UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

SAPIENT CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		04-3130648
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
131 Dartmouth St, Boston, MA		02116
(Address of principal executive offices)		(Zip Code)

617-621-0200
(Registrant’s telephone number, including area code)
(none)

(Former name, former address and former fiscal year, if changed since last report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at May 1, 2011
Common Stock, $0.01 par value per share		137,929,902 shares

 

 

SAPIENT CORPORATION
INDEX

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated and Condensed Balance Sheets as of March 31, 2011 and December 31, 2010			3
Consolidated and Condensed Statements of Operations for the Three Months ended March 31, 2011 and 2010			4
Consolidated and Condensed Statements of Cash Flows for the Three Months ended March 31, 2011 and 2010			5
Notes to Consolidated and Condensed Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			26
Item 4. Controls and Procedures			27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			28
Item 1A. Risk Factors			28
Item 6. Exhibits			33
Signatures			33
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements included in this Quarterly Report, including those related to our cash and liquidity resources and our cash expenditures relating to dividend payments and restructuring, as well as any statement other than statements of historical facts regarding our strategy, future operations, financial position, estimated revenues, projected costs, prospects, plans and objectives are forward-looking statements. When used in this Quarterly Report, the words “will,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee future results, levels of activity, performance or achievements and you should not place undue reliance on our forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks described below in Part II, Item 1A, “Risk Factors” in this Quarterly Report. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or strategic investments. In addition, any forward-looking statements represent our expectation only as of the day this Quarterly Report was first filed with the Securities and Exchange Commission (“SEC”) and should not be relied on as representing our expectations as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our expectations change.

SAPIENT CORPORATION

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

CONSOLIDATED AND CONDENSED BALANCE SHEETS

		March 31,				December 31,
		2011				2010
		(Unaudited)
		(In thousands, except
		per share and share amounts)
ASSETS
Current assets:
Cash and cash equivalents		$	196,386			$	219,448
Marketable securities, current portion			8,962				8,861
Restricted cash, current portion			547				1,416
Accounts receivable, less allowance for doubtful accounts of $107 and $91 at March 31, 2011 and December 31, 2010, respectively			139,817				136,300
Unbilled revenues			80,154				49,765
Deferred tax assets, current portion			21,610				23,938
Prepaid expenses and other current assets			24,225				21,256
Total current assets			471,701				460,984
Marketable securities, net of current portion			1,290				1,269
Restricted cash, net of current portion			3,114				3,093
Property and equipment, net			41,861				35,571
Purchased intangible assets, net			16,560				17,629
Goodwill			83,307				77,865
Deferred tax assets, net of current portion			19,752				19,692
Other assets			8,302				7,619
Total assets		$	645,887			$	623,722
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	21,837			$	18,714
Accrued expenses			56,337				51,444
Accrued compensation			50,255				66,609
Accrued restructuring costs			2,305				3,129
Income taxes payable			4,009				567
Deferred revenues			16,723				18,558
Total current liabilities			151,466				159,021
Long-term liabilities			23,839				22,396
Total liabilities			175,305				181,417
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, par value $0.01 per share, 5,000,000 shares authorized and none issued or outstanding at March 31, 2011 and December 31, 2010			—				—
Common stock, par value $0.01 per share, 200,000,000 shares authorized, 137,934,046 and 137,307,612 shares issued at March 31, 2011 and December 31, 2010, respectively			1,379				1,373
Additional paid-in capital			567,275				555,562
Treasury stock, at cost, 458,664 shares at March 31, 2011 and December 31, 2010			(2,466	)			(2,466	)
Accumulated other comprehensive loss			(8,088	)			(12,488	)
Accumulated deficit			(87,518	)			(99,676	)
Total stockholders’ equity			470,582				442,305
Total liabilities and stockholders’ equity		$	645,887			$	623,722

     The accompanying notes are an integral part of these Consolidated and Condensed Financial Statements.

SAPIENT CORPORATION

CONSOLIDATED AND CONDENSED STATEMENTS OF OPERATIONS

		Three Months Ended
		March 31,
		2011				2010
		(Unaudited)
		(In thousands, except per share amounts)
Revenues:
Service revenues		$	241,340			$	183,223
Reimbursable expenses			8,554				8,501
Total gross revenues			249,894				191,724
Operating expenses:
Project personnel expenses			166,676				127,767
Reimbursable expenses			8,554				8,501
Total project personnel expenses and reimbursable expenses			175,230				136,268
Selling and marketing expenses			10,156				8,647
General and administrative expenses			39,105				35,943
Restructuring and other related charges			5,642				286
Amortization of purchased intangible assets			1,273				1,467
Acquisition costs and other related charges			—				111
Total operating expenses			231,406				182,722
Income from operations			18,488				9,002
Interest and other income, net			1,459				800
Income before income taxes			19,947				9,802
Provision for income taxes			7,789				3,563
Net income		$	12,158			$	6,239
Basic net income per share		$	0.09			$	0.05
Diluted net income per share		$	0.09			$	0.05
Weighted average common shares			136,293				130,054
Weighted average dilutive common share equivalents			4,272				6,743
Weighted average common shares and dilutive common share equivalents			140,565				136,797

     The accompanying notes are an integral part of these Consolidated and Condensed Financial Statements.

SAPIENT CORPORATION

CONSOLIDATED AND CONDENSED STATEMENTS OF CASH FLOWS

		Three Months Ended
		March 31,
		2011				2010
		(Unaudited)
		(In thousands)
Cash flows from operating activities:
Net income		$	12,158			$	6,239
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Loss recognized on disposition of fixed assets			1				139
Unrealized loss on financial instruments			120				63
Unrealized gain on investments			—				(132	)
Depreciation expense			4,207				4,155
Amortization of purchased intangible assets			1,273				1,467
Deferred income taxes			1,984				2,238
Stock-based compensation expense			3,876				4,231
Non-cash restructuring charges			4,612				—
Changes in operating assets and liabilities:
Accounts receivable			(1,512	)			5,371
Unbilled revenues			(29,784	)			(16,639	)
Prepaid expenses and other current assets			(2,933	)			2,176
Other assets			(604	)			(68	)
Accounts payable			1,463				(2,622	)
Accrued compensation			(18,101	)			(10,240	)
Accrued restructuring costs			(854	)			(262	)
Deferred revenues			(2,051	)			(2,627	)
Other accrued liabilities			5,573				(2,140	)
Other long-term liabilities			1,598				661
Net cash used in operating activities			(18,974	)			(7,990	)
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired			—				(2,985	)
Purchases of property and equipment and cost of internally developed software			(8,065	)			(2,599	)
Sales and maturities of marketable securities classified as trading			—				1,850
Sales and maturities of marketable securities not classified as trading			2,197				781
Purchases of marketable securities			(2,298	)			—
Cash (paid) received on financial instruments, net			(37	)			673
Change in restricted cash			926				46
Net cash used in investing activities			(7,277	)			(2,234	)
Cash flows from financing activities:
Principal payments under capital lease obligations			(21	)			(21	)
Proceeds from credit facilities			1,768				—
Repayment of amounts borrowed under credit facilities			(4,862	)			—
Proceeds from stock option and purchase plans			4,236				2,536
Dividends paid on common stock			—				(46,832	)
Net cash provided by (used in) financing activities			1,121				(44,317	)
Effect of exchange rate changes on cash and cash equivalents			2,068				930
Decrease in cash and cash equivalents			(23,062	)			(53,611	)
Cash and cash equivalents, at beginning of period			219,448				195,678
Cash and cash equivalents, at end of period		$	196,386			$	142,067

The accompanying notes are an integral part of these Consolidated and Condensed Financial Statements.

NOTES TO UNAUDITED CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

1. Basis of Presentation

     The accompanying unaudited consolidated and condensed financial statements have been prepared by Sapient Corporation pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2010 included in the Company’s Annual Report on Form 10-K. These financial statements reflect all adjustments (consisting solely of normal, recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods presented. Certain items for the three months ended March 31, 2010 have been reclassified to conform to current period presentation. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results to be expected for any future period or the full fiscal year.

     During the first quarter of 2011, the Company re-evaluated its 2010 classification as a component of operating activities, cash inflows from the sale of trading auction rate securities (“ARS”), pursuant to a nontransferable rights offering (the “Put Right”) with UBS AG (“UBS”), one of its brokers. These securities were originally purchased prior to 2008, held as available for sale and the cash outflows to purchase the securities were included as a component of investing activities. When the Company entered into the Put Right arrangement in 2008, the Company re-classified these securities to trading securities. The Company has determined that a more appropriate classification relating to the sale of these securities in 2010 would be to include them as a component of investing activities rather than an as a component of operating activities.

     The Company will revise, as it files its Form 10-Q’s and Form 10-K for 2011, its statements of cash flows for the fiscal year ended December 31, 2010 and related quarterly periods to classify proceeds from the sale of its trading auction rate securities as cash inflows from investing activities. The Company will revise the statement of cash flows information to decrease cash provided by (increase cash used in) operating activities and decrease cash used in (increase cash provided by) investing activities by $16.4 million for the year ended December 31, 2010, $16.4 million for the nine months ended September 30, 2010, $9.6 million for the six months ended June 30, 2010 and $1.9 million for the three months ended March 31, 2010. The revision has no impact on the net change in cash and cash equivalents or our total balance of cash and cash equivalents as previously reported for any of the relevant periods. The revised statements of cash flows are summarized as follows (in thousands):

		Twelve Months				Nine Months				Six Months				Three Months
		Ended				Ended				Ended				Ended
		December 31,				September 30,				June 30,				March 31,
		2010				2010				2010				2010
Net cash provided by (used in) operating activities		$	70,885			$	26,858			$	7,200			$	(7,990	)
Net cash (used in) provided by investing activities			(17,011	)			(368	)			730				(2,234	)
Net cash used in financing activities			(33,856	)			(37,901	)			(42,633	)			(44,317	)
Effect of exchange rate changes on cash and cash equivalents			3,752				5,661				294				930
Increase (decrease) in cash and cash equivalents			23,770				(5,750	)			(34,409	)			(53,611	)
Cash and cash equivalents, at beginning of period			195,678				195,678				195,678				195,678
Cash and cash equivalents, at end of period		$	219,448			$	189,928			$	161,269			$	142,067

     Unless the context requires otherwise, references in this Quarterly Report to “Sapient,” “the Company,” “we,” “us” or “our” refer to Sapient Corporation and its consolidated subsidiaries.

2. Acquisitions

Nitro Limited

     On July 1, 2009 the Company completed its acquisition of Nitro Ltd. (“Nitro”), a global advertising network. Nitro operated across North America, Europe, Australia and Asia. The acquisition added approximately 300 employees. The Company acquired Nitro to leverage Nitro’s traditional advertising services with the Company’s digital commerce and marketing technology services. Nitro’s results of operations are reflected in the Company’s consolidated statements of operations as of July 1, 2009. The Nitro transaction was accounted for using the acquisition method.

     The purchase price, net of cash acquired, was $31.0 million for the acquisition of 100% of Nitro’s outstanding shares. The $31.0 million consisted of $11.1 million in cash, net of cash acquired, deferred consideration with an estimated fair value of $8.1 million and the issuance of 3.3 million shares of restricted common stock valued at $11.8 million. The value of common stock was determined as $6.27 per share, the value of the Company’s common stock on the acquisition date, less $8.7 million. The $8.7 million reduction in purchase price reflects the impact of the selling restrictions on the shares of $7.1 million and a $1.6 million reduction for the value of shares transferred as consideration that were also tied to the seller’s continued employment. The $1.6 million has been accounted for as compensation expense over the associated vesting period, which was originally scheduled to end in June 2013. However, during the three months ended March 31, 2011, the seller’s employment with Sapient was terminated. Under the terms of the original agreement, the seller was entitled to retain the entire $1.6 million value upon termination by the Company and therefore the unrecognized compensation expense was accelerated, resulting in a $1.0 million charge to earnings during the three months ended March 31, 2011. This charge is included in “Restructuring and other related charges” in the Company’s consolidated and condensed statement of operations.

     The Company acquired a deferred consideration obligation of $8.0 million in connection with the acquisition of Nitro. The obligation is denominated in a foreign currency. Pursuant to the purchase agreement, the seller agreed to indemnify the Company for payments in excess of $8.0 million. The Company paid $4.6 million in 2009 and $3.2 million in 2010 to settle this obligation. At March 31, 2011 the Company had a deferred consideration obligation of $1.3 million, offset by an indemnification asset of $1.1 million.

Derivatives Consulting Group Limited

     On August 6, 2008 the Company acquired 100% of the outstanding shares of Derivatives Consulting Group Limited (“DCG”). Aggregate initial consideration for the acquisition totaled $31.3 million, which consisted of: (i) cash consideration of $21.9 million, (ii) stock consideration of 307,892 shares, issued on the acquisition date, valued at $2.3 million, (iii) deferred stock consideration of 395,125 shares, valued at $4.5 million, which were issued in February 2010, and (iv) transaction costs of $2.6 million.

     Pursuant to the agreement, the former shareholders of DCG could earn additional consideration subject to achieving certain operating objectives in years one, two and three, ending March 31, 2009, 2010 and 2011, respectively. The year one operating objectives were partially achieved and, as a result, the Company paid approximately $5.6 million in contingent consideration in 2009 which comprised $2.4 million in stock and $3.2 million in cash. The Company determined the amount of contingent consideration due to achievement of year two performance objectives was $2.4 million, which was paid by issuing 235,744 common shares during the second quarter of 2010. The Company determined the amount of contingent consideration due to the achievement of year three performance objectives was approximately $4.6 million and has therefore recorded additional goodwill for the same amount as of March 31, 2011. The Company expects to settle this earn-out in the second quarter of 2011 by issuing approximately 400,000 shares of common stock to the former shareholders of DCG. As the DCG acquisition was completed in 2008, it was accounted for as a business combination under the purchase method. Accordingly, all of the aforementioned contingent consideration payments resulted in increases to goodwill at the time the contingent consideration amounts were earned.

3. Marketable Securities and Fair Value Disclosures

Marketable Securities

     At March 31, 2011, the estimated fair value of the Company’s marketable securities classified as available-for-sale securities was $10.3 million. At December 31, 2010 the estimated fair value of the Company’s marketable securities classified as available-for-sale securities was $10.1 million. The Company sold, at amortized cost, $1.9 million of its ARS classified as trading securities during the first three months of 2010. The remaining $14.6 million were sold prior to December 31, 2010 and the Company, accordingly, did not have any marketable securities classified as trading securities at March 31, 2011 or December 31, 2010.

     The following tables summarize the Company’s marketable securities (in thousands):

		Available-for-Sale Securities as of March 31, 2011
						Gross Unrealized				Gross Unrealized				Estimated Fair
		Amortized Cost				Gains				Losses				Value
Long-term:
Auction rate securities		$	1,400			$	—			$	(110	)		$	1,290
Short-term:
Mutual fund deposits			8,959				3				—				8,962
Total		$	10,359			$	3			$	(110	)		$	10,252

		Available-for-Sale Securities as of December 31, 2010
						Gross Unrealized				Gross Unrealized				Estimated Fair
		Amortized Cost				Gains				Losses				Value
Long-term:
Auction rate securities		$	1,400			$	—			$	(131	)		$	1,269
Short-term:
Mutual fund deposits			8,882				—				(21	)			8,861
Total		$	10,282			$	—			$	(152	)		$	10,130

     The Company’s available-for-sale securities comprise ARS and mutual funds. As of March 31, 2011 all of the Company’s available-for-sale ARS have been in an unrealized loss position for more than twelve months.

     Using a discounted cash flow analysis, the Company has assessed that the fair value of its ARS classified as available-for-sale securities is $110,000 less than their amortized cost at March 31, 2011, compared to $131,000 less than amortized cost at December 31, 2010. The Company has recorded the change in valuation, a gain of $21,000, in the “accumulated other comprehensive loss” section on its consolidated and condensed balance sheets. The Company does not intend to sell its ARS classified as available-for-sale until a successful auction occurs and these ARS investments are liquidated at amortized cost, nor does the Company expect to be required to sell these ARS before a successful auction occurs.

     At December 31, 2009 the amortized cost of the Company’s investment in the Primary Fund, a mutual fund that suspended redemptions, was $1.0 million. Due to events in 2009 that limited the liquidity of this investment the Company recorded an impairment of $0.2 million in 2009. In January 2010 the Company received the remaining $0.8 million balance.

     The following table reconciles the total other-than-temporary impairment losses to other-than-temporary losses reflected in earnings for the Company’s available-for-sale securities for the three months ended March 31, 2011 and 2010 (in thousands):

		Three Months Ended
		March 31,
		2011				2010
Total other-than-temporary losses		$	(2	)		$	(4	)
Less: portion of loss recognized in other comprehensive loss			(2	)			(4	)
Net impairment losses recognized in earnings		$	—			$	—

     Actual maturities of our marketable securities may differ from contractual maturities because some borrowers have the right to call or prepay obligations. Gross realized gains and losses on the sale of securities are calculated using the specific identification method, and were not material to the Company’s operations for the three months ended March 31, 2011 and 2010.

Fair Value Disclosures

     The Company accounts for certain assets and liabilities at fair value. The following tables represent the Company’s fair value hierarchy for its cash equivalents, marketable securities, foreign exchange option contracts and acquired assets and liabilities measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010 (in thousands):

		Fair Value Measurements at March 31, 2011 Using
		Level 1				Level 2				Level 3				Total
Financial assets:
Auction rate securities		$	—			$	—			$	1,290			$	1,290
Bank time deposits			—				69,003				—				69,003
Foreign exchange option contracts, net			—				39				—				39
Money market fund deposits			22,100				—				—				22,100
Mutual funds			8,962				—				—				8,962
Indemnification assets acquired			—				—				1,078				1,078
Total		$	31,062			$	69,042			$	2,368			$	102,472

		Level 1				Level 2				Level 3				Total
Financial liabilities:
Foreign exchange option contracts, net		$	—			$	179			$	—			$	179
Deferred consideration acquired			—				—				231				231
Other long-term liabilities acquired			—				—				1,443				1,443
Total		$	—			$	179			$	1,674			$	1,853

		Fair Value Measurements at December 31, 2010 Using
		Level 1				Level 2				Level 3				Total
Financial assets:
Auction rate securities		$	—			$	—			$	1,269			$	1,269
Bank time deposits			—				65,646				—				65,646
Foreign exchange option contracts, net			—				133				—				133
Money market fund deposits			27,703				—				—				27,703
Mutual funds			8,861				—				—				8,861
Indemnification assets acquired			—				—				1,078				1,078
Total		$	36,564			$	65,779			$	2,347			$	104,690

		Level 1				Level 2				Level 3				Total
Financial liabilities:
Foreign exchange option contracts, net		$	—			$	—			$	—			$	—
Deferred consideration acquired			—				—				231				231
Other long-term liabilities acquired			—				—				1,419				1,419
Total		$	—			$	—			$	1,650			$	1,650

     In January 2010 the Financial Accounting Standards Board (“FASB”) issued guidance related to disclosures of fair value measurements. The guidance requires gross presentation of activity within the Level 3 measurement roll-forward (below) and details of transfers in and out of Level 1 and 2 measurements. It also clarifies two existing disclosure requirements on the level of disaggregation of fair value measurements and disclosures on inputs and valuation techniques. A change in the hierarchy of an investment from its current level will be reflected in the period during which the pricing methodology of such investment changes. Disclosure of the transfer of securities from Level 1 to Level 2 or Level 3 will be made in the event that the related security is significant to total cash and investments. The Company did not have any transfers of assets and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy during the three months ended March 31, 2011.

     Level 1 assets consist of money market fund deposits and mutual funds that are traded in active markets with sufficient volume and frequency of transactions. The fair values of these assets were determined from quoted prices in active markets for identical assets.

     Level 2 assets consist of bank time deposits and foreign exchange option contracts and Level 2 liabilities include foreign exchange option contracts. The fair values of these assets were determined from inputs that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

     Level 3 assets include ARS investments structured with short-term interest rate reset dates of generally less than ninety days but with contractual maturities that can be well in excess of ten years. At the end of each reset period, which occurs every seven to thirty-five days, investors can continue to hold the investments at par or sell the securities at auction provided there are willing buyers to make the auction successful. The ARS investments the Company holds are collateralized by student loans and municipal debt and have experienced failed auctions. Level 3 assets and liabilities also include the following assumed, financial assets and liabilities as a result of the Nitro acquisition: (i) indemnification assets, (ii) deferred consideration and (iii) other long-term liabilities.

     The following table provides a summary of changes in fair value of the Company’s Level 3 financial assets and liabilities measured on a recurring basis for the three months ended March 31, 2011 (in thousands):

		Level 3 Inputs
		Assets				Liabilities
Balance at December 31, 2010		$	2,347			$	1,650
Loss on increase in fair value of other long-term liability acquired, included in general and administrative expenses			—				24
Unrealized gain included in accumulated other comprehensive loss			21				—
Balance at March 31, 2011		$	2,368			$	1,674

     Included in the Company’s cash and cash equivalents balance of $196.4 million as of March 31, 2011 were $69.0 million of time deposits with maturities of less than or equal to 90 days and money market fund deposits of $22.1 million. Included in the Company’s cash and cash equivalents balance of $219.4 million as of December 31, 2010 were $65.6 million of time deposits with maturities of less than or equal to 90 days and money market fund deposits of $27.7 million.

4. Stock-Based Compensation

     The Company recorded $3.9 million and $4.2 million of stock-based compensation expense for the three months ended March 31, 2011 and 2010, respectively. Project personnel expenses, selling and marketing expenses and general and administrative expenses appearing in the consolidated and condensed statements of operations include the following stock-based compensation amounts (in thousands):

		Three Months Ended
		March 31,
		2011				2010
Project personnel expenses		$	2,488			$	2,112
Selling and marketing expenses			267				435
General and administrative expenses			1,121				1,684
Total stock-based compensation		$	3,876			$	4,231

     Stock-based compensation expense capitalized related to individuals working on internally developed software was immaterial. The Company values restricted stock units (“RSUs”) based on performance conditions and RSUs contingent on employment based on the fair market value on the date of grant, which is equal to the quoted market price of the Company’s common stock on the date of grant.

     The Company recognizes stock-based compensation expense net of an estimated forfeiture rate and recognizes expense for only those shares expected to vest on a straight-line basis over the requisite service period of the award when the only condition to vesting is continued employment. If vesting is subject to a market or performance condition, vesting is based on the derived service period. The Company estimates its forfeiture rate based on its historical experience.

     During the three months ended March 31, 2010, the Company granted a special dividend equivalent payment of $0.35 per RSU for each outstanding RSU award as of March 1, 2010, to be paid in shares when the underlying award vests. If the underlying RSU does not vest, the dividend equivalent is forfeited. Under the terms of our RSU awards, RSUs were not entitled to dividends. As a result, the dividend declared on outstanding RSUs was a modification of the original awards, and the cost of the dividend equivalent is being recognized as stock-based compensation in the same manner which the Company recognizes stock-based compensation for RSUs. The Company estimated the total additional stock-based compensation expense related to the special dividend equivalent on RSUs, net of forfeitures, to be approximately $2.0 million. This expense is being recognized through March 1, 2014, with the amounts recorded in each period to be commensurate with the vesting of the underlying awards.

     During the second quarter of 2010, the Company granted RSUs with service and performance conditions to its Chief Executive Officer (“CEO”). Up to 100,000 units will vest on March 1, 2013 if the performance conditions are met for the three year period ending December 31, 2012. The CEO was also granted an additional 50,000 RSUs that will vest based on strategic objectives that will be determined by the Company’s Board of Directors.

     During the second quarter of 2011, the Company granted an aggregate of 294,000 RSU’s with service and performance conditions to six members of its leadership team.

     The following table summarizes activity relating to stock options under all stock option plans for the three months ended March 31, 2011 (in thousands, except prices):

						Weighted
						Average
						Exercise
		Shares				Price
Outstanding as of December 31, 2010			3,246			$	5.89
Options exercised			(451	)		$	9.46
Options forfeited/cancelled			(49	)		$	10.95
Outstanding as of March 31, 2011			2,746			$	5.22
Vested and expected to vest as of March 31, 2011			2,746			$	5.22
Options exercisable as of March 31, 2011			2,744			$	5.22
Aggregate intrinsic value of outstanding		$	17,119
Aggregate intrinsic value of vested and expected to vest		$	17,117
Aggregate intrinsic value of exercisable		$	17,111

     The aggregate intrinsic value of stock options exercised in the three months ended March 31, 2011 and 2010 was $0.8 million and $2.4 million, respectively, determined at the date of exercise. As of March 31, 2011 the weighted average remaining contractual term for stock options outstanding, vested and expected to vest, and exercisable was less than one year. As of March 31, 2011 there remained less than $0.1 million of compensation expense, net of estimated forfeitures related to non-vested stock options to be recognized as expense over a weighted average period of less than one year.

     The following table summarizes activity relating to RSUs for the three months ended March 31, 2011 (in thousands, except prices):

		Number of Shares				Weighted
		Underlying				Average Grant
		Restricted Units				Date Fair Value
Unvested as of December 31, 2010			6,188			$	6.23
Restricted units granted			135			$	12.00
Restricted units vested			(272	)		$	11.98
Restricted units forfeited/cancelled			(55	)		$	9.74
Unvested as of March 31, 2011			5,996			$	6.07
Expected to vest as of March 31, 2011			5,602			$	6.07

     The weighted average grant date fair value of RSUs granted for the three months ended March 31, 2011 and 2010 was $12.00 and $8.36, respectively. The aggregate intrinsic value of RSUs vested in the three months ended March 31, 2011 and 2010 was $3.3 million and $3.2 million, respectively. The intrinsic value of non-vested RSUs, net of forfeitures, as of March 31, 2011, was $68.6 million. As of March 31, 2011 there remained $29.5 million of compensation expense related to non-vested RSUs to be recognized as expense over a weighted average period of approximately 2.3 years.

5. Net Income Per Share

     The following information presents the Company’s computation of basic and diluted net income per share for the periods presented in the consolidated and condensed statements of operations (in thousands, except per share amounts):

		Three Months Ended
		March 31,
		2011				2010
		(Unaudited)
Net income		$	12,158			$	6,239
Basic net income per share:
Weighted average common shares outstanding			136,293				130,054
Basic net income per share		$	0.09			$	0.05
Diluted net income per share:
Weighted average common shares outstanding			136,293				130,054
Weighted average dilutive common share equivalents			4,272				6,743
Weighted average common shares and dilutive common share equivalents			140,565				136,797
Diluted net income per share		$	0.09			$	0.05
Anti-dilutive options and share-based awards not included in the calculation			9				9

     Included in weighted average dilutive common share equivalents are restricted shares associated with the Nitro acquisition. These shares were reflected in weighted average dilutive common share equivalents as they were contingent shares during the period presented.

6. Commitments and Contingencies

     The Company is subject to certain legal proceedings and claims, as discussed below. The Company is also subject to certain other legal proceedings and claims that have arisen in the course of business and that have not been fully adjudicated. However, the results of legal proceedings cannot be predicted with certainty. Should the Company fail to prevail in any of these legal matters or should several of these legal matters be resolved against the Company in the same reporting period, the operating results of a particular reporting period could be materially adversely affected.

     The Company accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. The Company is subject to various legal claims totaling approximately $10.3 million, for which the likelihood of a loss is considered more than remote, and various administrative audits, each of which have arisen in the ordinary course of business. The Company has recorded an accrual at March 31, 2011 of approximately $1.3 million related to certain of these items. Although the Company intends to defend these matters vigorously, the ultimate outcome of these matters is uncertain and the potential loss, if any, may be significantly higher or lower than the amounts that the Company has previously accrued.

7. Restructuring and Other Related Charges

2011 — Restructuring Events

     For the three months ended March 31, 2011 the Company recorded a restructuring charge of $5.7 million 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 its 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 compensation expense for stock-based awards.

     The following table shows activity during the three months ended March 31, 2011 related to the 2011 restructuring events (in thousands):

		Workforce
Balance, December 31, 2010		$	—
2011 provision			5,687
Non-cash portion of 2011 provision			(4,612	)
Cash utilized			(918	)
Balance, March 31, 2011		$	157

The remaining $157,000 accrued restructuring balance as of March 31, 2011 is expected to be paid in full by June 30, 2011.

2010 — Restructuring Event

     During the three months ended March 31, 2010, the Company consolidated its UK operations into one office space. As such, the Company restructured one lease which ended in March 2011. Estimated costs for the consolidation of facilities included contractual rental commitments and related costs. The Company recorded $0.9 million in restructuring expense during the three months ended March 31, 2010 and a benefit of less than $0.1 million during the three months ended March 31, 2011. The following table shows activity during the three months ended March 31, 2011, related to the 2010 restructuring event (in thousands):

		Facilities
Balance, December 31, 2010		$	242
Benefits, net			(23	)
Cash utilized			(155	)
Balance, March 31, 2011		$	64

The remaining $64,000 accrued restructuring balance as of March 31, 2011 is expected to be paid in full by June 30, 2011.

2001, 2002, 2003 — Restructuring Events

     As a result of the decline in the demand for advanced technology consulting services that began in 2000, the Company restructured its workforce and operations in 2001, 2002 and 2003. The restructuring events consisted of ceasing operations and consolidating or closing excess offices. Estimated costs for the consolidation of facilities included contractual rental commitments or lease buy-outs for office space vacated and related costs, offset by estimated sub-lease income.

     For the three months ended March 31, 2011 the Company recorded a net restructuring benefit associated with the 2001, 2002 and 2003 events of less than $0.1 million, principally related to changes in the Company’s estimated operating expenses to be incurred in connection with a previously restructured lease, which ends in November 2011.

     For the three months ended March 31, 2010, the Company recorded a net restructuring benefit of approximately $0.6 million, principally related to changes in the Company’s estimated operating expenses to be incurred and sub-lease income in connection with a previously restructured lease, which ends in the fourth quarter of 2011.

     The following table shows activity during the three months ended March 31, 2011 related to the 2001, 2002 and 2003 restructuring events (in thousands):

		Facilities
Balance, December 31, 2010		$	2,887
Benefits, net			(22	)
Cash utilized			(781	)
Balance, March 31, 2011		$	2,084

     The total remaining accrued restructuring balance for the 2001, 2002 and 2003 events of $2.1 million as of March 31, 2011 is expected to be paid in full by November 2011.

8. Income Taxes

     For the three months ended March 31, 2011 the Company recorded an income tax provision of $7.8 million compared to $3.6 million for the three months ended March 31, 2010. Income tax is related to federal, state, and foreign tax obligations. The increase in tax expense was primarily related to an increase in profits.

     The Company’s 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.

     The Company enjoys the benefits of income tax holidays in certain jurisdictions in which it operates. Tax holidays for the Company’s business located in Bangalore and Noida, India, expired on March 31, 2011. In addition, in 2009 the Company established a new India unit in a Special Economic Zone (“SEZ”) which is entitled to a five year, 100% tax holiday. Immediately following the expiration of the 100% tax holiday, the SEZ unit is entitled to a five year, 50% tax holiday.

     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. At March 31, 2011, certain state tax net operating loss carry forwards, as well as a portion of the net operating loss carry forwards relating to certain stock based compensation deductions remain with a valuation allowance recorded against them. Additionally, the Company maintains a valuation allowance against its deferred tax assets in Switzerland but believes that deferred tax assets in various other foreign jurisdictions are more likely than not to be realized and, therefore, no valuation allowance has been recorded against these assets.

     The Company had gross unrecognized tax benefits, including interest and penalties, of approximately $13.2 million as of March 31, 2011 and $12.0 million as of December 31, 2010. These amounts represent the amount of unrecognized tax benefits that, if recognized, would result in a reduction of the Company’s effective tax rate. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of March 31, 2011 and December 31, 2010, accrued interest and penalties totaled approximately $1.2 million and $1.1 million, respectively.

     The Company conducts business globally and, as a result, its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Canada, Germany, India, the United Kingdom and the United States. The Company’s U.S. federal tax filings are open for examination for tax years 2007 through the present. The statutes of limitations in the Company’s other tax jurisdictions remain open for 2004 through the present. However, carry forward attributes from prior years may still be adjusted upon examination by tax authorities if they are used in a future period.

     Although the Company believes its tax estimates are appropriate, the final determination of tax audits could result in favorable or unfavorable changes in its estimates. The Company anticipates the settlement of tax audits in the next twelve months and the expiration of relevant statutes of limitations could result in a decrease in its unrecognized tax benefits of an amount between $1.0 million and $2.0 million.

9. Comprehensive Income

     The components of comprehensive income are presented below for the periods presented in the consolidated and condensed statements of operations (in thousands):

		Three Months Ended
		March 31,
		2011				2010
Net income		$	12,158			$	6,239
Foreign currency translation gain (loss)			4,402				(1,501	)
Unrealized loss on available-for-sale securities			(2	)			(4	)
Comprehensive income		$	16,558			$	4,734

10. Segment Information

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

     The Company does not allocate certain marketing and general and administrative expenses to its business unit segments because these activities are managed separately from the business units. Management does not allocate restructuring and other related charges, amortization

of purchased intangible assets, stock-based compensation expense, interest and other income, net or acquisition expenses and other related charges to the segments for the review of results by the Chief Operating Decision Maker (“CODM”). Asset information by operating segment is not reported to or reviewed by the CODM, and therefore, the Company has not disclosed asset information for each operating segment.

     The tables below present the service revenues and income before income taxes attributable to these operating segments for the periods presented (in thousands):

		Three Months Ended
		March 31,
		2011				2010
Service Revenues:
SapientNitro		$	154,320			$	115,692
Sapient Global Markets			73,565				57,111
Sapient Government Services			13,455				10,420
Consolidated Service Revenues		$	241,340			$	183,223
Income Before Income Taxes:
SapientNitro		$	46,298			$	29,442
Sapient Global Markets			21,740				20,706
Sapient Government Services			3,742				2,772
Total reportable segments operating income (1)			71,780				52,920
Less reconciling items (2)			(51,833	)			(43,118	)
Consolidated Income Before Income Taxes		$	19,947			$	9,802

		Three Months Ended
		March 31,
		2011				2010
Centrally managed functions		$	46,001			$	38,124
Restructuring and other related charges			5,642				286
Amortization of purchased intangible assets			1,273				1,467
Stock-based compensation expense			3,876				4,231
Interest and other income, net			(1,459	)			(800	)
Acquisition expense and other related charges			—				111
Unallocated expenses (a)			(3,500	)			(301	)
Total		$	51,833			$	43,118

11. Geographic Data

     Data for the geographic regions in which the Company operates is presented below for the periods presented in the consolidated and condensed statements of operations and the consolidated and condensed balance sheets (in thousands):

		Three Months Ended
		March 31,
		2011				2010
Service revenues:
United States		$	144,560			$	105,434
International			96,780				77,789
Total service revenues		$	241,340			$	183,223

		March 31,				December 31,
		2011				2010
Long-lived assets:
United States		$	14,911			$	14,792
United Kingdom			4,815				3,936
India			18,230				13,771
Rest of International			3,905				3,072
Total long-lived assets (1)		$	41,861			$	35,571

12. Goodwill and Purchased Intangible Assets

     The following is a summary of goodwill allocated to the Company’s business segments as of March 31, 2011 and December 31, 2010 (in thousands):

						Sapient Global
		SapientNitro				Markets								Total
Goodwill as of December 31, 2010		$	52,902			$	24,963							$	77,865
Contingent consideration recorded during the period			—				4,613								4,613
Exchange rate effect			248				581								829
Goodwill as of March 31, 2011		$	53,150			$	30,157							$	83,307

     The following is a summary of intangible assets as of March 31, 2011 and December 31, 2010 (in thousands; the gross carrying amounts of local currency denominated purchased intangible assets are reflected at the respective balance sheet date exchange rate):

		March 31, 2011
		Gross								Net
		Carrying				Accumulated				Book
		Amount				Amortization				Value
Customer lists and customer relationships		$	23,158			$	(13,255	)		$	9,903
SAP license agreement			1,100				(1,100	)			—
Non-compete agreements			8,674				(3,480	)			5,194
Tradename			3,194				(1,731	)			1,463
Total purchased intangible assets		$	36,126			$	(19,566	)		$	16,560

		December 31, 2010
		Gross								Net
		Carrying				Accumulated				Book
		Amount				Amortization				Value
Customer lists and customer relationships		$	22,954			$	(12,351	)		$	10,603
SAP license agreement			1,100				(1,100	)			—
Non-compete agreements			8,538				(3,074	)			5,464
Tradename			3,149				(1,587	)			1,562
Total purchased intangible assets		$	35,741			$	(18,112	)		$	17,629

     Amortization expense related to the purchased intangible assets was $1.3 million and $1.5 million for the three months ended March 31, 2011 and 2010, respectively.

13. Foreign Currency Translation and Derivative Instruments

     Foreign exchange gains of $0.4 million and losses of $0.9 million were recorded for the three months ended March 31, 2011 and 2010, respectively. Foreign exchange gains and losses are included in general and administrative expenses in the consolidated and condensed statements of operations. These gains and losses were primarily related to intercompany foreign currency transactions that are of a short-term nature.

     Approximately 17% of the Company’s operating expenses for the three months ended March 31, 2011 were denominated in Indian rupees. Approximately 15%, 3% and 8% of service revenues for the three months ended March 31, 2011 were denominated in British pounds sterling, Euros and Canadian dollars, respectively. As the Company has minimal associated revenues in Indian rupees, any significant movement in the exchange rate between the U.S. dollar and the rupee has a significant impact on its operating expenses and operating profit. Any significant movement in the exchange rate between the U.S. dollar and the British pound sterling, the U.S. dollar and the Euro and the U.S. dollar and the Canadian dollar has a significant impact on the Company’s service revenues and operating income. The Company manages this exposure through a risk management program that partially mitigates its exposure to operating expenses denominated in the Indian rupee and operating margins denominated in the British pound sterling, the Euro and the Canadian dollar, and that includes the use of derivative financial instruments which are not designated as accounting hedges. The Company uses foreign exchange option contracts to partially protect its foreign currency exposure to: (i) Indian rupee denominated operating expenses against appreciation in the rupee relative to the U.S. dollar, (ii) British pound sterling denominated revenues against the appreciation of the U.S. dollar relative to the pound sterling, (iii) Euro denominated revenues against the appreciation of the U.S. dollar relative to the Euro, and (iv) Canadian dollar denominated revenues against the appreciation of the U.S. dollar relative to the Canadian dollar. Currently, the Company enters into 30 day average rate instruments covering a rolling 90 day period with notional amounts of 350 million rupees (approximately $7.7 million), 2.0 million pounds sterling (approximately $3.2 million), 0.1 million Euros (approximately $0.1 million), and 2.5 million Canadian dollars (approximately $2.5 million). As these instruments are option collars that are settled on a net basis with the bank, the Company has not recorded the gross underlying notional amounts in its consolidated and condensed balance sheets as of March 31, 2011.

     The following table reflects the fair value of the Company’s derivative assets and liabilities on its consolidated and condensed balance sheets as of March 31, 2011 and December 31, 2010 (in thousands):

		Derivative Assets Reported in Other								Derivative Liabilities Reported in
		Current Assets								Accrued Expenses
		March 31,				December 31,				March 31,				December 31,
		2011				2010				2011				2010
Foreign exchange option contracts not designated		$	39			$	133			$	(179	)		$	—

     Realized and unrealized losses on the Company’s foreign exchange option contracts are included in general and administrative expenses in the consolidated and condensed statements of operations. The following table shows the effect of realized and unrealized gains and losses, net, of the Company’s foreign exchange option contracts on its results of operations for the three months ended March 31, 2011 and 2010 (in thousands):

		Three Months Ended March 31,
		2011				2010
(Loss) gain on foreign exchange option contracts not designated		$	(268	)		$	610

14. Dividend Payment

     On February 18, 2010, the Company announced a special dividend of $0.35 per common share for shareholders as of the record date, March 1, 2010, which was paid on March 15, 2010. The dividend was a return of excess capital to shareholders. The $46.8 million in cash paid for the dividend is reflected as cash used in financing activities on the consolidated and condensed statements of cash flows.

15. Debt

     In May 2010, Sapient Consulting Pvt. Limited (an Indian subsidiary of the Company) entered into a $10,000,000 uncommitted revolving credit facility. The facility matures in May 2011 and can be used to finance working capital requirements, capital expenditures or any other purpose which may be permissible under local regulations. Borrowings in U.S. dollars bear interest at the six-month LIBOR plus 2%. Short-term loans denominated in Indian rupees are also permissible and bear interest at prevailing local borrowing rates, dependent on the payback period selected at the time of borrowing. There are no covenants based on financial measures governing this facility. At March 31, 2011, the Company had one short-term loan outstanding. The 60 million rupee loan (approximately $1.3 million) is at an interest rate of 12.0% and has a maturity date of April 16, 2011. This borrowing is reflected in accrued expenses on the consolidated and condensed balance sheets.

		Credit Facilities
Balance, December 31, 2010		$	4,420
Proceeds from credit facilities			1,768
Repayments of credit facilities			(4,862	)
Balance, March 31, 2011		$	1,326

16. Recent Accounting Pronouncements

     There were no recently issued accounting pronouncements or changes in accounting pronouncements during the three months ended March 31, 2011, that are expected to have a material effect on the Company’s financial condition, results of operations or cash flows.

SAPIENT CORPORATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Company

     Sapient Corporation (“Sapient” or the “Company”), a global services firm, helps 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, below 10% of our total revenues. Our Sapient Global Markets segment 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 a wide array of U.S. governmental agencies. Focused on driving long-term change and transforming the citizen experience, we use technology to help government agencies become more accessible, efficient, and transparent.

     Founded in 1990 and incorporated in Delaware in 1991, Sapient maintains 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 project 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

     Our service revenues for the three months ended March 31, 2011 were $241.3 million, a 32% increase compared to service revenues for same period in 2010. The increase in service revenues was primarily due to an increase in demand for our services compared to 2010.

     For the three months ended March 31, 2011 we reported income from operations of $18.5 million, a 105% increase compared to $9.0 million for the same period in 2010. The increase in operating income was due to the increase in demand for our services and our management of project personnel, sales and marketing, and general and administrative expenses, all of which decreased as a percentage of revenue in the first quarter of 2011 as compared to the first quarter of 2010.

     For the three months ended March 31, 2011 we reported net income of $12.2 million, a 95% increase compared to $6.2 million for the same period in 2010. The increase in service revenues and the fact that project personnel, sales and marketing and general and administrative expenses have decreased as a percentage of revenue were the primary contributors to this increase.

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 call “non-GAAP income from operations”. The second measure calculates non-GAAP income from operations as a percentage of reported services revenues, which we call “non-GAAP operating margin”. We believe that non-GAAP measures help illustrate underlying trends in our business, and use the measures to establish budgets and operational goals, communicated internally and externally, for managing our business and evaluating our performance. We exclude certain expenses from our non-GAAP operating income that we believe are not reflective of these underlying business trends or useful measures for determining our operational performance and overall business strategy. The following table reconciles income from operations as reported on our consolidated and condensed statements of operations to non-GAAP income from operations and non-GAAP operating margin for the three months ended March 31, 2011 and 2010 (in thousands, except percentages):

		Three Months Ended
		March 31,
		2011				2010
Service revenues		$	241,340			$	183,223
GAAP income from operations		$	18,488			$	9,002
Stock-based compensation expense			3,876				4,231
Restructuring and other related charges			5,642				286
Amortization of purchased intangible assets			1,273				1,467
Acquisition costs and other related charges			—				111
Stock-based compensation review and restatement benefit			(3,500	)			(301	)
Non-GAAP income from operations		$	25,779			$	14,796
GAAP operating margin			7.7	%			4.9	%
Effect of adjustments detailed above			3.0	%			3.2	%
Non-GAAP operating margin			10.7	%			8.1	%

     Non-GAAP income from operations increased in the three months ended March 31, 2011 compared to 2010 due primarily to the improvement in reported income from operations. Please see our Results of Operations section for a more detailed discussion and analysis of the excluded items. During the quarter ended March 31, 2011, we received insurance recovery proceeds of $3.5 million as reimbursement for expenses incurred during the stock option review and restatement in 2006 and 2007. When the expenses were originally incurred, they were excluded from our non-GAAP operating income. Similarly, the $3.5 million benefit has been excluded from non-GAAP operating income in the current quarter.

     When important to management’s analysis, operating results are compared in “constant currency terms”, which exclude the effect of foreign exchange rate fluctuations, a non-GAAP measure. The effect 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 2011 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 in our Annual Report on Form 10-K for the year ended December 31, 2010.

Results of Operations

     The following table sets forth the percentage of our service revenues of items included in our consolidated and condensed statements of operations:

		Three Months Ended
		March 31,
		2011				2010
Revenues:
Service revenues			100	%			100	%
Reimbursable expenses			4	%			5	%
Total gross revenues			104	%			105	%
Operating expenses:
Project personnel expenses			69	%			70	%
Reimbursable expenses			4	%			5	%
Total project personnel expenses and reimbursable expenses			73	%			74	%
Selling and marketing expenses			4	%			5	%
General and administrative expenses			16	%			20	%
Restructuring and other related charges			2	%			0	%
Amortization of purchased intangible assets			1	%			1	%
Acquisition costs and other related charges			0	%			0	%
Total operating expenses			96	%			100	%
Income from operations			8	%			5	%
Interest and other income, net			1	%			1	%
Income before income taxes			8	%			6	%
Provision for income taxes			3	%			2	%
Net income			5	%			3	%

Three months ended March 31, 2011 compared to the three months ended March 31, 2010

Service Revenues

     Our service revenues for the three months ended March 31, 2011 and 2010 were as follows (in thousands, except percentages):

		Three Months Ended
		March 31,				March 31,								Percentage
		2011				2010				Increase				Increase
Service revenues		$	241,340			$	183,223			$	58,117				32	%

     The increase in service revenues for the three months ended March 31, 2011 was primarily due to an increase in demand for our services compared to 2010. The following table compares our first quarter 2011 service revenues by industry sector to 2010 (in millions, except percentages):

														Percentage
		Three Months Ended March 31,								Increase /				Increase /
Industry Sector		2011				2010				(Decrease)				(Decrease)
Financial Services		$	80.0			$	53.0			$	27.1				51	%
Consumer, Travel & Automotive			81.7				53.3				28.3				53	%
Technology & Communications			32.2				27.3				4.9				18	%
Government, Health & Education			26.0				27.5				(1.5	)			(6	%)
Energy Services			21.4				22.1				(0.7	)			(3	%)
Total		$	241.3			$	183.2			$	58.1				32	%

     The increases in the sectors noted above were due to an increase in demand for our services in these industries. The decreases in the Government, Health & Education and Energy Services sector were due to decreases in demand. In constant currency terms, service revenues increased 30% compared to the same period in 2010, as the U.S. dollar has appreciated in value against the local currencies in certain geographies our foreign subsidiaries operate in compared to the same period in 2010.

     The increases in demand across the majority of industry sectors caused our average project personnel peoplecount to increase 31% for the three months ended March 31, 2011 compared to the same period in 2010. Utilization represents the percentage of our project personnel’s time spent on billable client work. Our utilization of 71% was lower than the 75% rate we had for the same period in 2010. We also increased our use of external contractors and consultants by 28% compared to 2010, as demand for our services concentrated in specialized areas increased.

     Our five largest customers, in the aggregate, accounted for approximately 21% of our service revenues for the three months ended March 31, 2011 and 2010. No customer accounted for more than 10% of our service revenues. Long-Term and Retainer Revenues are revenues from contracts with durations of at least twelve months, as well as revenues from applications management and long-term support projects, which are cancelable. Our Long-Term and Retainer Revenues were 47% of our service revenues for the three months ended March 31, 2011, compared to 45% for the same period in 2010.

Project Personnel Expenses

     Project personnel expenses consist principally of salaries and employee benefits for personnel dedicated to client projects, independent contractors and direct expenses incurred to complete projects that were not reimbursed by the client. These costs represent the most significant expense we incur in providing our services. Our project personnel expenses for the three months ended March 31, 2011 and 2010 were as follows (in thousands, except percentages):

		Three Months Ended
		March 31,				March 31,				Increase/				Percentage
		2011				2010				(Decrease)				Increase
Project personnel expenses		$	166,676			$	127,767			$	38,909				30	%
Project personnel expenses as a percentage of service revenues			69	%			70	%		(1 point)

     The increase for the three months ended March 31, 2011 was primarily due to the increase in project personnel peoplecount. Compensation expense increased $29.5 million due to the increase in peoplecount. Use of external contractors and consultants increased $4.6 million due to an increase in demand for our services in specialized areas. Travel costs increased $2.3 million as the Company incurred greater transportation costs due to the increase in peoplecount. The remaining increase was due to increases in various other project personnel expenses.

Selling and Marketing Expenses

     Selling and marketing expenses consist principally of salaries, employee benefits and travel expenses of selling and marketing personnel, and promotional expenses. Our selling and marketing expenses for the three months ended March 31, 2011 and 2010 were as follows (in thousands, except percentages):

		Three Months Ended
		March 31,				March 31,				Increase/				Percentage
		2011				2010				(Decrease)				Increase
Selling and marketing expenses		$	10,156			$	8,647			$	1,509				17	%
Selling and marketing expenses as a percentage of service revenues			4	%			5	%		(1 point)

     The increase for the three months ended March 31, 2011 was primarily due to costs incurred to drive the 32% increase in service revenues, and to a lesser extent, an increase in sales and marketing peoplecount. Compensation expense increased $0.6 million due to the increase in peoplecount. Travel costs increased $0.6 million as the Company incurred greater transportation costs due to the increase in peoplecount. External consultant expense increased $0.2 million due to the increase in service revenues, as this required more general sales support, in addition to costs associated with specific projects that required the use of external consultants. The remaining increase was due to increases in various other selling and marketing expenses.

General and Administrative Expenses

     General and administrative expenses consist principally of salaries and employee benefits associated with our management, legal, finance, information technology, hiring, training and administrative groups, and depreciation and occupancy expenses. Our general and administrative expenses for the three months ended March 31, 2011 and 2010 were as follows (in thousands, except percentages):

		Three Months Ended
		March 31,				March 31,				Increase/				Percentage
		2011				2010				(Decrease)				Increase
General and administrative expenses		$	39,105			$	35,943			$	3,162				9	%
General and administrative expenses as a percentage of service revenues			16	%			20	%		(4 points)

     The increase for the three months ended March 31, 2011 was primarily due to the following factors: (i) facilities expenses increased $2.3 million due to the opening of a new office in India in the first quarter of 2010, (ii) compensation expense increased $1.2 million due to an increase in general and administrative peoplecount, (iii) a currency gain of $0.4 million was recognized in 2011 and a currency loss of $0.9 million was recognized in 2010 as currency rates fluctuated on our short-term transactions, these amounts were offset by hedging losses of $0.3 million in 2011 and hedging gains of $0.6 million in 2010, (iv) travel costs increased $0.5 million due to the increase in peoplecount, (v) insurance costs increased $1.5 million due to the increase in peoplecount and rate increases, (vi) a $0.9 million legal accrual is included in 2011 and (vii) use of external contractors and consultants increased $0.7 million. These increases were partially offset by insurance recovery proceeds of $3.5 million received during the first quarter of 2011 as reimbursement for expenses incurred during the stock option review and restatement in 2006 and 2007. The remaining net decrease was due to changes in various other general and administrative expenses.

Restructuring and Other Related Charges

     Restructuring and other related charges were $5.6 million for the three months ended March 31, 2011, compared to $0.3 million during the same period in 2010. The restructuring charge in the first quarter of 2011 related primarily 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 compensation expense. The restructuring charge in the first quarter of 2010 consisted of $0.9 million for the consolidation of our UK operations into one office space, offset by a $0.6 million benefit related to changes in the Company’s estimated operating expenses to be incurred and sub-lease income in connection with a previously restructured lease, which ends in the fourth quarter of 2011.

     We expect to incur additional restructuring charges of approximately $1.5 million in the third quarter of 2011 related to the consolidation of our two office locations in New York City into one office. The $1.5 million is expected to comprise a charge for future committed rental payments and operating expenses after the cease-use date, offset by estimated sublease income over the remaining lease term.

Amortization of Purchased Intangible Assets

     Amortization of intangible assets consists of non-compete and non-solicitation agreements, customer lists and tradenames acquired in business combinations. Amortization of purchased intangible assets was $1.3 million for the three months ended March 31, 2011, compared to $1.5 million for the same period in 2010. The decrease in expense was due to the fact that certain intangible assets from previous acquisitions have been fully amortized.

Acquisition Costs and Other Related Charges

     Acquisition costs and other related charges are costs associated with third-party professional services we incur related to our evaluation process of potential acquisition opportunities. Although we may incur acquisition costs and other related charges, this is not indicative that any transaction will be consummated. We did not incur any acquisition costs in the first quarter of 2011, compared to a $0.1 million charge for the first quarter of 2010.

Interest and Other Income, Net

     Interest and other income is derived primarily from investments in U.S. government securities, bank time deposits and money market funds. Our interest and other income, net for the three months ended March 31, 2011 and 2010 were as follows (in thousands, except percentages):

		Three Months Ended
		March 31,				March 31,								Percentage
		2011				2010				Increase				Increase
Interest and other income, net		$	1,459			$	800			$	659				82	%

     The increase for the three months ended March 31, 2011 was primarily due to higher interest income. This increase in interest income was due to increases in local interest rates on our foreign currency cash and equivalents and higher average cash balances for the three months ended March 31, 2011 compared to the same period in 2010.

Provision for Income Taxes

     For the three months ended March 31, 2011, we recorded an income tax provision of $7.8 million, compared to $3.6 million in 2010. Income tax is related to federal, state and foreign tax obligations. The increase in tax expense was primarily related to an increase in profits.

     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.

     We enjoy the benefits of income tax holidays in certain jurisdictions in which we operate.

The tax holidays for our business located in Bangalore and Noida, India, expired on March 31, 2011. In addition, in 2009 we established a new India unit in a Special Economic Zone (“SEZ”) which is entitled to a five year, 100% tax holiday. Immediately following the expiration of the 100% tax holiday, the SEZ unit is entitled to a five year, 50% tax holiday.

     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. At March 31, 2011, certain state tax net operating loss carry forwards, as well as a portion of the net operating loss carry forwards relating to certain stock-based compensation deductions, remain with a valuation allowance recorded against them. Additionally, we maintain a valuation allowance against our deferred tax assets in Switzerland but believe that deferred tax assets in various other foreign jurisdictions 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 $13.2 million as of March 31, 2011 and $12.0 million as of December 31, 2010. 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, 2011 and December 31, 2010, accrued interest and penalties totaled approximately $1.2 million and $1.1 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, the United Kingdom and the United States. Our U.S. federal tax filings are open for examination for tax years 2007 through the present. The statutes of limitations in our other tax jurisdictions remain open for 2004 through the present. However, carry forward 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 in the next twelve months and the expiration of relevant statutes of limitations could result in a decrease in our unrecognized tax benefits of an amount between $1.0 million and $2.0 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.

     We do not allocate certain marketing and general and administrative expenses to our business unit segments because these activities are managed separately from the business units. Management does not allocate restructuring and other related charges, amortization of purchased intangible assets, stock-based compensation expense, interest and other income, net or acquisition expenses and other related charges to the segments for the review of results by the Chief Operating Decision Maker (“CODM”). Asset information by operating segment is not reported to or reviewed by the CODM, and therefore, we have not disclosed asset information for each operating segment.

     The tables below present the service revenues and income before income taxes attributable to these operating segments for the periods presented (in thousands):

		Three Months Ended
		March 31,
		2011				2010
Service Revenues:
SapientNitro		$	154,320			$	115,692
Sapient Global Markets			73,565				57,111
Sapient Government Services			13,455				10,420
Consolidated Service Revenues		$	241,340			$	183,223
Income Before Income Taxes:
SapientNitro		$	46,298			$	29,442
Sapient Global Markets			21,740				20,706
Sapient Government Services			3,742				2,772
Total reportable segments operating income (1)			71,780				52,920
Less reconciling items (2)			(51,833	)			(43,118	)
Consolidated Income Before Income Taxes		$	19,947			$	9,802

		Three Months Ended
		March 31,
		2011				2010
Centrally managed functions		$	46,001			$	38,124
Restructuring and other related charges			5,642				286
Amortization of purchased intangible assets			1,273				1,467
Stock-based compensation expense			3,876				4,231
Interest and other income, net			(1,459	)			(800	)
Acquisition expense and other related charges			—				111
Unallocated expenses (a)			(3,500	)			(301	)
Total		$	51,833			$	43,118

     The increase in SapientNitro service revenues for the three months ended March 31, 2011 was primarily due to increases in demand for our services in the majority of the industry sectors we operate in. The following table compares SapientNitro service revenues by industry sector for the three months ended March 31, 2011 compared to the same period in 2010 (in millions, except percentages):

														Percentage
		Three Months Ended March 31,								Increase /				Increase /
Industry Sector		2011				2010				(Decrease)				(Decrease)
Consumer, Travel & Automotive		$	81.7			$	53.4			$	28.3				53	%
Technology & Communications			32.1				27.2				4.9				18	%
Financial Services			28.7				17.1				11.6				68	%
Government, Health & Education			9.8				15.6				(5.8	)			(37	%)
Energy Services			2.0				2.4				(0.4	)			(18	%)
Total		$	154.3			$	115.7			$	38.6				33	%