Overview

We help clients transform in the areas of business, marketing, and technology and succeed in an increasingly complex marketplace. We market our services through three primary business units - SapientNitro, Sapient Global Markets, and Sapient Government Services - positioned at the intersection of marketing, business and technology. SapientNitro, one of the world's largest independent digitally-led, integrated marketing services firms, provides multi-channel marketing and commerce services that span brand and marketing strategy, digital/broadcast/print advertising creative, web design and development, e-commerce, media planning and buying, and emerging platforms, such as social media and mobile. Through SapientNitro we offer a complete, multi-channel marketing and commerce solution that strengthens relationships between our clients' customers and their brands. For simplicity of operations, SapientNitro also includes our traditional IT consulting services, which are currently, and are expected to remain, less than 10% of our total revenues. Sapient Global Markets provides business and IT strategy, process and system design, program management, custom development and package implementation, systems integration and outsourced services to financial services and energy services market leaders. A core focus area within Sapient Global Markets is trading and risk management, to which we bring more than 15 years of experience and a globally integrated service in derivatives processing. Sapient Government Services provides consulting, technology, and marketing services to U.S. governmental agencies and non-governmental organizations ("NGOs"). Focused on driving long-term change and transforming the citizen experience, we use technology to help our clients become more accessible, transparent and effective.

Founded in 1990 and incorporated in Delaware in 1991, we maintain a strong global presence with offices around the world. We utilize our proprietary Global Distributed Delivery ("GDD") model in support of our SapientNitro and Sapient Global Markets segments. Our GDD model enables us to provide high-quality, cost-effective solutions under accelerated assignment schedules. By engaging India's highly skilled technology specialists, we can provide services at lower total costs as well as offer a continuous delivery capability resulting from time differences between India and the countries we serve. We also employ our GDD model to provide application management services.

Summary of Results of Operations

The following table presents a summary of our results of operations for the
three months ended March 31, 2012 and 2011 (in thousands, except percentages):



                                          Three Months Ended March 31,                 Increase / (Decrease)
                                           2012                  2011              Dollars             Percentage
Service revenues                      $      260,622        $      241,340       $     19,282                     8 %
Income from operations                $       16,113        $       18,488       $     (2,375 )                 (13 )%
Net income                            $        9,482        $       12,158       $     (2,676 )                 (22 )%

The increase in service revenues for the three months ended March 31, 2012 was due to increases in demand for our services in 2012 compared to 2011, and to a lesser extent, revenues generated from the two acquisitions completed during the three months ended September 30, 2011. The decreases in income from operations and net income were due to increases in project personnel and general and administrative expenses, which increased as a percentage of service revenues in the three months ended March 31, 2012 as compared to the three months ended March 31, 2011.

Non-GAAP Financial Measures

In our quarterly earnings press releases and conference calls, we discuss two key measures that are not calculated according to generally accepted accounting principles ("GAAP"). The first non-GAAP measure is operating income, as reported on our consolidated and condensed statements of operations, excluding certain expenses and benefits, which we refer to as "non-GAAP income from operations". The second measure calculates non-GAAP income from operations as a percentage of reported services revenues, which we refer to as "non-GAAP operating margin". Management believes that these non-GAAP measures help illustrate underlying trends in our business. We use these measures to establish budgets and operational goals (communicated internally and externally), manage our business, and evaluate our performance. We exclude certain expenses and benefits from non-GAAP income from operations that we believe are not reflective of these underlying business trends and are not useful measures in determining our operational performance and overall business strategy. Because our reported non-GAAP financial measures are not calculated according to GAAP, these measures may not necessarily be comparable to GAAP or similarly described non-GAAP measures reported by other companies within our industry. Consequently, our non-GAAP financial measures should not be evaluated in isolation or supplant comparable GAAP measures, but, rather, should be considered together with our consolidated and condensed financial statements, which are prepared according to GAAP. The following table reconciles income from operations as reported on our consolidated and condensed statements of operations to non-GAAP income from operations and GAAP operating margin to non-GAAP operating margin for the three months ended March 31, 2012 and 2011 (in thousands, except percentages):

                                                              Three Months Ended
                                                                  March 31,
                                                             2012           2011
 Service revenues                                          $ 260,622      $ 241,340

 GAAP income from operations                               $  16,113      $  18,488
 Stock-based compensation expense                              5,148          3,876
 Restructuring and other related (benefits) charges              (76 )        5,642
 Amortization of purchased intangible assets                   2,622          1,273
 Acquisition costs and other related charges                   1,125             -
 Stock-based compensation review and restatement benefit          -          (3,500 )

 Non-GAAP income from operations                           $  24,932      $  25,779

 GAAP operating margin                                           6.2 %          7.7 %
 Effect of adjustments detailed above                            3.4 %          3.0 %

 Non-GAAP operating margin                                       9.6 %         10.7 %

Non-GAAP income from operations decreased in the three months ended March 31, 2012 compared to the three months ended March 31, 2011, due to the decrease in reported GAAP income from operations, offset by the impact of the non-GAAP adjustments. During the first quarter of 2011, we received insurance recovery proceeds of $3.5 million as reimbursement for expenses incurred in 2006 and 2007 relating to the stock option review and restatement. When the expenses were originally incurred, they were excluded from our non-GAAP income from operations. Similarly, the $3.5 million benefit has been excluded from non-GAAP income from operations for the three months ended March 31, 2011. Please see the "Results of Operations" section of this Management's Discussion and Analysis for a more detailed discussion and analysis of restructuring and other related charges, amortization of purchased intangible assets, and acquisition costs and other related charges.

When important to management's analysis, operating results are compared in "constant currency terms", a non-GAAP financial measure that excludes the effect of foreign currency exchange rate fluctuations. The effect of rate fluctuations is excluded by translating the current period's local currency service revenues and expenses into U.S. dollars at the average exchange rates of the prior period of comparison. For a discussion of our exposure to exchange rates, see Item 3, "Quantitative and Qualitative Disclosures About Market Risk".

Summary of Critical Accounting Policies; Significant Judgments and Estimates

We have identified the accounting policies which are critical to understanding our business and our results of operations. Management believes that there have been no significant changes during 2012 to the items disclosed in our summary of critical accounting policies, significant judgments and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in our Annual Report on Form 10-K for the year ended December 31, 2011.

Results of Operations

Three months ended March 31, 2012 compared to the three months ended March 31, 2011

The following table presents the components of net income included in our consolidated and condensed statements of operations as percentages of service revenues:

                                                               Three Months Ended
                                                                    March 31,
                                                               2012           2011
Revenues:
Service revenues                                                 100.0 %       100.0 %
Reimbursable expenses                                              3.4 %         3.5 %

Total gross revenues                                             103.4 %       103.5 %

Operating expenses:
Project personnel expenses                                        70.3 %        69.1 %
Reimbursable expenses                                              3.4 %         3.5 %

Total project personnel expenses and reimbursable expenses        73.7 %        72.6 %
Selling and marketing expenses                                     4.1 %         4.2 %
General and administrative expenses                               18.0 %        16.2 %
Restructuring and other related (benefits) charges                (0.0 )%        2.4 %
Amortization of purchased intangible assets                        1.0 %         0.5 %
Acquisition costs and other related charges                        0.4 %         0.0 %

Total operating expenses                                          97.2 %        95.9 %

Income from operations                                             6.2 %         7.6 %
Interest and other income, net                                     0.7 %         0.6 %

Income before income taxes                                         6.9 %         8.2 %
Provision for income taxes                                         3.3 %         3.2 %

Net income                                                         3.6 %         5.0 %

Service Revenues

Service revenues for the three months ended March 31, 2012 and 2011 were as follows (in thousands, except percentages):

                          Three Months Ended March 31,                       Percentage
                            2012                 2011          Increase       Increase
    Service revenues   $      260,622       $      241,340     $  19,282               8 %


The following table presents service revenues by industry sector for the three
months ended March 31, 2012 and 2011 (in millions, except percentages):



                                            Three Months Ended March 31,               Increase / (Decrease)
Industry Sector                              2012                 2011             Dollars             Percentage
Consumer, Travel & Automotive            $       116.2        $        81.7       $     34.5                    42 %
Financial Services                                72.0                 80.0             (8.0 )                 (10 )%
Technology & Communications                       22.4                 32.2             (9.8 )                 (30 )%
Government, Health & Education                    27.8                 26.0              1.8                     7 %
Energy Services                                   22.2                 21.4              0.8                     4 %

Total service revenues                   $       260.6        $       241.3       $     19.3                     8 %

The increases noted above were the result of increases in demand for our services in these industry sectors. The decreases in the Financial Services and Technology & Communications sectors were the result of decreases in demand for our services in those sectors. In constant currency terms, service revenues increased 8% compared to the same period in 2011.

Utilization, which represents the percentage of our delivery personnel's time spent on billable client work, was 70% for the three months ended March 31, 2012, compared to 71% for the same period in 2011. Our average delivery personnel peoplecount for the three months ended March 31, 2012 increased 8% compared to the same period in 2011, which was in line with service revenue growth. Contractor and consultant usage, measured by expense, decreased by 12% for the three months ended March 31, 2012 compared to the same period in 2011, based on our needs in specialized areas for certain client contracts.

Our five largest clients, in the aggregate, accounted for approximately 20% of our service revenues for the three months ended March 31, 2012, compared to 21% for the same period in 2011. For the three months ended March 31, 2012 and 2011, no single client accounted for more than 10% of our service revenues. Long-Term and Retainer Revenues represented 50% of our service revenues for the three months ended March 31, 2012, compared to 47% for the same period in 2011. Long-Term and Retainer Revenues are revenues from contracts with durations of at least twelve months, and from applications management and long-term support assignments, which are cancelable.

Project Personnel Expenses

Project personnel expenses consist primarily of salaries and employee benefits for personnel dedicated to client projects,

contractors and consultants and other direct expenses incurred to complete assignments that were not reimbursed by the client. These costs represent the most significant expense we incur in providing our services. The following table presents project personnel expenses for the three months ended March 31, 2012 and 2011 (in thousands, except percentages):

                                                                     Three Months Ended March 31,                         Percentage
                                                                      2012                  2011           Increase        Increase
Project personnel expenses                                       $      183,371        $      166,676      $  16,695               10 %
Project personnel expenses as a percentage of service revenues               70 %                  69 %      1 point

The increase for the three months ended March 31, 2012 was a result of our service revenue growth, as we had to increase delivery personnel peoplecount, use of contractors and consultants and other direct expenses in order to support the increase in demand for our services. Compensation expenses increased $17.0 million, due to the 8% increase in average peoplecount. Travel costs increased $0.5 million, in support of revenue growth. Contractor and consultant expense decreased $2.5 million as our need for contractors and consultants in specialized areas for certain client contracts decreased. Other project personnel expenses increased, in the aggregate, $1.7 million.

Selling and Marketing Expenses

Selling and marketing expenses consist primarily of salaries, employee benefits
and travel expenses of selling and marketing personnel, and promotional
expenses. The following table presents selling and marketing expenses for the
three months ended March 31, 2012 and 2011 (in thousands, except percentages):



                                            Three Months Ended March 31,                             Percentage
                                            2012                   2011              Increase         Increase
Selling and marketing expenses          $      10,695          $      10,156        $      539                 5 %
Selling and marketing expenses as a
percentage of service revenues                      4 %                    4 %        0 points

The increase for the three months ended March 31, 2012 was due to an increase of $0.4 million in compensation expense, relating to an increase in peoplecount, and an increase of $0.3 million in travel expense. Other selling and marketing expenses decreased, in the aggregate, $0.2 million.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and employee benefits associated with our management, legal, finance, information technology, hiring, training and administrative functions, and depreciation and occupancy expenses. The following table presents general and administrative expenses for the three months ended March 31, 2012 and 2011 (in thousands, except percentages):

                                            Three Months Ended March 31,                              Percentage
                                            2012                   2011              Increase          Increase
General and administrative expenses     $      46,772          $      39,105        $    7,667                 20 %
General and administrative expenses
as a percentage of service revenues                18 %                   16 %        2 points

The increase for the three months ended March 31, 2012 was due to the following factors:

• facilities expenses increased $2.1 million, due to office space expansions in several locations during 2011 and the first three months of 2012;

• compensation expenses increased $1.8 million due to a 15% increase in average general and administrative peoplecount;

• currency transaction gains and losses resulted in an increase of $0.2 million, as net gains of $0.2 million were recorded in the three months ended March 31, 2012, compared to net gains of $0.4 million in the three months ended March 31, 2011; and

• the three months ended March 31, 2011 included a benefit of $3.5 million relating to insurance recovery proceeds received as reimbursement of expenses incurred in 2006 and 2007 relating to the stock option review and restatement.

These increases were partially offset by the impact of hedging gains and losses, which resulted in a decrease of $0.5 million, as net gains of $0.2 million were recorded in the three months ended March 31, 2012, compared to net losses of $0.3 million in the three months ended March 31, 2011. In addition, the three months ended March 31, 2011 included expense of $0.9 million relating to the settlement of a legal matter, while no such costs were recorded in the three months ended March 31, 2012.

Other general and administrative expenses increased, in the aggregate, $1.5 million.

Restructuring and Other Related (Benefits) Charges

Restructuring and other related (benefits) charges were $(0.1) million and $5.6 million for the three months ended March 31, 2012 and 2011, respectively. The benefits recorded in the three months ended March 31, 2012 related to changes in estimated future costs to be incurred on two previously restructured leases. The charge recorded in the three months ended March 31, 2011 was related to cash and other termination benefits for two former Nitro executives whose positions were made redundant, as well as the re-positioning of a portion of our SapientNitro business in Australia from traditional advertising capabilities to digitally-led capabilities. The restructuring charge consisted of $1.1 million of cash severance and other associated termination benefits, and a $4.6 million non-cash charge related to the acceleration of unrecognized stock-based compensation expense.

Amortization of Purchased Intangible Assets

Purchased intangible assets consist of customer lists and customer relationships, non-compete and non-solicitation agreements, intellectual property and tradenames acquired in business combinations. Amortization of purchased intangible assets was $2.6 million and $1.3 million for the three months ended March 31, 2012 and 2011, respectively. The increase in expense was due to the impact of new intangible assets recorded in acquisitions which occurred during the three months ended September 30, 2011.

Acquisition Costs and Other Related Charges

Acquisition costs and other related charges include expenses associated with third-party professional services we utilize related to the evaluation of potential targets and the execution of successful acquisitions. Although we may incur costs to evaluate targets, the related potential transaction(s) may never be consummated. Acquisition costs and other related charges also include changes in the fair value of contingent consideration liabilities recorded as the result of acquisitions. These liabilities must be measured at fair value on the acquisition date, and until these liabilities are settled, they must be remeasured to fair value each reporting period, with the changes included in earnings. Acquisition costs and other related charges were $1.1 million and zero for the three months ended March 31, 2012 and 2011, respectively. The increase was due to the use of third-party services and remeasurements of the fair value of contingent consideration liabilities during the three months ended March 31, 2012, while no such activity occurred during the three months ended March 31, 2011.

We recorded contingent consideration liabilities as the result of our acquisition of D&D Holdings Limited during 2011, and we expect to record quarterly remeasurements of the fair value of these liabilities until they are settled at various points in time through 2014. Acquisition costs and other related charges recorded in the three months ended March 31, 2012 included expense of $0.8 million relating to the remeasurement of the fair value of these contingent consideration liabilities. We may also incur additional acquisition costs and other related charges in future periods resulting from the evaluation of potential acquisition targets.

Interest and Other Income, Net

Interest and other income, net, consists primarily of interest income, which is derived from investments in U.S. government securities, bank time deposits and money market funds. The following table presents interest and other income, net for the three months ended March 31, 2012 and 2011 (in thousands, except percentages):

Three Months Ended March 31, Percentage 2012 2011 Increase Increase Interest and other income, net $ 1,822 $ 1,459 $ 363 25 %

The increase for the three months ended March 31, 2012 was related to an increase in interest income, due to higher average interest rates on our foreign currency cash and cash equivalents during the three months ended March 31, 2012 as compared to the same period in 2011.

Provision for Income Taxes

The provision for income taxes was $8.5 million and $7.8 million for the three months ended March 31, 2012 and 2011, respectively. Income tax is related to federal, state and foreign tax obligations. The increase in tax expense was primarily related to a change in the mix of jurisdictional profits, and the discrete items relating to each quarter.

Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss by jurisdiction, changes to the valuation allowance, changes to federal, state or foreign tax laws, future expansion into areas with varying country, state, and local income tax rates, deductibility of certain costs and expenses by jurisdiction and as a result of acquisitions. For the three months ended March 31, 2012, our effective tax rate varied from the statutory tax rate due to state income taxes, the tax rate differential attributable to income earned by our foreign subsidiaries and the related mix of jurisdictional profits, and changes in uncertain tax positions.

Deferred tax assets are to be reduced by a valuation allowance if, based on the weight of available positive and negative evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of March 31, 2012, a valuation allowance is maintained against deferred tax assets associated with certain state tax net operating loss carryforwards. We also maintain a valuation allowance against our certain foreign deferred tax assets, primarily in Switzerland, but we believe that deferred tax assets in our other foreign subsidiaries are more likely than not to be realized, and therefore, no valuation allowance has been recorded against these assets.

We had gross unrecognized tax benefits, including interest and penalties, of approximately $15.7 million as of March 31, 2012 and $15.2 million as of December 31, 2011. These amounts represent the amount of unrecognized tax benefits that, if recognized, would result in a reduction of our effective tax rate. We recognize accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of March 31, 2012 and December 31, 2011, accrued interest and penalties were $1.5 million and $1.4 million, respectively.

We conduct business globally, and as a result, our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as Canada, Germany, India, Switzerland, the United Kingdom and the United States. Our U.S. federal tax filings are open for examination for tax years 2008 through the present. The statutes of limitations in our other tax jurisdictions remain open for various periods between 2004 and the present. However, carryforward attributes from prior years may still be adjusted upon examination by tax authorities if they are used in a future period.

Although we believe our tax estimates are appropriate, the final determination of tax audits could result in favorable or unfavorable changes in our estimates. We anticipate the settlement of tax audits and the expiration of relevant statutes of limitations in the next twelve months could result in a decrease in our unrecognized tax benefits of an amount between $1.5 million and $2.5 million.

Results by Operating Segment

We have discrete financial data by operating segments available based on our method of internal reporting, which disaggregates our operations. Operating segments are defined as components of the Company for which separate financial information is available to manage resources and evaluate performance.

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