Forward-looking Statements

Management's Discussion and Analysis of Financial Condition and Results of Operations as well as other sections of this quarterly report on Form 10-Q contain forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. The forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry in which we operate and management's beliefs and assumptions. Forward-looking statements may be identified by the use of words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "projects," "forecasts," and similar expressions. Forward-looking statements are not guarantees of future performance and involve certain known and unknown risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from what is expressed, forecasted or implied in the forward-looking statements. Factors that may affect the outcome of the forward-looking statements include, among other things, our expectations regarding our revenues, expenses and operations and our ability to sustain profitability; our ability to recruit and retain qualified executive search consultants to staff our operations appropriately; our ability to expand our customer base and relationships, especially given the off-limit arrangements we are required to enter into with certain of our clients; declines in the global economy and our ability to execute successfully through business cycles; our anticipated cash needs; our anticipated growth strategies and sources of new revenues; unanticipated trends and challenges in our business and the markets in which we operate; social or political instability in markets where we operate; the impact of foreign currency exchange rate fluctuations; price competition; the ability to forecast, on a quarterly basis, variable compensation accruals that ultimately are determined based on the achievement of annual results; the mix of profit and loss by country; and our ability to estimate accurately for purposes of preparing our consolidated financial statements. For more information on the factors that could affect the outcome of forward-looking statements, see Risk Factors in Item 1A of our annual report on Form 10-K which was filed with the Securities and Exchange Commission on March 22, 2012. We caution the reader that the list of factors may not be exhaustive. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

On January 2, 2012, we acquired our Latin America licensee for $10.5 million consisting of an initial cash payment of $5.25 million and a non-interest bearing seller note for $5.25 million which has been discounted by the Company in the amount of $263,303. Management's discussion and analysis includes the searches engaged to be performed by our Latin American offices and the resulting net revenues, expenses and cash flows for periods beginning January 1, 2012. For periods prior to January 1, 2012, we disclose the results of our then Latin America licensee separately.

For the three-month period ended June 30, 2012, we were engaged to perform 350 searches including 77 by our Latin America offices. For the three-month period ended June 30, 2011, we were engaged to perform 287 searches. Our then Latin American licensee was engaged to perform 98 searches during the three-month period ended June 30, 2011. For the three-month period ended June 30, 2012, we placed candidates in 121 U.S. searches and 151 non-U.S. searches, including 52 by our Latin America offices. For the three-month period ended June 30, 2011, we placed candidates in 133 U.S. searches and 86 non-U.S. searches. Our then Latin American licensee placed 80 candidates during the three-month period ended June 30, 2011.

Net revenue increased $700,000, or 2%, to $33.8 million for the three-month period ended June 30, 2012 compared to $33.1 million for the three-month period ended June 30, 2011. The increase in net revenue was the result of the acquisition of our Latin American operations on January 2, 2012, which accounted for $3.1 million, offset by a decrease in net revenue of $2.4 million for all other locations.

For the six-month period ended June 30, 2012, we were engaged to perform 735 searches including 148 by our Latin America offices. For the six-month period ended June 30, 2011, we were engaged to perform 587 searches. Our then Latin American licensee was engaged to perform 196 searches during the six-month period ended June 30, 2011. For the six-month period ended June 30, 2012, we placed candidates in 225 U.S. searches and 281 non-U.S. searches, including 97 by our Latin America offices. For the six-month period ended June 30, 2011, we placed candidates in 248 U.S. searches and 172 non-U.S. searches. Our then Latin American licensee placed 144 candidates during the six-month period ended June 30, 2011.

Net revenue increased $2.6 million, or 4.1%, to $66.2 million for the six-month period ended June 30, 2012 compared to $63.6 million for the six-month period ended June 30, 2011. The increase in net revenue was primarily due to the results of operations of our Latin American locations, acquired on January 2, 2012, in the amount of $6.1 million, offset by a decline in the revenues of $3.5 million for all other locations.

Relevant data is set forth below (this data excludes the operations of our associated offices in Latin America for 2011):

                                               Three Months Ended                             Percentage               Six Months Ended                              Percentage
                                                    June 30,                Increase/         Increase/                    June 30,                Increase/         Increase/
Performance Metrics                          2012             2011           Decrease          Decrease             2012             2011           Decrease          Decrease
Number of new search assignments                  350              287              63               22.0 %              735              587             148               25.2 %
Number of executive search consultants
(as of period end)                                109               99              10               10.1 %              109               99              10               10.1 %
Productivity, as measured by average
annualized net revenue per executive
search consultant                         $ 1,238,689      $ 1,336,754      $  (98,065 )             (7.3 )%     $ 1,213,890      $ 1,284,160      $  (70,270 )             (5.5 )%
Average revenue per executive search      $    94,373      $   111,950      $  (17,577 )            (15.7 )%     $    91,456      $   105,900      $  (14,444 )            (13.6 )%

The decrease in average revenue per executive search is attributable to the inclusion of Latin America in the first and second quarters of 2012. Excluding Latin America, average revenue per executive search would have been $110,606 and $105,566 in the three and six months ended June 30, 2012, respectively.

Operating income remained flat at $1.1 million for the three-month period ended June 30, 2012 compared to the three-month period ended June 30, 2011. Operating income results include an increase in net revenues of $700,000 and a decrease in compensation and benefits expense of $200,000 offset by a $600,000 increase in general and administrative expenses and a $300,000 increase in unreimbursed and other expenses.

Operating income decreased $200,000 to $1.8 million for the six-month period ended June 30, 2012, compared to operating income of $2.0 million for the six-month period ended June 30, 2011. The decrease primarily reflects an increase in net revenues of $2.6 million offset by a $1.4 million increase in compensation and benefits expense and $1.4 million increase in general and administrative expenses.

Results of Operations

The following table summarizes, for the periods indicated, our results of
operations as a percentage of net revenue:



                                      Three Months Ended           Six Months Ended
                                           June  30                    June  30
                                      2012           2011          2012         2011
       Revenue:
       Net revenue                      100.0 %       100.0 %       100.0 %      100.0 %
       Reimbursable expenses              3.4           4.0           3.3          3.8

       Total revenue                    103.4         104.0         103.3        103.8

       Operating Expenses:
       Compensation and benefits         75.1          77.2          76.1         76.9
       General and administrative        21.2          19.7          21.1         19.8
       Reimbursable expenses              3.9           3.9           3.5          3.9

       Total operating expenses         100.2         100.8         100.7        100.6
       Operating income                   3.2           3.2           2.6          3.2
       Net interest expense              (0.1 )         0.0          (0.1 )        0.0

       Income before income taxes         3.1           3.2           2.5          3.2
       Income tax expense                (1.5 )        (1.2 )        (1.2 )       (1.2 )

       Net income                         1.6 %         2.0 %         1.3 %        2.0 %

Three-Month Period Ended June 30, 2012 Compared to Three-Month Period Ended June 30, 2011

Net Revenue. Net revenue increased $700,000, or 2.0%, to $33.8 million for the three-month period ended June 30, 2012 compared to $33.1 million for the three-month period ended June 30, 2011. The increase in net revenue was the result of the inclusion of Latin American operations which contributed $3.1 million in net revenue for the three-month period ended June 30, 2012, offset by a reduction of $2.4 million in net revenue for all other locations. License fees from our Latin America licensee of $150,000 were included in net revenue for the three-month period ended June 30, 2011.

Compensation and Benefits Expenses. Compensation and employee benefits expense decreased $200,000, or 0.7%, to $25.4 million for the three-month period ended June 30, 2012 from $25.6 million for the three-month period ended June 30, 2011. As a percentage of net revenue, compensation and benefits decreased to 75.1% for the three-month period ended June 30, 2012 compared to 77.2% for the three-month period ended June 30, 2011.

The decrease in compensation and benefits expense is comprised of an increase of $2.0 million from our Latin America operation offset by a $2.2 million decrease from all other locations. The $2.0 million increase from Latin America was comprised of a $1.4 million increase in consultant compensation and benefits expense which was the direct result of the net revenues generated by our 16 Latin America search consultants, and a $600,000 increase in non-consultant compensation and benefits expense due to the addition of 63 support staff from the Latin America acquisition.

The $2.2 million decrease in compensation and benefits expense from all other locations consisted of a decrease in consultant compensation of $1.5 million, a decrease in payroll taxes of $200,000, and a decrease in talent acquisition costs of $500,000. The $1.5 million decrease in consultant compensation and benefits expense was a direct result of the $2.5 million decrease in net revenues in our non-Latin America locations.

General and Administrative Expenses. General and administrative expenses increased to $7.1 million, or 21.2% of net revenue for the three-month period ended June 30, 2012, from $6.5 million, or 19.7% of net revenue for the three-month period ended June 30, 2011. The increase in general and administrative expenses was primarily the result of the inclusion of $500,000 of operating expenses from our Latin America offices.

Operating Income. Operating income remained flat at $1.1 million for the three-month period ended June 30, 2012 compared to the three-month period ended June 30, 2011. Operating income results include an increase in net revenues of $700,000 and a decrease in compensation and benefits expense of $200,000 offset by a $600,000 increase in general and administrative expenses and a $300,000 increase in unreimbursed and other expenses. The net revenues and operating income attributable to Latin America and included in the consolidated statement of operations for the three months ended June 30, 2012, were $3.1 million and $700,000, respectively.

Net Interest Expense. Net interest expense increased to $40,000 for the three-month period ended June 30, 2012 compared to $7,000 interest income for the three-month period ended June 30, 2011. The increase in net interest expense is principally due to a $49,000 increase in imputed interest expense related to the seller note for the Latin America acquisition.

Income Before Taxes and Income Tax Expense. For the three-month period ended June 30, 2012, we reported income before taxes of $1,054,502 and recorded income tax expense of $503,109, compared to income before taxes of $1,065,659 and income tax expense of $412,126 for the three month period ended June 30, 2011. Our effective income tax rate for the second quarter of 2012 was 47.7%, compared to 38.7% for the second quarter of 2011. The increase is due to delays in the realization of foreign income tax payments as credits against our current United States tax obligation until foreign taxable income is generated.

Six-Month Period Ended June 30, 2012 Compared to Six-Month Period Ended June 30, 2011

Net Revenue. Net revenue increased $2.6 million, or 4.1%, to $66.2 million for the six-month period ended June 30, 2012 compared to $63.6 million for the six-month period ended June 30, 2011. The increase in net revenue was the result of the inclusion of Latin American operations which contributed $6.1 million in net revenue for the six-month period ended June 30, 2012, offset by a reduction of $3.5 million in net revenue for all other locations. License fees from our Latin America licensee of $300,000 were included in net revenue for the six -month period ended June 30, 2011.

Compensation and Benefits Expenses. Compensation and employee benefits expense increased $1.4 million, or 2.9%, to $50.3 million for the six -month period ended June 30, 2012 from $48.9 million for the six -month period ended June 30, 2011. As a percentage of net revenue, compensation and benefits decreased to 76.1% for the six -month period ended June 30, 2012 compared to 76.9% for the six -month period ended June 30, 2011.

The increase in compensation and benefits expense is comprised of an increase of $3.7 million from our Latin America operation offset by a $2.3 decrease from all other locations. The $3.7 million increase from Latin America was comprised of a $2.4 million increase in consultant compensation and benefits expense which was the direct result of the net revenues generated by our 16 Latin America search consultants, and a $1.3 million increase in non-consultant compensation and benefits expense due to the addition of 63 support staff from the Latin America acquisition.

The $2.3 million decrease from all other locations consisted of a decrease in consultant compensation of $2.0 million, directly related to a decrease in net revenues in our non-Latin American locations, a decrease of $700,000 in talent acquisition costs offset by an increase in consultant employee benefits of $200,000, an increase in non-consultant compensation of $200,000 and an increase in non-consultant benefits expense of $100,000. The decrease in consultant compensation was a direct result of the $2.6 million decrease in net revenues. The $300,000 increase in overall benefits expense was due to increases in the rates incurred by the company to provide medical benefits to our employees.

General and Administrative Expenses. General and administrative expenses increased to $13.9 million, or 21.1% of net revenue for the six-month period ended June 30, 2012, from $12.6 million, or 19.8% of net revenue for the six-month period ended June 30, 2011. The increase in general and administrative expenses was primarily the result of the inclusion of $1.1 million of operating expenses from our Latin America offices, and a $200,000 increase in our reserve for bad debt.

Operating Income. Operating income decreased $257,000 to $1.7 million for the six-month period ended June 30, 2012, compared to operating income of $2.0 million for the six-month period ended June 30, 2011. The decrease primarily reflects an increase in net revenues of $2.6 million offset by an increase in compensation and benefits expense of $1.4 million, and a $1.4 million increase in general and administrative expenses. The net revenues and operating income attributable to the Latin America acquisition since the acquisition date, included in the consolidated statement of operations for the six months ended June 30, 2012, were $6.1 million and $1.3 million, respectively.

Net Interest Expense. Net interest expense increased to $80,000 for the six-month period ended June 30, 2012 compared to $3,000 for the six-month period ended June 30, 2011. The increase in net interest expense is principally due to a $96,000 increase in imputed interest expense related to the seller note for the Latin America acquisition.

Income Before Taxes and Income Tax Expense. For the six-month period ended June 30, 2012, we reported income before taxes of $1,675,032 and recorded income tax expense of $775,708, compared to income before taxes of $2,008,299 and income tax expense of $749,312 for the six month period ended June 30, 2011. Our effective income tax rate for the six-month period ended June 30, 2012 was 46.3%, compared to 37.3% for the six-month period ended June 30, 2011. We expect our full year annualized effective tax rate to be approximately 50%, which is due to our overall foreign tax loss position, which delays the realization of foreign income tax payments as credits against our current United States tax obligation until foreign taxable income is generated. Generally, credits can be carried forward for up to ten years.

Liquidity and Capital Resources

General. Our primary sources of liquidity are cash, cash flow from operations and borrowing availability under our revolving credit facility. We continually evaluate our liquidity requirements, capital needs and availability of capital resources based on our operating needs. We believe that our existing cash balances together with the funds expected to be generated from operations and funds available under our committed revolving credit facility will be sufficient to finance our operations for the foreseeable future.

The following table summarizes our cash flow for the periods shown:

                                                      Six months Ended
                                                          June 30,
                                                   2012              2011
       Net cash used in operating activities   $ (2,038,168 )    $ (3,279,502 )
       Net cash used in investing activities     (5,346,936 )      (1,476,568 )
       Net cash used in financing activities       (217,219 )        (105,866 )

       Net decrease in cash                    $ (7,602,323 )    $ (4,861,936 )

Cash. Cash at June 30, 2012 was $13.8 million, as compared to $21.8 million at December 31, 2011. The decrease in cash principally reflects a decrease in cash used in operating activities of $1.2 million, an increase of cash used in investing activities of $3.9 million, $5.2 million of which was related to the purchase of our Latin America licensee, offset by a decrease of capital expenditures of $1.3 million, and a $100,000 increase in cash used in financing activities.

Cash Flow from Operating Activities. Cash used in operating activities was $2.0 million in the six-month period ended June 30, 2012, compared to cash used in operating activities of $3.3 million in the six-month period ended June 30, 2011. The decrease in cash used in operating activities is due to a decrease in accrued compensation of $4.9 million, an increase in prepaid expenses and other receivables of $900,000 and an increase in accounts payable and accrued expenses of $5.3 million.

Cash from Investing Activities. For the six-month period ended June 30, 2012, cash used in investing activities was $5.3 million compared to $1.5 million for the six-month period ended June 30, 2011. The increase was due to a payment for the acquisition of our Latin America licensee for $5.2 million offset by a decrease of $1.3 million in capital expenditures.

Cash from Financing Activities. For the six-month period ended June 30, 2012, cash used in financing activities was $220,000 consisting of $80,000 of payments made on long-term debt and $140,000 used to repurchase shares. Cash used in financing activities for the six-month period ended June 30, 2011, was $105,000 resulting from payments made on long-term debt.

Off-Balance Sheet Arrangements. We do not have off-balance sheet arrangements, special purpose entities, trading activities or non-exchange traded contracts.

Recently Adopted Financial Accounting Standards

On January 1, 2012, we adopted the Financial Accounting Standards Board's guidance to increase the prominence of other comprehensive income within the financial statements. The guidance requires entities to present the components of net income and other comprehensive income either in a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. The option to only present other comprehensive income within the statement of stockholders' equity has been eliminated. We have presented the components of net income and other comprehensive income in two separate, but consecutive, statements of net income and other comprehensive income.

On January 1, 2012, the Financial Accounting Standards Board Accounting Standards Update No. 2011-08, Testing Goodwill for Impairment, became effective. This standard gives an entity the option of performing a qualitative assessment to determine whether it is necessary to perform step 1 of the annual goodwill impairment test. An entity is required to perform step 1, only if it concludes that it is more likely than not that a reporting unit's fair value is less than its carrying amount. An entity may choose to perform the qualitative assessment on none, some, or all of its reporting units or an entity may bypass the qualitative assessment for any reporting unit in any period and proceed directly to step 1 of the impairment test. We perform our impairment test during the fourth quarter of each year.