in the 2008 fourth quarter. The reduction was not a result of CTG's performance, but rather a change in our client's business needs. These reductions coupled with a continued general weakness in 2009 in demand for our IT staffing services from our other customers resulted in our IT staffing business realizing approximately $18.6 million less revenue in the 2009 third quarter as compared with the 2008 third quarter.

The Company also saw a decrease in the demand for its IT solutions business during the 2009 third quarter, which decreased by $3.8 million year-over-year, primarily due to healthcare providers not having access to capital markets in the current economy which has limited their ability to finance new projects.

The Company promotes a significant portion of its services through three vertical market focus areas: Technology Service Providers, Healthcare (which includes services provided to health care providers, health insurers, and life sciences companies) and Financial Services. The Company focuses on these three vertical areas as it believes that these areas are either higher growth markets than the general IT services market and the general economy, or are areas that provide greater potential for the Company's growth due to the size of the vertical market. The remainder of CTG's revenue is derived from general markets.

The Company's revenue by vertical markets as a percentage of total revenue for the quarter and three quarters ended October 2, 2009 and September 26, 2008 is as follows:

                                                                    For the Three
                                   For the Quarter Ended            Quarters Ended
                                  Oct. 2,        Sept. 26,      Oct. 2,      Sept. 26,
                                    2009           2008          2009          2008
   Technology service providers         31 %            36 %         31 %           35 %
   Healthcare                           24 %            26 %         26 %           27 %
   Financial services                    7 %             7 %          7 %            8 %
   General markets                      38 %            31 %         36 %           30 %

   Total                               100 %           100 %        100 %          100 %

The IT services industry is extremely competitive and characterized by continuous changes in customer requirements and improvements in technologies. Competition varies significantly by geographic region, as well as by the type of service provided. Many of the Company's competitors are larger and have greater financial, technical, sales and marketing resources. In addition, the Company frequently competes with a client's own internal IT staff. Our industry is affected by the growing use of lower-cost offshore delivery capabilities. There can be no assurance that the Company will be able to continue to compete successfully with existing or future competitors or that future competition will not have a material adverse effect on our results of operations and financial condition.

Revenue and Cost Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, when the services have been rendered, when the price is determinable, and when collectability of the amount due is reasonably assured. For time-and-material contracts, revenue is recognized as hours are incurred and costs are expended. For contracts with periodic billing schedules, primarily monthly, revenue is recognized as services are rendered to the customer. Revenue for fixed price contracts is recognized as per the proportional method of

The Company's revenue from contracts accounted for under time-and-material, progress billing and percentage of completion methods for the quarter and three quarters ended October 2, 2009 and September 26, 2008 is as follows:

                                                                  For the Three
                                 For the Quarter Ended            Quarters Ended
                                Oct. 2,        Sept. 26,      Oct. 2,      Sept. 26,
                                  2009           2008          2009          2008
     Time-and-material                92 %            90 %         91 %           90 %
     Progress payment                  6 %             7 %          7 %            7 %
     Percentage of completion          2 %             3 %          2 %            3 %

     Total                           100 %           100 %        100 %          100 %

Results of Operations

The table below sets forth data as contained in the condensed consolidated
statements of income with the percentage information calculated as a percentage
of consolidated revenues.



For the Quarter ended:                              October 2, 2009            September 26, 2008
                                                                (amounts in thousands)
Revenue                                           100.0 %     $ 66,771        100.0  %      $ 89,131
Direct costs                                       77.2 %       51,570         78.0  %        69,488
Selling, general, and administrative expenses      19.1 %       12,713         18.1  %        16,167

Operating income                                    3.7 %        2,488          3.9  %         3,476
Interest and other expense, net                       -            (29 )        (0.1 )%          (55 )

Income before income taxes                          3.7 %        2,459          3.8  %         3,421
Provision for income taxes                          1.3 %          853          1.5  %         1,340

Net income                                          2.4 %     $  1,606          2.3  %      $  2,081

In the 2009 third quarter, the Company recorded revenue of $66.8 million, a decrease of 25.1% compared with revenue of $89.1 million recorded in the 2008 third quarter. There were 64 billable days in the 2009 third quarter and 63 billable days in the 2008 third quarter. Revenue from the Company's North American operations totaled $52.0 million in the 2009 third quarter, a decrease of 26.2% when compared with revenue in the 2008 third quarter of $70.4 million. Revenue from the Company's European operations in the 2009 third quarter totaled $14.8 million, a decrease of 20.9% when compared with revenue in the 2008 third quarter of $18.7 million. The European revenue represented 22.1% and 21.0% of 2009 and 2008 third quarter consolidated revenue, respectively. The Company's revenue includes reimbursable expenses billed to customers. These expenses totaled $1.5 million and $2.2 million in the 2009 and 2008 third quarters, respectively.

The significant revenue decrease in the 2009 third quarter as compared with the corresponding 2008 period is due to the general weakness in IT spending associated with the current global recession. IT staffing revenue decreased 30% and IT solutions revenue decreased 13.9% in the 2009 third quarter as compared with the corresponding 2008 period. The IT solutions revenue decrease is

The decrease in revenue in the Company's European operations was primarily due to weakness in their IT staffing business. Additionally, revenue decreased due to the weakness of the currencies of Belgium, the United Kingdom, Luxembourg, and Germany, the countries in which the Company's European subsidiaries operate. In Belgium, Luxembourg and Germany, the functional currency is the Euro, while in the United Kingdom the functional currency is the British pound. Had there been no change in these exchange rates from the third quarter of 2008 to the third quarter of 2009, total European revenue would have been approximately $0.9 million higher, or $15.7 million as compared with the $14.8 million reported.

In the 2009 third quarter, IBM was the Company's largest customer, accounting for $17.2 million or 25.8% of consolidated revenue as compared with $28.7 million or 32.2% of revenue in the comparable 2008 period. The Company's current National Technical Services (NTS Agreement) contract with IBM runs until July 1, 2011. As part of the NTS Agreement, the Company also provides its services as a predominant supplier to IBM's Integrated Technology Services and Systems and Technology Group business units. We expect to continue to derive a significant portion of our revenue from IBM throughout the remainder of 2009 and in future years. However, the continued significant decline or the loss of the revenue from IBM would have a significant negative effect on our operating results. The Company's accounts receivable from IBM at October 2, 2009 and September 26, 2008 totaled $9.4 million and $12.0 million, respectively. No other customer accounted for more than 10% of the Company's revenue in either the third quarter of 2008 or 2009.

Direct costs, defined as costs for billable staff including billable out-of-pocket expenses, were 77.2% of revenue in the 2009 third quarter as compared with 78.0% of revenue in the 2008 third quarter. The decrease in direct costs as a percentage of revenue in the 2009 third quarter compared with the corresponding 2008 period is due to an increase in the Company's IT solutions business in 2009, which in aggregate has higher direct margins than the Company's IT staffing business. In the 2009 third quarter, the Company's IT solutions business represented 35% of total consolidated revenue, which was an increase of 4% year-over-year.

Selling, general and administrative (SG&A) expenses were 19.1% of revenue in third quarter of 2009 and 18.1% in the 2008 corresponding period. While the Company has closely managed and reduced its SG&A expense as total revenues have decreased, SG&A expense as a percentage of revenue has increased year-over-year as the Company incurs certain fixed costs which can not be rapidly reduced.

Operating income was 3.7% of revenue in the 2009 third quarter as compared with 3.9% of revenue in the 2008 third quarter. The decrease in 2009 operating income as a percentage of revenue is due to the significant decrease in revenue year-over-year, offset by disciplined cost control. Operating income from North American operations was $2.1 million and $3.6 million in the 2009 and 2008 third quarters, respectively, while European operations recorded operating income
(loss) of $0.4 million and $(0.1) million, respectively, in such periods.

The Company's effective tax rate (ETR) is calculated quarterly based upon current assumptions relating to the full year's estimated operating results and various tax-related items. The Company's normal ETR is 38 to 42% of pre-tax income. The 2009 third quarter ETR was 34.7%, and was below the normal range primarily due to less than $0.1 million of federal and state tax credits approved in the 2009 third quarter. The 2008 third quarter ETR was 39.2%.

Net income for the 2009 third quarter was 2.4% of revenue or $0.10 per diluted share, compared with net income of 2.3% of revenue or $0.13 per diluted share in the 2008 third quarter. Diluted earnings per share were calculated using 15.8 million weighted-average equivalent shares outstanding for the quarter ended October 2, 2009, and 16.2 million weighted-average equivalent shares outstanding for the quarter ended September 26, 2008. The number of equivalent shares outstanding decreased year-over-year as the Company purchased a total of approximately 1.1 million shares for treasury during the last quarter of 2008 and the first three quarters of 2009.

For the Three Quarters ended:                       October 2, 2009             September 26, 2008
                                                                (amounts in thousands)
Revenue                                          100.0 %      $ 207,907        100.0 %      $ 269,885
Direct costs                                      77.5 %        161,034         77.8 %        209,854
Selling, general, and administrative expenses     19.0 %         39,554         18.6 %         50,185

Operating income                                   3.5 %          7,319          3.6 %          9,846
Interest and other expense, net                   (0.1 )%          (209 )          -             (172 )

Income before income taxes                         3.4 %          7,110          3.6 %          9,674
Provision for income taxes                         1.3 %          2,807          1.5 %          4,139

Net income                                         2.1 %      $   4,303          2.1 %      $   5,535

For the first three quarters of 2009, the Company recorded revenue of $207.9 million, a decrease of 23.0% compared to revenue of $269.9 million recorded in the first three quarters of 2008. There were 193 total billable days in the first three quarters of 2009 and 190 total billable days in the first three quarters of 2008. Revenues from the Company's North American operations totaled $160.4 million in the first three quarters of 2009, as compared to $210.8 million in the comparable 2008 period. The Company's European operations accounted for $47.5 million or 22.9% of consolidated revenue in the first three quarters of 2009, as compared to $59.1 million or 21.9% in the comparable 2008 period. Reimbursable expenses billed to customers totaled $4.7 million and $6.6 million in the first three quarters of 2009 and 2008, respectively.

The significant revenue decrease in the first three quarters of 2009 as compared with the corresponding 2008 period is due to the general weakness in IT spending associated with the current global recession. Overall, IT staffing revenue decreased 24.8% and IT solutions revenue decreased 19.1% in the first three quarters of 2009 as compared with the corresponding 2008 period. For the IT solutions revenue, the decrease is primarily due to healthcare providers not having access to capital markets in the current economy which has limited their ability to finance new projects.

The decrease in revenue in the Company's European operations in the first three quarters of 2009 as compared with the first three quarters of 2008 was primarily due to weakness in their IT staffing business and the strength of the US dollar as compared to the local currencies. Had there been no change in the exchange rates from the first three quarters of 2008 as compared to the first three quarters of 2009, total European revenue would have been approximately $6.0 million higher, or $53.5 million as compared with the $47.5 million reported.

In the first three quarters of 2009, IBM accounted for $53.4 million or 25.7% of consolidated revenue, compared to $85.2 million or 31.6% of consolidated revenue in the first three quarters of 2008. No other customer accounted for more than 10% of the Company's revenue in either the first three quarters of 2008 or 2009.

Operating income was 3.5% of consolidated revenue in the first three quarters of 2009 as compared to 3.6% of consolidated revenue in the comparable 2008 period. The slight decrease in 2009 year-over-year operating income as a percentage of revenue is due to the significant decrease in revenue year-over-year, offset by disciplined cost control. Operating income from North American operations was $6.3 million and $9.1 million in the first three quarters of 2009 and 2008, respectively, while European operations recorded operating income of $1.0 million and $0.7 million, respectively, in such periods.

The 2009 year-to-date ETR was 39.5%. The 2008 year-to-date ETR was 42.8%. The 2008 year-to-date ETR was above the normal range primarily due to an addition to the valuation allowance for net operating losses in foreign countries of approximately $0.3 million in the 2008 second and third quarters.

Net income was 2.1% of consolidated revenue or $0.28 per diluted share in the first three quarters of 2009 as compared with net income of 2.1% of consolidated revenue or $0.35 per diluted share in the comparable 2008 period. Diluted earnings per share were calculated using 15.4 million weighted-average equivalent shares outstanding for the year-to-date period ended October 2, 2009, and 16.0 million weighted-average equivalent shares outstanding for the year-to-date period ended September 26, 2008.

Accounting Standards Pronouncements

For the year ended December 31, 2009, CTG will be required to add to its annual report disclosures about plan assets of the Company's defined benefit and other postretirement plans. These disclosures will include how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period, and significant concentrations of risk within plan assets. The addition of these disclosures will not have any impact on the Company's financial condition or results of operations.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires the Company's management to make estimates, judgments and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The Company's significant accounting policies, along with the underlying assumptions and judgments made by the Company's management in their application, have a significant impact on the Company's condensed consolidated financial statements. The Company identifies its most critical accounting policies as those that are the most pervasive and important to the portrayal of the Company's financial position and results of operations, and that require the most difficult, subjective and/or complex judgments by management regarding estimates about matters that are inherently uncertain. The Company's most critical accounting policies are those related to income taxes, specifically relating to deferred taxes and valuation allowances, and goodwill valuation.

Income Taxes - Deferred Taxes and Valuation Allowances - At October 2, 2009, the Company had a total of $6.3 million of current and non-current deferred tax assets, net of deferred tax liabilities, recorded on its consolidated balance sheet. The changes in deferred tax assets and liabilities from period to period are determined based upon the changes in differences between the basis of assets and liabilities for financial reporting purposes and the basis of assets and liabilities for tax purposes, as measured by the enacted tax rates when these differences are estimated to reverse. The Company has made certain assumptions regarding the timing of the reversal of these assets and liabilities, and whether taxable income in future periods will be sufficient to recognize all or a part of any gross deferred tax asset of the Company.

The Company's deferred tax assets and their potential realizability are evaluated each quarter to determine if any changes should be made to the valuation allowance. Any change in the valuation allowance in the future could result in a change in the Company's ETR. A 1% increase or decrease in the ETR in the 2009 third quarter would have increased or decreased, respectively, net income in the quarter by approximately $25,000.

Goodwill valuation - As of the fiscal month-end October 2008, with the assistance of an independent appraisal company, the Company completed its annual valuation of the business to which the Company's goodwill relates. The valuation indicated that the estimated fair value of the business exceeded the carrying value of the business. Additionally, given the declining market conditions during 2008, the Company reviewed its goodwill balance at December 31, 2008 to determine if a triggering event may have occurred which would be an indication of a potential impairment. The Company's review included analyzing the enterprise value of the consolidated company and reconciling it to the carrying . . .