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Executives

Denise Stone – Director of Investor Relations

F. Edwin Harbach – Chief Executive Officer

Eddie R. Munson – Chief Financial Officer

Analysts

Jason Kupferberg - UBS

Tien-Tsin Huang – JPMorgan

Rod Bourgeois – Sanford C. Bernstein

[Inaudible Analyst]

Shlomo Rosenbaum - Stifel Nicolaus & Company, Inc.

BearingPoint, Inc. (BE) Q2 2008 Earnings Call August 11, 2008 5:00 PM ET

Operator

Welcome to the Q2 2008 BearingPoint Inc. earnings conference call. (Operator Instructions) I would now like to turn the call over to Denise Stone.

Denise Stone

I’m Denise Stone, Director of Investor Relations at BearingPoint. With me this afternoon is Ed Harbach, our Chief Executive Officer and Eddie Munson, our Chief Financial Officer.

We hope you had a chance to review the press release and Form 10-Q filed earlier this afternoon. Let me quickly outline the agenda for this afternoon’s call. Ed will review key highlights from our 2008 second quarter 10-Q and Eddie will review the financial results. At the end of the call, we will conduct a Q&A session to address any questions you may have.

Before we get started, I want to remind you that some of the information discussed in this call, particularly our 2008 business outlook includes forward-looking statements. These statements are based on our current expectations, estimates and projections. They speak only as of the date they are made. Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that can cause actual results to differ materially is contained in our filings with the SEC.

With that it is now my pleasure to welcome BearingPoint CEO Ed Harbach.

F. Edwin Harbach

Thank you for joining us this afternoon to review our second quarter 2008 results. I am pleased to start on a positive note by saying the BearingPoint return to profitability in the second quarter for the first time in more than three years hosting GAAP net income of $18 million. There are a lot of moving pieces that go into these numbers and Eddie and I will walk you through them on today’s call, but the fact is that our bottom line continues to improve significantly.

We told you that our goal was to return to profitability sometime in 2008 and we did so in Q2. Now our challenge is to finish the year strong. Before we look at the numbers, I would like to congratulate BearingPoint’s employees for staying focused in delivering these results. I’m proud of what they’ve been able to accomplish in a very challenging environment.

I also want to thank all of you on the phone for your support and understanding over the last few months. I know we have not been very active in our communication to the street of late. There has been a lot going on much of which and still is highly sensitive so we weren’t in position to talk about it. You have my commitment to be more proactive in our communications going forward.

In February at our investor meeting, we laid out a clear three-point strategy for the year and we’re working hard to execute this strategy. We said we would focus on creating a differentiation in the marketplace, getting our costs down to industry competitive levels and making BearingPoint the best place for people to develop their skills and serve clients.

Let’s start with the goal of creating differentiation. This is about playing to our strengths rather than trying to be all things to all clients. We initially focused on exiting markets in business where we were not differentiated and right sizing our workforce. This was a necessary step but each of our business units has also been moving to build their capabilities in areas we know we are differentiated.

For example, we have unique capabilities in assisting countries in diverging markets to develop their financial systems, installing SAP for oil and gas companies, providing complex systems integration for the federal government and implementing state-based motor vehicle and retirement systems. We are also focused on selling more of our leading-edge global solutions such as risk, compliance and security, and information management to our key accounts. We are also lining our people with the industry where we have the skill, experience and solutions to able us to win, for example, life sciences and energy and commercial services.

As to our cost structure, our SG&A costs year-to-date have been reduced 19.4% from 2007. We plan to hit our target SG&A in a range of $580 to $585 million in 2008 and further reduce SG&A in 2009.

Our third strategic priority is focused on our people. We still have work to do on making BearingPoint a better place to work. Our attrition is flat but it’s still too high. We continue to believe that posting solid results and increasing our financial stability is the best way to gain traction with our employees.

I have been spending a lot of time with employees in town halls and small group meetings talking about where the business is heading and answering their questions. When they hear the full story, they get it. In fact, despite the challenges, our employee satisfaction scores have improved each month since the end of the Q1. We are also retooling our bonus and equity plans and intend to provide competitive equity programs going forward. Our people deserve to be compensated and rewarded for their efforts in the successful turnaround we are experiencing.

Now, let’s move to the numbers. Our second quarter results for 2008 show some meaningful improvements. In spite of the difficult economy, we posted an increase in net revenue. Net revenue was $694 million for the quarter and $1.37 billion year-to-date, an increase of 1.2% from the second quarter of 2007 and 0.7% year-to-date.

At the beginning of the year, we told you that in spite our decision to exit certain businesses and a challenging economy, we expected net revenue to be flat or slightly up. Year-to-date, our net revenue is up since 2007, demonstrating our ability to meet this goal even as we streamline the business and tighten our focus.

We are continuing to improve utilization globally. For the second quarter, utilization was 79.4% versus 76.3% in the second quarter of 2007. This is a good demonstration of the work we’ve been doing to increase efficiency and productivity of our workforce. Headcount as of June 30 was approximately 15,900 compared to 17,500 in June 30 of ’07. Much of this change reflects the intense focus we have placed on aligning employees only in the areas where we can be profitable and differentiate our offerings in keeping with out strategies.

Total voluntary annualized attrition for the second quarter of 2008 was 26.1%, essentially flat from a year ago, but down from the 26.9% posted in the first quarter. We are still not happy with this number and we know we have to do better.

Bookings decreased in the second quarter of 2008 totaling $675 million. This represents a decrease of 9.6% year-over-year and 9.4% sequentially. [Inaudible] in new contract bookings but they were tempered by bookings declined in other segments. Bookings in our public services practices were flat during the quarter but up 6% year-to-date. Our ratio of bookings to net revenues or book-to-bill in 2008 is still positive at 1.04 year-to-date, one sign of a healthy business. I know the bookings decline will raise a few eyebrows, especially after the solid bookings growth last quarter of 5.1% over the first quarter of 2007.

Here are a few points I suggest you consider. During the first half of 2008, our bookings were down 2.4% from 2007 and remember we are transitioning our business model. Right now we are tightening our focus on target areas and walking away from work we might have pursued previously. Our pipeline is at the highest level of four years and this pipeline is increasingly comprised of truly differentiated work.

Next, we increased our prices at the end of Q1. Some of you may question passing along price increases in today’s environment but where we have unique service offerings, we will charge appropriately for them. We are okay trading some growth to increase profitability in the near-term.

Finally, our volatile stock price has caused some clients to cancel the program or break up work we have otherwise won in Q2. I personally experienced situations where clients were reluctant to sign contracts based on these concerns. We have to deal with this and we will. Mechanically, we can affect the stock price through reverse stock splits but psychologically, we have to stay in touch with our clients to assure them that we are in this for the long haul and we can deliver performance and financial results.

Our global cash and cash equivalents balance was $351 million at the end of June 30, 2008, which is essentially flat as compared to June 30 of ’07. These numbers however really don’t tell the story. Keep in mind that for the first half of ’07, our operations used over $300 million in cash. In the first half of 2008, our operations used just over $110 million. We are running our business much more efficiently. In the absence of a revolving credit facility, we need approximately $200 million a year to run our daily operations. Historically, our business has used cash in the first half of the year and generated in the second half. We expect to generate cash in the second half of 2008.

Our DSO of 87 days continues to show improvement over last year versus historical patterns. The second quarter DSO was 8 days better than Q2 of 2007. We have improved DSOs for three straight quarters on a year-over-year basis due to our continued efforts and focus in this area. Improving DSOs is one of the highest priority issues of the company and we have appointed senior leaders of the company to assure that we get this right.

Despite the progress in DSOs, cash decreased by $120 million from December of 2007 and $62 million since the end of Q1. Some of this is cyclical, and Eddie will explain the drivers of those cash declines in a few minutes.

Obviously cash is critically important to us. We have had to expand our focus beyond DSOs. We are going to increase our focus on getting our unbilled revenues invoiced earlier and now that we are doing our financial reporting, utilizing more of our internal bandwidth in continued efforts to optimize our structure and operations from a tax standpoint.

Our restructuring efforts in Q2 generated some tax accruals primarily associated with our RV restructuring. In the long-term, our ultimate goal is to restructure as much more efficiently manage as cash, allocate the cost and save cash paid out in taxes.

Now I would like to discuss our business unit region results. The second quarter was a good quarter overall for our public services business which represents 44% of BearingPoint’s revenue.

Gross revenue for the quarter increased by 6% over last year’s second quarter, primarily due to strong performance in emerging markets, defense and civilian sectors. Gross profits in public services business increased significantly or 37.6% year-over-year largely due to the increase in revenues coupled with notable declines in professional compensation expenses. The professional comp reductions were driven primarily by the reversal of a number of tax accruals which Eddie will describe in more detail later. Below that, it is important to emphasize that revenue growth still contributed strong growth to our gross profit improvement.

As I mentioned a little earlier, public services bookings were flat quarter-over-quarter, 246 versus 247, but up 6% year-to-date, 4890 versus 463. This quarter we experienced some delayed opportunities in our emerging markets and healthcare practice that will ship bookings in the later quarter. Public services has been and remains the core of our business. Importantly, our robust public services pipeline continues to expand as among the highest it’s been in recent years. Despite the flat bookings, this robust pipeline makes me optimistic regarding public services prospects.

Our public services segment continues to experience high customer satisfaction among key accounts. Through the end of the second quarter, we have retained 100% of our Top 50 accounts and approximately 92% of our Q2 bookings were in key accounts which demonstrates our ability to execute our strategies to focus on solutions in targeted key areas.

Q2 highlights, during the second quarter, we won business in the Maryland Department of Education to develop a web-based application to collect various student data directly from the loan education agencies over the Internet. Total contract value is over $4 million.

In addition, we won a multi-million dollar contract with the New York City Housing Authority to provide ongoing support services for their Oracle eBusiness suite. We also won a 5-year award with the U.S. Department of the Army for their logistics supply and support functions with a first year value of up to $48 million. These are examples of competing and winning in target markets where we have built up deep expertise and long experience in differentiated solutions.

Our financial services and commercial services segments are still in transition and they are my primary area of focus, as I believe they have great value over the long-term for our company.

Revenue in the financial services segment which provides 5% of our total revenue declined 33.8% compared to the second quarter of last year primarily due to revenue declines in our banking services and global markets industries sectors. Simply put, we ended 2007 overstaffed for the business downturn in all areas of the industry in 2008. Our portfolio business engagement was overweighed in those areas of the financial services industry most impacted by the recent financial losses and writedowns. Our financial service division is largely driven by short-term engagements and many of our clients are taking a “wait and see” approach towards consulting spend until the environment brightens.

Having devoted significant efforts in the first quarter of 2008 to reducing headcount and stabilizing our business model, we are now turning to aggressively rebalancing the weighting of our portfolio and market offerings to provide the greatest opportunity for return to profitability in financial services. Oddly, our headcount actions confirmed wide and had an inordinate effect on our financial services results as changes in our stock comp estimations has generated significant expense accrual reversal in financial services which in turn has caused an increase in the gross profit the first half of the year. We must significantly improve our gross profit and business operations in the second half of 2008.

We have also made noteworthy progress in two key areas. Bookings have increased for the second consecutive quarter and our book-to-bill ratio for FS is now 1.4:1. Our win rate dramatically improves since December 2007 and our financial services pipeline has grown almost 17% this quarter. So there is light at the end of the tunnel and we are pushing forward by streamlining the segment and focusing our efforts on where we can have the most impact.

A few notable wins in the quarter, we closed business with Manitoba Public Insurance to support its initiative to implement an enhanced bodily injury claims management model. In addition, we closed business with Northern Trust to assist with the development of its new leading-edge client portal. Again, these wins reflect two of our capabilities that are truly differentiated and applied in target markets.

Moving to commercial services, overall revenue declined by 20.6% in the second quarter, largely due to decreases in communications and media and product sectors. Our revenue for the life sciences section was flat year-over-year so we remain optimistic about this segment’s performance in the coming months. Gross profit in this unit remained flat for the quarter. However this result was achieved largely through significant reductions in professional compensation expenses driven by the reversal of accruals in stock compensation and global tax equalization expenses.

We have made progress in implementing our strategy in promoting more focused market offerings to our targeted clientele. While the quantity of our new contract signings has declined, we believe our strategies should result in improving the quality, focus and profitability of new work.

For example, during the quarter we closed business with Crestron Electronics to optimize a return to business process, customer service capabilities and internal quality process fees to enable the SAP-QRM 2007 Service Management solution.

We also closed business with The Travel Channel to help enhance their digital asset management and business rights management capabilities.

Our workforce is now more appropriately aligned with our execution strategy and we are placing increasing emphasis on the utilization of our lower cost global delivery centers so that we can further reduce the costs of our services. We have also devoted a significant amount of time to managing both planned and unplanned attrition as we optimize our service delivery model. Our book-to-bill ratio of win rates decreased during the quarter and we are seeing signs they are improving for the remainder of the year.

We hope that if we can continue to successfully execute our strategy and address our clients’ concerns regarding our ability to properly staff our projects, results in our changing strategies will become more apparent and intangible of the second half of 2008.

Now turning to our geographic segments outside North America, during Q2, total asset impact on the consolidated results for gross revenue was $46 million or 5.3% primarily driven by an increase in the Euro-U.S. dollar exchange rate as well as an increase in Latin America from the Brazilian real. Our European practice continues to expand as a key part of our portfolio in global strategies.

Revenue from [inaudible], which represents about 27% of our total revenues, increased by 22.2% and 4.3% in constant currency. Aside from the favorable currency impact, we posted solid local currency revenue growth particularly in Germany and France.

Revenue in Asia-Pacific decreased by 3.6% and 14.3% in constant currency. Revenue growth in Japan continues to be offset by significantly lower revenues in Australia/New Zealand which has been dampened by the favorable currency impact. Revenue declines in Australia were primarily related to loss of key personnel which reduced our ability to win and close new business. Revenue in Japan continued to grow from systems limitation contracts and projects involving compliance with Japan’s financial instruments and exchange law, J-SOX. We are leveraging our strong position of expanding client relationships into other repeatable solutions.

In terms of new business during the second quarter, we closed business with Dai Nippon Toryo Co. Ltd. to provide internal control and DPR consulting services. In addition, we signed a contract with Nikon to develop a budget management system.

As I eluded to earlier in this call, we understand that it is important to provide as much transparency as possible in how we are looking at the business particularly as it relates to our capital structure and liquidity. Throughout 2008, our Board has been intensively reviewing with our financial advisors, Greenhill & Co. all alternatives available to us in light of our evolving cash and leverage position.

I continue to be extremely pleased with how we are turning around our business in 2008 and I am optimistic about the future but in these turbulent economic times where credit markets have effectively dried up, we can’t turn a blind eye to the leverage that we have built up on our balance sheet over the years. We have to be prepared to continue our business through all possible economic and financial scenarios.

In early January 2008, we asked Greenhill to assist us in a review of our balance sheet and the alternatives that are available to us with respect to reducing or restructuring our outstanding debt. The Board is looking at very strategic and business alternatives in the company including a merger or sale of the company as a whole, a sale of all of the assets of the company or the sale by the company of any of its six principal business units. In particular, our Board of Directors asked Greenhill to respond to inquiries of numerous strategic and financial buyers of acquisitions or other strategic transactions. A number of potential buyers undertook primary due diligence. As of today, two parties continue to express an interest in purchasing all of the portions of the company’s business. Discussions and due diligence are continuing. We hope to bring these discussions to closure in the near future and enter into a transaction to generate net cash proceeds sufficient to significantly reduce our outstanding debt. At present, we can give no assurance that a sale of all or a portion of the company’s business can be completed in the near-term at or near current market prices or at all.

I want to personally assure you that we’re protecting the interests of our client, shareholders, creditors and our people and this will be at the heart of our analysis and decisions. We dramatically cut costs in our business this year. We continue improving our ability to generate cash from our operations. We continue to post significant year-over-year improvements in our cash collections each quarter. We are doubling our efforts in each of these critical areas for the remainder of the year and into 2009 but an incurrent, uncertain macroeconomic and credit environment prunes demands that we explore and prepare to execute alternatives. As I am sure you can appreciate, the details are influx and as a result, we can’t comment further. I appreciate your understanding on this matter and I speak for the Board in saying that we will provide any meaningful updates to you as soon as they arrive.

I also want to take this opportunity to update you on our CFO position. Eddie Munson is acting as our interim CFO and has settled in and is doing a great job. We are engaging a search for a new CFO.

In summary, even in the face of a multiple of challenges including serious economic headwinds, we posted positive net income and continue to produce great work for our clients. As a result, we are showing quarter-over-quarter increases in revenue, improvements in our cost structure and the largest operating profit net income in more than three years. I’d like to acknowledge our total employee workforce for this remarkable achievement and also would like to thank our investors for standing by through this process.

With that, I would like to turn the call over to Eddie Munson who will provide more detail on results and an update on our balance sheet.

Eddie R. Munson

Looking at Q2 results, our gross revenue for second quarter 2008 was $87 million, and a $1.7 billion year-to-date amount. These represented an increase of 1.3% from the second quarter of 2007 and a 1.4% decrease year-to-date.

Net revenue was $694 million for the quarter and $1.37 billion year-to-date, an increase of 1.2% from the second quarter of 2007 and a 0.7% increase year-to-date. We are all extremely proud of our ability to maintain net revenue in this challenging environment as we continue to reshape the business.

Gross profit for the second quarter increased by $67 million to $209 million. This represents a 47% improvement. This compares with a gross profit of $143 million for the same period last year and notably, our gross profit as a percent of gross revenue increased to 23.6% as compared to 16.3% last year.

For the six months ended June 30, 2008, gross profit improved by $88 million to 21.1% of gross revenue versus a 15.8% amount in the prior year period. Drivers for the improvement for reduced professional compensation costs due mainly to a benefit of the reversal of accruals associated with the local tax equalization expenses and a decline in stock-based compensation and bonus expenses.

We had a number of accrual reversals this quarter that affected our results so let me give you a bit of a background. First, we estimate and record expenses so that our employees long-term assignments pay the same tax rates wherever they work, but actual expenses differ from estimates where accruals are reversed and additional expenses are charged.

Second, our stock compensation expense is partially derived from estimates regarding forfeiture rates. We have changed those estimates of forfeiture rates in this quarter, primarily due to the high attrition rate that we experienced recently. Consequently, our professional compensation and expense this quarter reflects the effect of reversing significant amounts of accruals in both of these areas.

Now turning to SG&A. Our expenses totaled $141 million in the second quarter and $284 million year-to-date. These represented an overall decrease in expenses of 19.4% for the second quarter and the same amount over the prior year-to-date period. This improvement was primarily due to much lowered costs related to the closing of our financial statements and internal control remediation process that we incurred in 2007.

Overall, I believe we remain on track to deliver SG&A costs in the range of $580 to $585 million in 2008.

Through our continued improvements at managing costs, we posted operating income of $69 million which was positive for the second consecutive quarter. This operating profit represents a $101 million improvement over the loss of $32 million in Q2 of 2007. This quarter’s operating profit was comprised of a number of things. We recognized $11 million in increased revenue over the second quarter of last year and SG&A improvements of $34 million, in line with our goals. Global tax equalization accrual reversals accounted for a benefit of $23 million and reduction in compensation expense of $21 million generated by revised forfeiture rates estimates also contributed.

We posted GAAP net income for the first time in more than three years at $18 million or $0.08 per share. This compares to the loss of $4 million or $0.30 a share in Q2 of ’07 and a loss of $5 million year-to-date versus a loss of $126 million in the prior year-to-date period.

Let me talk to you about the disconnect between our GAAP net income and our cash burn for the quarter. Although our net income increased from a loss of $23 million in the first quarter of 2008 to a positive $18 million this quarter, our cash decreased from the end of the first quarter by $62 million. A few of the items that provided GAAP net income this quarter were global cash equalization of $23 million, and stock compensation adjustments related to the expiration of certain PSUs of $21 million or non-cash items. Additionally, we used significant cash amounts to satisfy expenses that were incurred in 2007 such as $41 million in cash tax payments and severance payments of $16 million related to 2007 headcount reductions.

Now, turning to our balance sheet. As Ed had mentioned, our global cash and cash equivalents balance was $351 million at June 30, 2008 representing a decrease of $4 million from Q2 of 2007 and a $118 million decline since December 2007. Net cash used in operating activities of the second quarter of 2008 and 2007 was a negative $50 million and a negative $162 million respectively. Purchases of property and equipment for the second quarters of 2008 and 2007 were $12 million and $10 million respectively.

The year-over-year change of pre-cash flow for the second quarter of 2008 is primarily attributable to positive improvements in our operating income. Significant uses of cash in the first half of 2008 resulted from a need to use more cash in operations due to a increase of $57 million in our client net investments which comprised of accounts receivable plus unbilled revenue less deferred revenue. Also, the payment of taxes net of refunds was $41 million for a certain amount of profitable operating entities and severance payments of $16 million related to managed reductions in our workforce. This was partially offset by a favorable impact of $11 million due to the strengthening of foreign currencies against the U.S. dollar. Historically, we have always seen a rise in our accounts receivable in the first half of each year but frankly, this is a trend that we have to work hard to reverse and we will.

For the second quarter alone, DSOs increased two days over the first quarter causing us to use approximately $14 million more of our cash to operate our business. Other expenses included an annual insurance payment, cash tax payments, severance payments and immediate bonus payments offset by a currency benefit.

Looking more closely at tax payments, for the first half of 2008, our income tax expenses increased $33 million compared to the first half of 2007. A number of our foreign subsidiaries are generating significant levels of taxable income in local currencies. Historically, we have not fully allocated our corporate level expenses to local country operations but we plan to do so in the future. Consequently, our tax expenses are increasing as local currency income increases and it’s not being offset by the allocation of corporate level expenses. Also included in our tax expense in the second quarter is $19 million related to a foreign corporate entity restructuring which resulted in the loss of certain lost credit boards and the realization of capital gains.

Now, let me turn it back to Ed.

F. Edwin Harbach

At the end of Q1, we provided you with the following guidance: flat revenue growth, SG&A of $580 to $585 million, net loss of approximately $70 million, year in cash and cash equivalents in the vicinity of $500 million and pre-cash flow of approximately $30 million.

Now, let me give you our current thinking. Our gross revenue was down 1.4% year-to-date but our net revenue was up 0.7% year-to-date. We believe these trends will continue and are comfortable with our flat revenue growth guidance in 2008 in U.S. dollars.

SG&A was $284 million year-to-date which resulted in approximately $568 million annualized thus we are also comfortable with our SG&A guidance.

Regarding our net loss projection, we lost $23 million in Q1 and made $18 million in Q2. Our product guidance was for a loss of approximately $70 million for the year. If we can maintain our current trajectory, we believe that we can do significantly better than $70 million lost that we previously committed to you, suggesting a net loss in the range of

negative $70 to negative $30 million.

Regarding our yearly cash projection of approximately $500 million as of June 30, 2008, we had a cash balance of $351 million. We believe we will be cash flow positive in the second half of 2008. Our current cash projections of 2008 are approximately $425 to $475 million absent any sale of assets or other refinancing activities. Our longer-term goal is to achieve 10% net income.

While there are still challenges to overcome, I’m excited about the progress we have made and the opportunities that will drive this company forward and create value. To that end, we continue to focus our energies on what is most important, our business and our people and to hold ourselves accountable for results. I am optimistic about the future and what it will bring to our employees, shareholders and customers. We truly appreciate your continued support.

Now, I will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Adam Frisch - UBS.

Jason Kupferberg – UBS

The first question I have is regarding the strategic alternatives. If you can first of all, give a little bit of color in terms of why you seem to be a lot more open to those alternatives than maybe six months ago and as a follow-up to that, if nothing comes of those alternatives which you did mention is a possibility, if that ends up being the case, how concerned should we be about the $200 million net obligation that can come back to you next April?

F. Edwin Harbach

I think the reason that the question comes up, I remember my first call with each of you, I remember I said I was calling off a transaction and I wanted to focus on the business. I think in the beginning that was the most important thing. Said another way, if we fix the business, everything is possible. If the business deteriorates and we have another year like we had last year, where we are losing $300 million over nothing, then we can turn this thing around. So we did go back and focus on the business. I think as we start to stabilize that, you can decide whether Q2 is the stabilization.

We started to look around a little bit at what some of the alternatives are because we obviously have a balance sheet issue that we have to deal with and we’ve started to look at those alternatives to do that. We believe a fix in business helps us do that. I know there’s lots of discussion taking place. We’ve had some discussions with third parties and I’m not sure how well a kept secret that is but we at least wanted to disclose those discussions. If nothing happens, we always have the default of running the business. We can talk about the cash if you want, but the cash is there and it’s a little tight. That’s where we are.

Jason Kupferberg – UBS

In terms of the free cash flow outlook for the year, if my math is right, you would need about plus $100 million or so in the second half of the year to get to the midpoint of your full year ’08 guidance.

F. Edwin Harbach

That’s right, Jason. We are at $350 million or so now and I always use round numbers. You can look at the disclosures for exact numbers and we’re saying to get to $450 million, we need plus $100 million.

To give a little color commentary on that, you have to look back at how we performed last year, DSOs will always come down in the second half of the year. So last year from the end of June to the end of December, we improved DSOs by 18 days. If we do the same this year, and by the way, our internal targets are to do that. Let’s see if we can execute. 18 days times seven, if I do the math, it’s about $126 million which takes you to 351 plus $126 million which takes you to the top end of the range.

So if we break even for the business, we hit our DSOs reduction on the same scale as we did last year, we would be on the top end of the range. If we somehow only picked up $100 million in the second half of the year, it would go in the middle of the range and obviously, if we missed our target in orders we could go to the low end of the range.

Jason Kupferberg – UBS

Just to confirm on the non-cash reversals of the accruals, those are one-time in nature, I’m assuming, on the stock-based comp and the global tax equalization or is that going to get revisited further in the second half?

Eddie R. Munson

We don’t expect to have any adjustments but as you can imagine, those are judgment calls that we base on estimates of where we are at a particular point in time. When it comes to the global tax equalization matter, of course, as I indicated, we want to make sure our people are whole with respect to taxes. We don’t anticipate that level of reversal but sometimes it is beyond our control.

On the other matter with respect to the PSUs, we have in fact trued up the books so to speak for the change in the forfeiture rate and we believe that we are at a rate that should hold for some period of time.

Operator

Your next question comes from Tien-Tsin Huang – JPMorgan.

Tien-Tsin Huang – JPMorgan

For the global tax equalization expense, the accrual reversal, how does that get allocated to the segments? Is there any differentiation there in terms of looking at the gross margins by segment?

F. Edwin Harbach

It does get allocated differently. Let’s take the PSUs for example. The PSUs were primarily allocated in North America. There’s an anomaly about why so you’re seeing more of those reversals show up in North America and less in Asia-Pacific and less of them in Amia. There is a difference by DU.

Tien-Tsin Huang – JPMorgan

Is there anything in particular for the public service sector? It sounds like it would be up correct?

F. Edwin Harbach

It would hit public services. Public services were allocated PSUs. So anything in North America, so North America Commercial, North America Financial Services and North America Public Services would have a disproportionately large share of the PSU reversal.

Tien-Tsin Huang – JPMorgan

On headcount by segment, would it be possible to give us a rough estimate of what that looks like today?

F. Edwin Harbach

Have a follow-up call with Denise and we can break that out. We just gave overall headcount but we don’t mind sharing headcount by segment. We just won’t do it on the call today. It’s detailed.

Tien-Tsin Huang – JPMorgan

Then the reorg in Europe, I didn’t quite catch exactly what it was.

F. Edwin Harbach

Do you remember last year when we had started a discussion about possibly spinning off a European MD and I called it off in December? We started off on that process and as part of that process, we identified some restructuring that we would do if we were going to go ahead and execute that. Once we called it off, we still thought that some of that restructuring made sense. We simplified our European organization and in doing that, we created an accrual from a tax standpoint, potential capital gains tax.

Tien-Tsin Huang – JPMorgan

Tax outlook, you provided tax outlook in dollars for the rest of the year, can you give us some information on how that might look?

Eddie R. Munson

Let me talk first of all, one of the comments that we made to Jason was, in reference to go about making sure we got a better allocation of shares and service costs. Some of those costs are coming in from our foreign operations and in fact, we are going to be looking to bring those down. If I gave a range, it would be something in the neighborhood of $20 million per quarter. It should be a reasonable estimate.

Tien-Tsin Huang – JPMorgan

Other income was a little bit bigger than what we expected by about a penny or so in contribution. What’s in that line, is it primarily foreign-related items, foreign exchange?

Eddie R. Munson

Yes.

Operator

Your next question comes from Rod Bourgeois - Bernstein.

Rod Bourgeois – Sanford C. Bernstein

I wanted to see if you could give us some details in your free cash flow guidance, specifically what you are assuming about DSO reduction in your free cash flow guidance. Assuming DSO reduction will be a benefit, how big of a benefit are you assuming there?

F. Edwin Harbach

I think most of the cash pickup we are going to see in the second half of the year is through DSOs. I think it is a bit more complicated than this. My simple-time assumption is that the business breaks even from a cash standpoint. What we want to do with DSOs, we were approximately 87 days at the end of June. Last year we were 95. We went from 95 to 77 in the second half of the year. That is what we executed on. This year we are hoping to go from 87 to about 69, which picks up 18 days, which is about $126 million if I am doing the calculation quickly enough.

In essence, the pickup in cash in the second part of the year is DSO-driven without having drains from non-DSO factors on it. Obviously the range we have in terms of free cash flow, what I described to you as our target takes us out to the upper end of the range. If we miss that in either DSO or we generate that net cash loss as a business, it will pull us down from that targeted number.

Rod Bourgeois – Sanford C. Bernstein

But are you expected to be cash-flow break-even in the second half on an operating basis, would you expect that to turn negative given seasonality in the first half of next year again?

F. Edwin Harbach

Next year is tough, so I knew the question would come up in terms of that. Everyone is backing in the same numbers, using the current cash, and trying to go through the put and calculate the numbers. If you take first half and excuse me for digressing for a second but I think it will be helpful, if you take the first half of 2007, we were negative about $300 million or so in cash. If you take the first half of 2008, we are negative $100 million in cash. We just started the projections in terms of what we expect to do in the ’09 budget. We just started the ’09 budgeting process so we don’t have a plan in place to do that.

Now it would be reasonable to assume that the DSO would increase. Like this year, it went from 77 at the end of the fourth quarter last year to basically 85 or so at the end of first quarter and 87 at the end of second quarter. So it popped up a little bit. I think that DSOs will also increase the first couple of quarters next year. What’s not clear yet, Rod, is we don’t have the operating plan for next year, but how much cash we are going to generate from just underlying business operations because if you look at Q1 and Q2 last year compared to Q1 and Q2 this year, it is a dramatic improvement.

I’ll say it in a different way, I would be deeply disappointed if we didn’t show an improvement next year in Q1 and Q2. I don’t think we are going to swing it $200 million but I’d be disappointed if our cash from underlying operations in ’09 was the same as it was in ’08 because that would mean we leveled out from a recovery standpoint.

Rod Bourgeois – Sanford C. Bernstein

So you’re currently thinking you have enough liquidity to make it through the first half of next year even recognizing the put on the convert?

F. Edwin Harbach

It’s close so if you do the calculation, it depends on where you are at in the range. Let me help you a little bit with the math. Let’s just say we end the year at $450 million, which is the middle of the range in terms of doing that. Let’s take a, I don’t want to say worst case, but let’s take a bad case.

Let’s say we go $50 million negative in the first quarter to $50 million negative in the second quarter on cash, it takes from the $450 million range down to the $350 million range. You have a $250 million put on April 15 next year which takes you down to $150 million range that is tight in terms of running it. We said before we would like to have a couple hundred million dollars in the bank to run our business. The $150 million is tight from the put standpoint but not possible.

Rod Bourgeois – Sanford C. Bernstein

When you look at the commercial unit and you financial services unit, I wonder if you can help aggregate between how much of the decline in those units is coming from the potential exiting that you’re doing in certain portions of those business units and how much of that decline is just struggling with the actual growth rate. Can you just aggregate for us on that front?

F. Edwin Harbach

It’s hard because it is not exact in terms of doing it but I’ll give you some commentary. It is not going to be precise numbers because I don’t think you can separate it precisely. On the promotional side, I believe most of the shrinkage is due to the decisions reached on our part.

We’ve decided as I mentioned before, there are 13 industry segments we monitor. We’re being a little bit coy about which ones we are exiting but it’s difficult because you have some client commitments and contracts, but we are in the process of exiting several of those, doubling down on others. Sometimes we emphasize those. A lot of what’s going on in commercial services today is I would say over half of it is decisions on our part to do different things but there certainly are some situations where we have gone after commercial services work and we have not won that.

In financial services, it is probably a little bit of the opposite. It’s a case, where it is probably more of that’s been our ability to execute when in the marketplace and the lesser extent of decisions made to exit that part of the business. It’s mixed depending on which of the two you’re in.

Rod Bourgeois – Sanford C. Bernstein

The other question I have relates to the performance on your major contracts. Are you seeing any cause for worry about problem contracts, is the catchall phrase for it, a continued build-up in receivables or other accruals related to contracts where your performance is subpar. Is that one of your major concerns right now or are the concerns for the other items that you spoken about?

F. Edwin Harbach

It’s always a concern. I don’t want to upset some people that may not have the same background as you do on the call. With consulting firms that do fixed price contracts, we will always have problem contracts. It’s the nature of our beast. If we don’t have that, then we’re overbidding all of those contracts and we are losing too much work. We always allocated a certain percent of revenue. Like a snake in the ground, sometimes I use a 2% for in layman terms, I call it unplanned fee adjustments.

So if you look back in ’05, we were way above that. In ’06, we were way above that. In ‘07, it came down significantly and we were within a reasonable range, maybe a little bit above that but we’re really close. In ’08, it’s running much, much lower year-to-date. We have a red list and a yellow list that I review on a weekly basis. We are looking at those. We right now believe that we are adequately reserved for all known problems. We have not seen receivables increase due to contract problems. In fact, if anything we are seeing a reduction in terms of the overall risk in the mix we have right now. You never know.

You have to go through the year and these things have a way of creeping up and showing up in December. That’s why we try to manage them on a year-by-year basis. You end up always getting surprised a few times. It doesn’t like it is increasing, in fact if you just look at the facts, it looks like our portfolio risk has gone down and the writeoffs associated with our portfolio are certainly less year-to-date in 2008 and any time over the last three years. It’s something we monitor closely.

Operator

Your next question comes from [Inaudible Analyst].

[Inaudible Analyst]

You had mentioned in early May about possibly repricing the PSUs. Can you give us an update regarding that?

F. Edwin Harbach

Yes, my intention is to do something about the PSUs. The PSUs are referred to, I think I mentioned this before, by our group is Confederate currency which is probably not a complement. They have a high P&L expense although I am sure most of you are sophisticated enough to look through that. They are called reversals that Eddie referred to before and they have no retentive value. They aren’t exactly something that has a high cost and no retentive value so that’s not necessarily good. I talked to several of our major investors and what they asked me to do is to, they understood the need to reissue equity. They wanted to have us demonstrate some progress on the financial turnaround before we reset the equity. So I will have some more conversations hopefully this quarter but Q1 and particularly Q2 is a step in the right direction.

We will have some point in time take out the PSUs. The most likely thing is we will have a tender offer to our employees offering something of value in exchange for pennies on the dollar, whether it’s our issues or performance cash rewards or something will be determined. We will in effect take those PSUs back. We will take a charge for doing those. Just to let you know, if we did that to the end of Q2 which we obviously didn’t, that charge would be up to $88 million all going through the P&L one time. We will take a charge for doing that and we will reissue some equity going forward. That required two things before we pulled the trigger.

Number one, we want to return to financial stability to demonstrate to our investors that we did that first before we repriced the securities. Number two, based on what we talked about earlier, we prefer not to do that during any type of strategic discussions. It’s just awkward. So we need to wrap those strategic discussions up one way or another before we redo the securities.

[Inaudible Analyst]

You had mentioned from your commentary that the sales pipeline, in public in particular it is the highest it has been in some time. Can you give us, what is likely a makeshift in that pipeline, can you shed some light in terms of what should be assumed in terms of the lag time between current bookings versus revenue at some point? Is it three to six months or is it longer now?

F. Edwin Harbach

No, I think that’s a reasonable time frame in terms of doing that. The key for us is what the conversion rate is. If you look at bookings for the first quarter, they were strong. The second quarter was a little weaker in terms of doing that. What we had done, we improved the pipeline. In 12/31 last year, we had a decent pipeline but it was still too thin and also it was too much in the early stages of the pipeline, so we had too many opportunities and not enough stuff in proposal.

If you lock at our pipeline today, it is more balance across the various timings and it’s at a record level for us. I don’t think there’s anytime in our history, certainly not the last three or four years since I have access to our financials to where our pipeline has been. So we have a very strong pipeline. It’s also focused on the areas that we want to sell in. So the pipeline maybe six months ago, we did this reteaching and reshuffling with a focus on a lot of things but maybe some of those were non-strategic to us.

Not only have we grown the pipeline as we refocused it, the pipeline is queued up to convert Q3, Q4, Q1, and Q2 next year. It is a normal distribution that you would expect to cross that. Obviously the major variable for us right now is conversion rates and can we convert that pipeline.

[Inaudible Analyst]

You had mentioned some of the disruption associated with your stock price and clients’’ willingness to renew or sign up and so forth. Did they affect across the board your segments or was it one versus the other?

F. Edwin Harbach

No, Joe, it differs where you are at. I am sitting in Manhattan today and I can make a joke sometimes, a little tongue-in-cheek that people are nervous about the economy is diametrically opposed to just how far they are in Manhattan. If you’re in Manhattan, it seems to be a lot worse than if you’re sitting in Moscow for example. We’re not seeing any significant issues in Asia-Pacific for example. We get a few questions but we really don’t see any significant issues in Latin America or Europe.

Once you get within the U.S. base, with our public services business, we occasionally get questions but it is really more on or off. If you are an approved vendor and DCA is blessed you with that loose terminology, everything’s fine. People will ask us a question about our financials so we’re fine. So when you do get those questions, they tend to be more in financial services particularly, and the last step, it is somewhat in Commercial Services North America. It does differ dramatically DU by DU, if you look at our results for the first and second quarter, you would see some of that impact.

Operator

You final question comes from Shlomo Rosenbaum - Stifel Nicolaus.

Shlomo Rosenbaum - Stifel Nicolaus & Company, Inc.

I just want to go a little bit more over the liquidity. Can you go over, you got down to the $150 million, would that be the actual cash balance on the balance sheet if you were to go as a ongoing concern making those assumptions or would there be any income in having to repeat some of the cash from overseas to pay for some of the puts and cash burn?

Eddie R. Munson

That’s the cash on the balance sheet. Obviously, we’re doing that. We don’t have the time to get into that on the call. We’re looking at the cash around the world. We’re constantly moving cash around from country to country. But that would be the cash on the balance sheet.

Shlomo Rosenbaum - Stifel Nicolaus & Company, Inc.

So you wouldn’t have to burn some of the cash beyond that in order to repatriate into.

F. Edwin Harbach

Purchasing costs at that level are relatively minor. There are some purchasing costs and some taxes associated with that. Part of the thing that we were talking about before, I didn’t go into much detail about some of the restructuring we are doing. Simplifying our entities helps make that easier. There’s a little friction but not significant.

Shlomo Rosenbaum - Stifel Nicolaus & Company, Inc.

On an operating level, are there some one-time items or some items in the first half that you can compare to the first half of 2009 that might not pop up? Maybe some tax payments or something that might actually boost you liquidity beyond the $150 million?

F. Edwin Harbach

I certainly hope our tax payments are lower in 2009 than they are in 2008. You have been kind so far in not asking how somebody can have year-to-date taxes higher than net income. I certainly want to reduce taxes. Eddie mentioned accruals before. I think accruals should go down as we settle in more. There’s also, I think we put it in the conversation we had earlier in the queue but there were some severance costs in Q1 this year that we should not have next year.

We are in balance in terms of supply and demand and obviously when I took over in December, we had some things to do. We changes some strategy, we do some headcount. We took the charge for that mostly last year, not completely. We took some of the charges in Q1 and Q2 of this year from that P&L standpoint. We certainly paid a lot of that cash in the first and second quarter.

There are a number of things related to the turnaround in business where we took some charges in the first part of this year and paid some cash in the first part of this year that I don’t think will be replicated in the first half of 2009. I am sure we will have our challenges then.

Shlomo Rosenbaum - Stifel Nicolaus & Company, Inc.

On the global tax equalization, was that a true up, but you are still doing that, making sure your employees are paying the same taxes all over. Was it just catching up on that?

Eddie R. Munson

Yes, that is fair. We are at an amount that we are no longer subjected to pay and we do continue to monitor that amount, that liability.

F. Edwin Harbach

Let me wrap up because we are running out of time but I do appreciate your questions. Thank you for joining us and we look forward to updating you on the progress and near future. In the meantime, if you have questions and we didn’t get to it today or you want to talk about something, go ahead and contact Denise Stone or Aaron Bedy, at 908-607-2100 and media contacts are also noted in our press release. Again, thank you very much for joining us. I look forward to talking to you over the next several days and weeks.

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