The following discussion and analysis of significant factors affecting the Company's operating results, liquidity and capital resources should be read in conjunction with the accompanying financial statements and related notes.

Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this document that do not relate to present or historical conditions are "forward-looking statements" within the meaning of that term under Section 27A of the Securities Act of 1933, as amended, and under Section 21E of the Securities Exchange Act of 1934, as amended. Additional oral or written forward-looking statements may be made by the Company from time to time, and such statements may be included in documents that are filed with the SEC. Such forward-looking statements involve risks and uncertainties that could cause results or outcomes to differ materially from those expressed in such forward-looking statements. Words such as "believes," "forecasts," "intends," "possible," "expects," "estimates," "anticipates," or "plans" and similar expressions are intended to identify forward-looking statements. The Company cautions readers that results predicted by forward-looking statements, including, without limitation, those relating to the Company's future business prospects, revenues, working capital, liquidity, capital needs, interest costs, and income are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. The important factors on which such statements are based, include but are not limited to, assumptions concerning the magnitude of the ongoing economic crisis, including its impact on the Company's customers, demand trends in the information technology industry and the continuing needs of current and prospective customers for the Company's services.

Overview

Since 1983, Helios and Matheson has provided high quality IT services and solutions to Fortune 1000 companies and other large organizations. The Company is headquartered in New York City and has a second office in Bangalore, India.

The Company's services include Application Value Management, Application Development, Integration, Independent Validation, Infrastructure and Information Management services. The Company believes that a philosophy of intense focus on client satisfaction, business aware solutions and guaranteed delivery provides tangible business value to its client base across banking, financial services, insurance, pharmaceutical and manufacturing/automotive verticals.

The Company is dedicated to providing a Flexible Delivery Model to its clients, which allows for dynamically configurable "right shoring" of service delivery based on client needs.

For the three months ended March 31, 2012, approximately 88% of the Company's consulting services revenues were generated from clients under time and materials engagements, as compared to approximately 93% for the three months ended March 31, 2011, with the remainder generated under fixed-price engagements and recruitment process outsourcing (RPO). 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 weekly and monthly basis. Arrangements for fixed-price engagements are made on a case-by-case basis. Consulting services revenues generated under time and materials engagements are recognized as those services are provided. Revenues from fixed fee contracts are recorded when work is performed on the basis of the proportionate performance method, which is based on costs incurred to date relative to total estimated costs.

The Company's most significant operating cost is its personnel cost, which is included in cost of revenues. For the three months ended March 31, 2012 and 2011, gross margin was 23.9% and 19.1% respectively. The increase in gross margin is primarily a result of an increase in higher margin long term annuity revenue and additional net revenue from RPO services. A significant number of the Company's engagements are on a time and materials basis.

The Company actively manages its personnel utilization rates by monitoring project requirements and timetables. The Company's utilization rate for the three months ending March 31, 2012 was approximately 89% as compared to 91% for the three months ending March 31, 2011. As projects are completed, consultants either are re-deployed to new projects at the current client site or to new projects at another client site or are encouraged to participate in the Company's training programs in order to expand their technical skill sets.

2011 ACHIEVEMENTS

2011 was a very important year of transition and achievement for the Company - a year of three very important strategic shifts: the Company replaced a significant portion of its short-term revenue with long-term annuity revenue, the Company generated cash of $358,000 from operations and after 4 years the Company turned the corner with positive net income for the year.

The following is the list of the Company's achievements as of December 31, 2011:

· The balance sheet was strong with current assets of $3.8 million and a total asset base of $4.9 million.

· The Company continued to have no debt.

· The current ratio was 3.4:1.

· While there is a decline of $1.1 million in revenue in 2011 as compare to 2010, revenue quality has improved. The Company replaced a significant portion of declining short-term revenue with long-term, annuity revenue.

· SG&A reduced by $1.37 million leading to a positive bottom line of approximately $203,000. This was an increase of $1.15 million from 2010.

· Cash provided by operations was $358,000 as compared to $1.7 million of cash utilized in operations in 2010.

· The Company has introduced certain strategic initiatives that could potentially yield non-linear growth in revenue and profits. These initiatives are in the pilot phase.

We expect to continue the progress we made during 2011 throughout 2012.

The Company has moved its principal executive office to the iconic Empire State Building, New York. The United States in general and New York is particular are key to the Company's growth strategy. The Empire State Building has most recently invested significantly to upgrade its infrastructure. The top to bottom enhancement and upgrade program provides a first-rate infrastructure in a premier business environment.

Management believes that the Company's financial performance is beginning to accelerate and that this trend will continue in future. The Company continues to invest in growth and fortify leadership and culture.

Critical Accounting Policies

The methods, estimates and judgments the Company uses in applying its most critical accounting policies 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.

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. Revenues from RPO services are recorded when service is performed. 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 re-evaluated 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 the FASB whereby compensation cost is recognized over the remaining service period based on the grant-date fair value of those awards as calculated for pro forma disclosures 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:



                                  Three Months Ended
                                       March 31,
                                   2012          2011
Revenues                             100.0 %      100.0 %
Cost of revenues                      76.1 %       80.9 %
Gross profit                          23.9 %       19.1 %
Operating expenses                    20.1 %       22.5 %
Income/(Loss) from operations          3.8 %       (3.4 )%
Net Income/(loss)                      0.5 %       (3.6 )%

Comparison of the Three Months Ended March 31, 2012 to the Three Months Ended March 31, 2011

Revenues. Revenues for the three months ended March 31, 2012 were $2.68 million compared to $3.2 million for the three months ended March 31, 2011.

Gross Profit. The resulting gross profit for the three months ended March 31, 2012 was $640,000 as compared to $619,000 for the three months ended March 31, 2011. As a percentage of total revenues, gross margin for the three months ended March 31, 2012 was 23.9% compared to 19.1% for the three months ended March 31, 2011. The gross margin increased primarily as a result of improvement in consulting revenue margins and additional net revenue from RPO services.

Operating Expenses.Operating expenses are comprised of selling, general and administrative ("SG&A") expenses and depreciation and amortization. Operating expenses for the three months ended March 31, 2012 were $539,000 compared to the 2011 comparable period level of $731,000. The decrease in SG&A was associated with various cost reduction initiatives including, but not limited to, renegotiation of agreements with major vendors and process restructuring, leading to higher efficiency.

Profit/(Loss) from Operations. Profit from operations for the three months ended March 31, 2012 is $102,000 as compared to a net loss of ($112,000) for the three months ended March 31, 2011. The Company had profit from operations of $211,000 for the full year 2011.

Other Expenses. Other expenses for the three months ended March 31, 2012 are primarily comprised of an early lease termination fee of $82,548 due to the Company's former landlord. The termination payment was deducted from the security deposit already held by the landlord.

Taxes. Tax provision for the three months ended March 31, 2012 was $6,000 compared to $5,500 for the three months ended March 31, 2011.

Net Income/(loss). As a result of the above, the Company had a net profit of $14,000 or $0.01 per basic and diluted share for the three months ended March 31, 2012 compared to a net loss of ($117,000) or ($0.05) per basic and diluted share for the three months ended March 31, 2011.

Liquidity and Capital Resources

The Company believes that its business, operating results and financial condition have been affected by the recent economic crisis and ongoing economic uncertainty which continue to impact the IT spending of its clients. A significant portion of the Company's major customers are in the financial services industry and came under considerable pressure as a result of the unprecedented economic conditions in the financial markets. Spending on IT consulting services is largely discretionary, and the Company has experienced a pushback of new assignments and high margin projects from existing clients. Yet, the Company has reported a profit during the three months ended March 31, 2012 as compared to a loss in 2011. The Company had a profit from operations of approximately $102,000 and a net profit of approximately $14,000 for the three months ended March 31, 2012. During the three months ended March 31, 2011, the Company had a loss from operations of approximately ($112,000) and a net loss of approximately ($117,000).

The Company's cash balances were approximately $1.94 million at March 31, 2012 and $2 million at December 31, 2011. Net cash provided by operating activities for the three months ended March 31, 2012 was approximately $24,000 compared to net cash used in operating activities of approximately ($436,000) for the three months ended March 31, 2011.

The Company's accounts receivable, less allowance for doubtful accounts, at March 31, 2012 and at December 31, 2011 were approximately $1.42 million and $1.7 million, respectively, representing 44.3 days and 52 days of sales outstanding ("DSO") respectively. The Company believes that DSO of 44.3 and 52 days is consistent with favorable resolutions of a limited number of dated client disputes and shift of revenue to clients having more favorable payment terms. The Company has provided an allowance for doubtful accounts at the end of each of the periods presented. After giving effect to this allowance, the Company does not anticipate any difficulty in collecting amounts due.

The Company's accounts payable and accrued expenses at March 31, 2012 and at December 31, 2011 were approximately $903K and $1.1 million, respectively. The primary reason for the reduction is payments to various vendors on due date including $97K to Helios and Matheson parent (under HMIT MOU) and true up of accrued expenses.

For the three month period ended March 31, 2012 cash used by investing activities was ($76,000) compared to no cash used by investing activity for the three months period March 31, 2011. Cash used in investing activity was the amount paid as a security deposit for the new executive office in Empire State Building.

For the three month periods ended March 31, 2012 and March 31, 2011, there was no cash provided by financing activities.

In management's opinion, cash flows from operations combined with cash on hand will provide adequate flexibility for funding the Company's working capital obligations for the next twelve months.

For the three months ended March 31, 2012 and 2011, there were no shares of common stock issued pursuant to the exercise of options granted under the Company's stock option plan.

Off Balance Sheet Arrangements

As of March 31, 2012, the Company does not have any "Off Balance Sheet Arrangements".

Contractual Obligations and Commitments

The Company's commitments at March 31, 2012 are reflected and further detailed in the Contractual Obligation table located in Part I, Item 1, Note 7 of this Form 10-Q.

Inflation

The Company has not suffered material adverse affects from inflation in the past. However, a substantial increase in the inflation rate in the future may adversely affect customers' purchasing decisions, may increase the costs of borrowing or may have an adverse impact on the Company's margins and overall cost structure.

Recent Accounting Pronouncements

None.