e10vq

/s/ Alan J. Herrick

Alan J. Herrick

Chief Executive Officer

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PRzQncAB/j22jNwqTi1bcPalTuKNjmJDRm0mjgCCwsIV9hCGeZyUqXsSyNvQoV1A 5GZdLGiPS9CLrNJtGby6eQ== 0000950135-07-003622.txt : 20070612 0000950135-07-003622.hdr.sgml : 20070612 20070612171754 ACCESSION NUMBER: 0000950135-07-003622 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20070612 DATE AS OF CHANGE: 20070612 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAPIENT CORP CENTRAL INDEX KEY: 0001008817 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 043130648 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-28074 FILM NUMBER: 07915705 BUSINESS ADDRESS: STREET 1: 25 FIRST STREET CITY: CAMBRIDGE STATE: MA ZIP: 02141 BUSINESS PHONE: (617) 621-0200 MAIL ADDRESS: STREET 1: 25 FIRST STREET CITY: CAMBRIDGE STATE: MA ZIP: 02141 10-Q 1 b65658q2e10vq.htm SAPIENT CORPORATION e10vq

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 June 30, 2006


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

For the transition period from to

Commission file number: 0-28074

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.)

25 First Street, Cambridge, MA		02141
(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 day

Yes o No þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

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 June 7, 2007

Common Stock, $0.01 par value per share		123,679,495 shares

SAPIENT CORPORATION

INDEX


	Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated and Condensed Balance Sheets as of June 30, 2006 and December 31, 2005 (restated)		8
Consolidated and Condensed Statements of Operations for the Three and Six Months Ended June 30, 2006 and 2005 (restated)		9
Consolidated and Condensed Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005 (restated)		10
Notes to Consolidated and Condensed Financial Statements (restated)		11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		35
Item 3. Quantitative and Qualitative Disclosures About Market Risk		50
Item 4. Controls and Procedures		50
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors		51
Item 6. Exhibits		57
Signatures		58
Ex-10.1 Sapient Corporation Winning Performance Plan
Ex-10.2 2006 Global Performance Bonus Plan
Ex-10.3 Form of Restricted Stock Units Agreement (initial grants)
Ex-10.4 Form of Restricted Stock Units Agreement (annual grants)
Ex-31.1 Certification of CEO
Ex-31.2 Certification of CFO
Ex-32.1 Certification of CEO
Ex-32.2 Certification of CFO

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, 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors” and elsewhere 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.

EXPLANATORY NOTE

In this Form 10-Q, Sapient Corporation (“Sapient” or the “Company”):

(a) restates its Consolidated and Condensed Balance Sheets as of as of December 31, 2005 (“Q4 2005”), and the related Consolidated and Condensed Statements of Operations for the three months ended and six months ended June 30, 2005 and the Consolidated and Condensed Statement of Cash Flows for the six months ended June 30, 2005; and

(b) amends its “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) for the foregoing periods.

Concurrent with the filing of this Form 10-Q, the Company is filing its quarterly report Form 10-Q for the three months ended and nine months ended September 30, 2006 (“Q3 2006”) and an annual report on Form 10-K for the year ended December 31, 2006 (“2006 Form 10-K”).

The Company has restated its Consolidated Balance Sheet as of December 31, 2005, and the related Consolidated Statements of Operations and Cash Flows, and Changes in Stockholders’ Equity, for each of the years ended December 31, 2005 and 2004 in its 2006 Form 10-K.

Previously filed annual reports on Form 10-K and quarterly reports on Form 10-Q have not been amended and should not be relied upon.

Background of the Restatement

As announced on August 8, 2006, the Audit Committee of Sapient’s Board of Directors (“Audit Committee”) initiated a voluntary, independent investigation into the Company’s historical stock-based compensation practices after a management review discovered irregularities in certain past stock option grants for the periods 1996 through 2001. One committee member who had been on the Compensation Committee during this period recused himself from participation.

On November 20, 2006, the Audit Committee announced that the results of the internal investigation indicated a lack of controls and documentation, principally prior to 2004, around the Company’s stock-based compensation granting process, as well as irregularities relating to pricing of certain grants of options to purchase the Company’s common stock (“options” or “stock options”) awarded principally during the period from 1996 through 2001 (the “Identified Period”). With the exception of the 60-day and 7-day pricing, which occurred primarily in 1996 and 1997, the Audit Committee did not find any evidence of a systematic effort to intentionally backdate stock option grants on a large scale. The Audit Committee’s report included the following key findings:


	•	The investigation found no misconduct by any of the individuals who were serving on the Company’s management team as of the conclusion of the Audit Committee’s internal investigation.

	•	The investigation found that the Company’s former CEO, Jerry Greenberg, former CFO, Susan Cooke and former General Counsel, Deborah Gray, participated, to varying degrees, in issuing these grants. All three participated in the authorization of the 60-day pricing practice and in certain instances of targeted pricing. Additionally, the investigation found that the former CFO and former General Counsel participated in the authorization of re-pricing and "look-back" pricing of grants in connection with certain of the Company’s acquisitions in 1998 and 1999. The investigation was inconclusive on whether the former CEO and former General Counsel fully understood the accounting and disclosure ramifications of these practices. The Audit Committee found evidence that the former CFO knew that certain practices had accounting and disclosure implications but failed to take steps to ensure that the accounting for those practices was proper. The former CEO, who received no stock options in the 15 years since his co-founding Sapient, resigned from the Company in October 2006. The former CFO also resigned then. The former General Counsel, Deborah Gray, left the Company in January 2002. Stuart Moore, a member of the Board of Directors, who co-founded Sapient and was co-CEO until June 2006, never received stock options and did not participate in issuing these grants.

	•	Some members of current management received options that, in some cases, had prices corresponding to a date earlier than the measurement date for accounting purposes. None of the members of current management were in a position at the time to approve their own option grants.


	•	Certain outside members of the Board of Directors received options that had prices corresponding to a date other than the measurement date for accounting purposes. In some instances Board members receiving these grants had executed written consents approving the grants, although none of the members of the Board of Directors directed the pricing of options they received or the pricing of any other options.

The Audit Committee and Management concluded that the actual “measurement date,” as that term is defined in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), was different from the measurement date recorded by the Company for a number of grants of options to purchase the Company’s common stock (“options” or “stock options”) which were awarded to both “Section 16” officers and directors and other employees. As a result of having identified these incorrect measurement dates and other errors described below in accounting for stock option grants, management concluded that the Company’s previously issued financial statements should be restated. The issues identified by the investigation fall into the following main categories:

(a) Lack of certain documentation for Company-wide grants. With respect to certain of the grants that were typically made on an annual or semi-annual basis to all eligible rank-and-file employees in the Company (“Company-wide grants”), there is a lack of certain supporting documentation.

(b) Grants without proper authorization. These grants which were primarily to new hires or in connection with promotions were made: (i) by individuals who may not have been explicitly delegated the authority to make grants under the relevant plans (e.g., grants were authorized by one of the Company’s two co-CEOs, during a period when approval from both co-CEOs was required under the terms of the plans); (ii) in amounts beyond the ranges authorized by the Compensation Committee; or (iii) without Compensation Committee approval, when such approval was required (e.g., a grant to an individual who had been designated as a Section 16 officer).

(c) 7-day, 15-day or 60-day pricing for grants. Certain grants were priced at the lowest quoted market price in the 7 days, 15 days or 60 days following the date of grant. It appears that this practice occurred primarily in 1996 and 1997.

(d) Targeted pricing. Certain grants were made to an individual or small group of individuals in which the measurement date recorded by the Company preceded the appropriate measurement date as determined under APB No. 25, and in which it appears that the earlier measurement date was chosen in part because pricing was favorable on that date.

(e) Grants issued in connection with business acquisitions. For grants issued to employees who joined the Company in connection with two acquisitions which occurred in 1999, it was determined that both acquisitions granted options priced utilizing a 30-day lookback where the Company priced the options at the lowest stock price in the 30-day period after the acquisition. The Company determined that options granted in connection with one acquisition in 1998 were repriced.

(f) Promotion grants. In certain instances, the Company priced grants as of the date the promotion was authorized, rather than the date that the terms of the stock option grant (including the number of shares to be granted) were finalized. In some instances, this practice resulted in more favorable prices and in some instances it did not result in more favorable pricing.

(g) Grants authorized by written consent. These grants, primarily to senior personnel within the Company, and in one instance in 1999 to outside Directors on the Board, were authorized by written consents bearing a date which was used to establish the exercise price, and which was significantly earlier than the date the written consents were fully executed.

(h) Administrative errors. These grants comprise several instances where stock-based compensation grants were mispriced due to what appears to be administrative or clerical errors, such as failing to correctly input a date from a grant list.

Upon the conclusion of the internal investigation, the Company completed an assessment of the appropriate measurement dates and the related accounting for the matters described above.

The Company is restating the financial statements and related disclosures described above in accordance with accounting principles generally accepted in the United States to record the following:


	•	Non-cash, stock-based compensation expense for the difference between the option price and the quoted market price on the measurement date;

	•	Other immaterial adjustments that were not previously recorded; and

	•	Related tax effects for all items.

Summary of the Restatement Adjustments

The restatement principally reflects additional stock-based compensation expense and related tax effects pertaining to the Company’s historical stock-based compensation practices under APB No. 25, the Company’s accounting method for periods prior to January 1, 2006.

The following is a summary of the pre-tax compensation expense associated with the Adjusted Options to be recognized in each period from 1996 to 2005 (in thousands):


	Compensation
Period	Expense

1996		$	51
1997			567
1998			2,896
1999			6,251
2000			13,333
2001			10,663
2002			6,835
2003			3,762
2004			2,388
2005			288

Total		$	47,034

Of the $288,000 of compensation expense related to 2005, $110,000 and $225,000 were recorded in the three and six months ended June 30, 2005, respectively.

Related Tax Adjustments

The Company reviewed the income tax effect associated with the Adjusted Options. Certain of the Adjusted Options were originally intended to be Incentive Stock Options (“ISOs”), under U.S. tax regulations. However, by definition, ISOs may not be granted with an exercise price less than the fair market value of the underlying stock on the date of grant. Due to the impact of the measurement date changes on the qualified status of affected ISOs, they no longer qualify as ISOs under the regulations. Therefore, the affected ISOs were accounted for as if they were non-qualified stock options for income tax accounting purposes. The Company recorded a liability for the unpaid income and employment taxes plus potential penalties and interest based upon the change in status of the affected options. The Company recorded a liability for the taxes, penalties and interest due to based upon the change in status of the options in the amount of $17.8 million. The Company recorded a reversal of this accrual in the amount of $16.5 million due to the expiration of the tax statute of limitations for years 2002 and prior. These adjustments resulted in a net charge to income of $1.3 million over the period 1996 to 2006. The net charge (benefit) recorded by the Company for these liabilities for the period indicated was as follows :



	Net payroll tax related
Year	charge (Benefit)
	(In thousands)
1997	$	1
1998		429
1999		4,224
2000		11,070
2001		773
2002		(429	)
2003		(4,143	)
2004		(10,640	)
2005		(352	)
2006		366

Total	$	1,299

Of the $366,000 net charge recorded during 2006, $34,000 and $238,000 was recorded in the three and six months ended June 30, 2006, respectively. Of the $(352,000) net benefit recorded during 2005, $(595,000) and $(572,000) were recorded in the three and six months ended June 30, 2005, respectively.

Because the Company has a full valuation allowance against its deferred tax assets in the U.S., the income tax benefit of stock-based compensation adjustments described above was not material.

The following table sets forth the net impact of the Company’s restatement and the related tax effects as a result of historical stock option practices, as well as other immaterial adjustments unrelated to historical stock option practices that were previously unrecorded. The Company recorded other immaterial adjustments that were not previously recorded in the financial statements which consisted primarily of corrections to restructuring related lease obligations, adjustments to interest income and other miscellaneous adjustments. The pre-tax impact of all adjustments are set forth below:


			(Decrease)
			Increase to Net
Period			Earnings
			(in thousands)
2003 and prior			$	(57,438	)
2004				8,483
First quarter 2005	(247	)
Second quarter 2005	108
Third quarter 2005	(891	)
Fourth quarter 2005	1,731

Total 2005				701
First quarter 2006				(546	)

Total impact through first quarter of 2006			$	(48,800	)

The following table is a summary of all restatement amounts included in the cumulative adjustment to opening Accumulated Deficit as of January 1, 2004:


			Net Payroll Tax Related
	Compensation		Charge			Other
Period	Expense		(Benefit)			Adjustments			Total Adjustment
			(in thousands)
1996	$	51	$	—		$	—		$	51
1997		567		1			—			568
1998		2,896		429			—			3,325
1999		6,251		4,224			—			10,475
2000		13,333		11,070			—			24,403
2001		10,663		773			756			12,192
2002		6,835		(429	)		415			6,821
2003		3,762		(4,143	)		(16	)		(397	)

Cumulative Adjustment to Opening Accumulated Deficit as of January 1, 2004	$	44,358	$	11,925		$	1,155		$	57,438

SAPIENT CORPORATION

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED AND CONDENSED BALANCE SHEETS


	June 30,			December 31,
	2006			2005
				As Restated
	Unaudited
	(In thousands, except
	per share and share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	47,660		$	69,948
Marketable securities		48,003			86,288
Restricted cash, current portion		327			319
Accounts receivable, less allowance for doubtful accounts of $2,135 and $887, at June 30, 2006 and December 31, 2005, respectively		87,443			60,016
Unbilled revenues		30,033			16,849
Prepaid expenses and other current assets		20,628			10,397

Total current assets		234,094			243,817
Restricted cash, net of current portion		1,290			1,217
Property and equipment, net		23,770			20,561
Purchased intangible assets, net		9,233			2,940
Goodwill		38,929			11,770
Other assets		9,072			5,746

Total assets	$	316,388		$	286,051


LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	7,756		$	5,396
Accrued compensation		21,722			25,337
Accrued restructuring costs, current portion		5,078			6,565
Deferred revenues, current portion		11,374			5,559
Other accrued liabilities		45,214			21,432

Total current liabilities		91,144			64,289
Accrued restructuring costs, net of current portion		13,034			15,010
Deferred revenues, net of current portion		994			1,154
Other long-term liabilities		5,434			3,507

Total liabilities		110,606			83,960
Commitments and contingencies (Note 6)
Redeemable common stock, par value $0.01 per share, 224,469 and 313,943 issued and outstanding at June 30, 2006 and December 31, 2005, respectively		480			671
Stockholders’ equity:
Preferred stock, par value $0.01 per share, 5,000,000 authorized and none issued at June 30, 2006 and December 31, 2005		—			—
Common stock, par value $0.01 per share, 200,000,000 shares authorized, 131,785,758 and 130,478,206 shares issued at June 30, 2006 and December 31, 2005, respectively		1,318			1,304
Additional paid-in capital		542,355			542,028
Treasury stock, at cost, 8,923,425 and 6,951,772 shares at June 30, 2006 and December 31, 2005, respectively		(31,830	)		(18,601	)
Deferred compensation		—			(11,927	)
Accumulated other comprehensive income		2,389			1,051
Accumulated deficit		(308,930	)		(312,435	)

Total stockholders’ equity		205,302			201,420

Total liabilities, redeemable common stock and stockholders’ equity	$	316,388		$	286,051

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						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
				As Restated						As Restated
	(Unaudited)
	(In thousands, except per share amounts)
Revenues:
Service revenues	$	98,003		$	74,940		$	185,097		$	150,214
Reimbursable expenses		3,378			2,480			6,347			6,026

Total gross revenues		101,381			77,420			191,444			156,240

Operating expenses:
Project personnel expenses		66,232			42,465			124,173			87,912
Reimbursable expenses		3,378			2,480			6,347			6,026

Total project personnel expenses and reimbursable expenses		69,610			44,945			130,520			93,938
Selling and marketing expenses		4,589			3,720			11,422			7,260
General and administrative expenses		24,244			20,826			47,559			41,353
Restructuring and other related charges		334			5,367			1,148			5,491
Amortization of intangible assets		844			212			1,881			342

Total operating expenses		99,621			75,070			192,530			148,384

Income (loss) from operations		1,760			2,350			(1,086	)		7,856
Interest and other income		2,160			1,125			3,540			2,139

Income from continuing operations before income taxes, discontinued operations and cumulative effect of accounting change		3,920			3,475			2,454			9,995
Provision for income taxes		3,742			550			3,504			1,533

Income (loss) from continuing operations before discontinued operations and cumulative effect of accounting change		178			2,925			(1,050	)		8,462
(Loss) income from discontinued operations		(65	)		(53	)		(433	)		314
Gain on disposal of discontinued operations (net of tax provision of $342)		4,834			—			4,834			—

Income before cumulative effect of accounting change		4,947			2,872			3,351			8,776
Cumulative effect of accounting change		—			—			154			—

Net income	$	4,947		$	2,872		$	3,505		$	8,776

Basic income (loss) per share from continuing operations	$	0.00		$	0.02		$	(0.01	)	$	0.07

Diluted income (loss) per share from continuing operations	$	0.00		$	0.02		$	(0.01	)	$	0.07

Basic net income per share	$	0.04		$	0.02		$	0.03		$	0.07

Diluted net income per share	$	0.04		$	0.02		$	0.03		$	0.07

Weighted average common shares outstanding		124,373			124,427			124,273			124,304
Weighted average dilutive common share equivalents		2,725			5,424			—			5,559

Weighted average common shares and dilutive common share equivalents		127,098			129,851			124,273			129,863

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

SAPIENT CORPORATION

CONSOLIDATED AND CONDENSED STATEMENTS OF CASH FLOWS


	Six Months Ended
	June 30,
	2006			2005
				As Restated
	(Unaudited)
	(In thousands)
Cash flows from operating activities:
Net income	$	3,505		$	8,776
Adjustments to reconcile net income to net cash used in operating activities:
Loss recognized on disposition of fixed assets		84			1
Depreciation expense		4,673			2,791
Amortization of purchased intangible assets		1,881			342
Deferred income taxes		494			188
Provision for (recovery of) allowance for doubtful accounts, net		1,258			(609	)
Stock-based compensation expense		5,559			269
Gain on disposal of discontinued operations		(4,834	)		—
Cumulative effect of accounting change		(154	)		—
Changes in operating assets and liabilities, net of acquisitions and dispostions:
Accounts receivable		(19,628	)		2,858
Unbilled revenues		(12,639	)		(8,016	)
Prepaid expenses and other current assets		(7,998	)		(4,372	)
Other assets		(3,142	)		5
Accounts payable		(2,027	)		886
Accrued compensation		(3,956	)		471
Accrued restructuring costs		(3,442	)		112
Other accrued liabiliites		19,634			(555	)
Deferred revenues		(515	)		(4,686	)
Other long-term liabilities		693			1,517

Net cash (used in) provided by operating activities		(20,554	)		(22	)


Cash flows from investing activities:
Cash paid for acquisitions, including transaction costs, net of cash received		(26,664	)		(13,334	)
Cash received for sale of discontinued operations, net of cash disposed of and payment to minority stockholders		5,142			—
Purchases of property and equipment and cost of internally developed software		(6,078	)		(9,347	)
Sales and maturities of marketable securities		83,301			39,542
Purchases of marketable securities		(44,491	)		(35,959	)
Restricted cash		(9	)		2,190

Net cash provided by (used in) investing activities		11,201			(16,908	)

Cash flows from financing activities:
Principal payments under capital lease obligations		(68	)		—
Proceeds from stock option and purchase plans		4,523			3,211
Repurchases of common stock		(16,957	)		(2,604	)

Net cash (used in) provided by financing activities		(12,502	)		607
Effect of exchange rate changes on cash and cash equivalents		(433	)		(216	)

Decrease in cash and cash equivalents		(22,288	)		(16,539	)
Cash and cash equivalents, at beginning of period		69,948			66,779

Cash and cash equivalents, at end of period	$	47,660		$	50,240


Supplemental Cash Flow Information:
Non-cash investing transactions:
Issuance of common stock with acquisition (see Note 3)	$	5,855		$	3,310

Note receivable related to the sale of HWT (see Note 15)	$	1,350		$	—

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

SAPIENT CORPORATION

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying unaudited consolidated and condensed financial statements have been prepared by Sapient Corporation (the “Company”) 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 consolidated financial statements and notes thereto for the year ended December 31, 2006 included in the Company’s Annual Report on Form 10-K, which was filed concurrently with this Form 10-Q. 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. The results of operations for the three and six months ended June 30, 2006 are not necessarily indicative of the results to be expected for any future period or the full fiscal year.

Certain amounts in previously issued financial statements have been reclassified to conform to the current presentation. The results of discontinued operations for the three and six months ended June 30, 2005 are presented separately in the condensed and consolidated statements of operations to conform with the presentation for the three and six months ended June 30, 2006.

On May 2, 2006, the Company sold 100% of its investment in HWT, Inc. (“HWT”), the Company’s majority-owned, fully consolidated subsidiary. On January 3, 2006, the Company purchased 100% of the outstanding shares of Planning Group International, Inc. (“PGI”). The acquisition of PGI was accounted for under the purchase method of accounting and, accordingly, the results of operations have been included in the Company’s consolidated financial statements as of the acquisition date. On June 1, 2005, the Company purchased Business Information Solutions, LLC (“BIS”). The acquisition of BIS was accounted for under the purchase method of accounting and, accordingly, the results of operations have been included in the consolidated financial statements since the date of acquisition.

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. Restatement of Unaudited Condensed Consolidated Financial Statements


	•	The investigation found no misconduct by any of the individuals who were serving on the Company’s management team as of the conclusion of the Audit Committee’s internal investigation.

	•	The investigation found that the Company’s former CEO, Jerry Greenberg, former CFO, Susan Cooke and former General Counsel, Deborah Gray, participated, to varying degrees, in issuing these grants. All three participated in the authorization of the 60-day pricing practice and in certain instances of targeted pricing. Additionally, the investigation found that the former CFO and former General Counsel participated in the authorization of re-pricing and “look-back” pricing of grants in connection with certain of the Company’s acquisitions in 1998 and 1999. The investigation was inconclusive on whether the former CEO and former General Counsel fully understood the accounting and disclosure ramifications of these practices. The Audit Committee found evidence that the former CFO knew that certain practices had accounting and disclosure implications but failed to take steps to ensure that the accounting for those practices was proper. The former CEO, who received no stock options in the 15 years since his co-founding Sapient, resigned from the Company in October 2006. The former CFO also resigned then. The former General Counsel, Deborah Gray, left the Company in January 2002. Stuart Moore, a member of the Board of Directors, who co-founded Sapient and was co-CEO until June 2006, never received stock options and did not participate in issuing these grants.

	•	Some members of current management received options that, in some cases, had prices corresponding to a date earlier than the measurement date for accounting purposes. None of the members of current management were in a position at the time to approve their own option grants.

SAPIENT CORPORATION


	•	Certain outside members of the Board of Directors received options that had prices corresponding to a date other than the measurement date for accounting purposes. In some instances Board members receiving these grants had executed written consents approving the grants, although none of the members of the Board of Directors directed the pricing of options they received or the pricing of any other options.

SAPIENT CORPORATION

Upon the conclusion of the internal investigation, the Company completed an assessment of the appropriate measurement dates and the related accounting for the matters described above.

The Company is restating the financial statements and related disclosures described above in accordance with accounting principles generally accepted in the United States to record the following:


	•	Non-cash stock-based compensation expense for the difference between the option price and the quoted market price on the measurement date;

	•	Other immaterial adjustments that were not previously recorded; and

	•	Related tax effects for all items.

Summary of the Restatement Adjustments

The following is a summary of the pre-tax compensation expense associated with the Adjusted Options to be recognized in each period from 1996 to 2005 (in thousands):


	Compensation
Period	Expense

1996	$		51
1997			567
1998			2,896
1999			6,251
2000			13,333
2001			10,663
2002			6,835
2003			3,762
2004			2,388
2005			288

Total		$	47,034

Of the $288,000 of compensation expense related to 2005, $110,000 and $225,000 were recorded in the three and six months ended June 30, 2005, respectively.

SAPIENT CORPORATION

Related Tax Adjustments

The Company reviewed the tax effect associated with the Adjusted Options. Certain of the Adjusted Options were originally intended to be Incentive Stock Options (“ISOs”), under U.S. tax regulations. However, by definition, ISOs may not be granted with an exercise price less than the fair market value of the underlying stock on the date of grant. Due to the impact of the

SAPIENT CORPORATION

measurement date changes on the qualified status of affected ISOs, they may no longer qualify as ISOs under the regulations. Therefore, the affected ISOs were accounted for as if they were non-qualified stock options for income tax accounting purposes. The Company recorded a liability for the unpaid income and employment taxes plus potential penalties and interest based upon the change in status of the affected options. The Company recorded a liability for the taxes, penalties and interest due to based upon the change in status of the options in the amount of $17.8 million. The Company recorded a reversal of this accrual in the amount of $16.5 million due to the expiration of the tax statute of limitations for years 2002 and prior. These adjustments resulted in a net charge to income of $1.3 million over the period 1996 to 2006. The net charge recorded by the Company for these liabilities is as follow (in thousands):



	Net payroll tax related
Year	charge (Benefit)
	(In thousands)
1997	$	1
1998		429
1999		4,224
2000		11,070
2001		773
2002		(429	)
2003		(4,143	)
2004		(10,640	)
2005		(352	)
2006		366

Total	$	1,299

Because the Company has a full valuation allowance against its deferred tax assets in the U.S., the income tax benefit of stock-based compensation adjustments described above was not material to any of the periods presented in this Form 10-Q.

Restatement Adjustments


			(Decrease)
			Increase to Net
Period			Earnings

			(in thousands)
2003 and prior			$	(57,438	)
2004				8,483
First quarter 2005	(247	)
Second quarter 2005	108
Third quarter 2005	(891	)
Fourth quarter 2005	1,731

Total 2005				701
First quarter 2006				(546	)

Total impact through first quarter of 2006			$	(48,800	)

SAPIENT CORPORATION

The following table is a summary of all restatement amounts included in the cumulative adjustment to opening Accumulated Deficit as of January 1, 2004:


			Net Payroll
	Compensation		Tax Related			Other			Total
Period	Expense		Charge (Benefit)			Adjustments			Adjustment
	(in thousands)
1996	$	51	$	—		$	—		$	51
1997		567		1			—			568
1998		2,896		429			—			3,325
1999		6,251		4,224			—			10,475
2000		13,333		11,070			—			24,403
2001		10,663		773			756			12,192
2002		6,835		(429	)		415			6,821
2003		3,762		(4,143	)		(16	)		(397	)

Cumulative Adjustment to Opening Accumulated Deficit as of January 1, 2004	$	44,358	$	11,925		$	1,155		$	57,438

The following table illustrates the effect of the restatement adjustments on the Company’s pro forma net income and pro forma net income per share if the Company had recorded compensation expense based on the revised grant dates, under the fair value accounting method defined by SFAS No. 123 for three and six months ended June 30, 2005.


	For the three Months ended June 30, 2005									For the six Months ended June 30, 2005
	As Reported			Adjustments			As Restated			As Reported			Adjustments			As Restated
	(in thousands, except per share data)
Income from continuing operations	$	2,817		$	108		$	2,925		$	8,601		$	(139	)	$	8,462
Add back: Stock-based compensation expense, included in income from continuing operations, as reported		22			110			132			44			225			269

Deduct: Stock-based employee compensation expense determined under fair value based method for all awards		(3,004	)		(74	)		(3,078	)		(5,940	)		(127	)		(6,067	)


Pro forma income (loss) from continuing operations	$	(165	)	$	144		$	(21	)	$	2,705		$	(41	)	$	2,664


Income per share from continuing operations:
Basic	$	0.02		$	0.00		$	0.02		$	0.07		$	(0.00	)	$	0.07

Diluted	$	0.02		$	0.00		$	0.02		$	0.07		$	(0.00	)	$	0.07

Pro forma income (loss) per share from continuing operations:
Basic	$	(0.00	)	$	0.00		$	(0.00	)	$	0.02		$	(0.00	)	$	0.02

Diluted	$	(0.00	)	$	0.00		$	(0.00	)	$	0.02		$	(0.00	)	$	0.02


Net Income	$	2,764		$	108		$	2,872		$	8,915		$	(139	)	$	8,776

Add back:
APB 25 compensation expense, net of tax effects		22			110			132			44			225			269
Deduct:
FAS 123 historical compensation expense, net of tax effects		(3,004	)		(74	)		(3,078	)		(5,940	)		(127	)		(6,067	)

Net income – FAS 123 pro forma	$	(218	)	$	144		$	(74	)	$	3,019		$	(41	)	$	2,978


Net income per share:
Basic	$	0.02		$	0.00		$	0.02		$	0.07		$	(0.00	)	$	0.07


Diluted	$	0.02		$	0.00		$	0.02		$	0.07		$	(0.00	)	$	0.07

Pro forma net income (loss) per share
Basic	$	(0.00	)	$	0.00		$	(0.00	)	$	0.02		$	(0.00	)	$	0.02


Diluted	$	(0.00	)	$	0.00		$	(0.00	)	$	0.02		$	(0.00	)	$	0.02

The following tables present the effect of the restatement adjustments by financial statement line item for the Consolidated and Condensed Statements of Operations, Balance Sheet, and Statements of Cash Flows for the period indicated.

SAPIENT CORPORATION

UNAUDITED CONSOLIDATED AND CONDENSED STATEMENTS OF OPERATIONS


	For the Three Months Ended June 30, 2005
	(Unaudited)
				Stock-Based
	(1)			Compensation			Other			Tax			As
	As Reported			Adjustments			Adjustments			Adjustments			Restated
	(in thousands, except per share data)
Revenues :

Service revenue	$	74,940		$	—		$	—		$	—		$	74,940
Reimbursable expenses		2,480			—			—			—			2,480

Total gross revenues		77,420			—			—			—			77,420

Operating expenses:
Project personnel expenses		42,867			52			3			(457	)		42,465
Reimbursable expenses		2,480			—			—			—			2,480

Total project personnel expenses and reimbursable expenses		45,347			52			3			(457	)		44,945
Selling and marketing expenses		3,708			24			—			(12	)		3,720
General and administrative expenses		21,061			34			(143	)		(126	)		20,826
Restructuring and other related charges		5,250			—			117			—			5,367
Amortization of intangible assets		212			—			—			—			212
Stock-based compensation		22			—			(22	)		—			—

Total operating expenses		75,600			110			(45	)		(595	)		75,070

Income from operations		1,820			(110	)		45			595			2,350
Interest and other income		1,484			—			(359	)		—			1,125

Income before income taxes, discontinued operations and accumulated effect of accounting change		3,304			(110	)		(314	)		595			3,475
Provision for income taxes		487			—			63			—			550

Income from continuing operations before discontinued operations and cumulative effect of accounting change		2,817			(110	)		(377	)		595			2,925
Loss from discontinued operations		(53	)		—			—			—			(53	)

Net income	$	2,764		$	(110	)	$	(377	)	$	595		$	2,872

Basic income per share from continuing operations	$	0.02											$	0.02

Diluted income per share from continuing operations	$	0.02											$	0.02

Basic net income per share	$	0.02											$	0.02

Diluted net income per share	$	0.02											$	0.02

Weighted average common shares		124,427			—			—			—			124,427
Weighted average dilutive common share equivalents		5,185			239			—			—			5,424

Weighted average common shares and dilutive common share equivalents		129,612			239			—			—			129,851


(1)		As reported amounts have been adjusted to account for discontinued operations related to HWT, see footnote 15.

SAPIENT CORPORATION

UNAUDITED CONSOLIDATED AND CONDENSED STATEMENTS OF OPERATIONS


	For the Six Months Ended June 30, 2005
			Stock-Based
	(1)		Compensation			Other			Tax			As
	As Reported		Adjustments			Adjustments			Adjustments			Restated
	(in thousands, except per share data)
Revenues:
Service revenues	$	150,092	$	—		$	122		$	—		$	150,214
Reimbursable expenses		6,026		—			—			—			6,026

Total gross revenues		156,118		—			122			—			156,240

Operating expenses:
Project personnel expenses		88,230		118			2			(438	)		87,912
Reimbursable expenses		6,026		—			—			—			6,026

Total project personnel expenses and reimbursable expenses		94,256		118			2			(438	)		93,938
Selling and marketing expenses		7,216		53			—			(9	)		7,260
General and administrative expenses		41,432		54			(8	)		(125	)		41,353
Restructuring and other related charges		5,250		—			241			—			5,491
Amortization of intangible assets		341		—			1			—			342
Stock-based compensation		44		—			(44	)		—			—

Total operating expenses		148,539		225			192			(572	)		148,384

Income from operations		7,579		(225	)		(70	)		572			7,856
Interest and other income		2,348		—			(209	)		—			2,139

Income before income taxes and discontinued operations		9,927		(225	)		(279	)		572			9,995
Provision for income taxes		1,326		—			207			—			1,533

Income from continuing operations before discontinued operations and cumulative effect of accounting change		8,601		(225	)		(486	)		572			8,462
Income from discontinued operations		314		—			—			—			314

Net income	$	8,915	$	(225	)	$	(486	)	$	572		$	8,776

Basic income per share from continuing operations	$	0.07										$	0.07

Diluted income per share from continuing operations	$	0.07										$	0.07

Basic net income per share	$	0.07										$	0.07

Diluted net income per share	$	0.07										$	0.07

Weighted average common shares		124,304		—			—			—			124,304
Weighted average dilutive common share equivalents		5,249		310			—			—			5,559

Weighted average common shares and dilutive common share equivalents		129,553		310			—			—			129,863


(1)		As reported amounts have been adjusted to account for discontinued operations related to HWT, see Footnote 15.

SAPIENT CORPORATION

UNAUDITED CONSOLIDATED AND CONDENSED BALANCE SHEET


	As of December 31, 2005
	APB 25 – Historical Accounting Method
				Stock-Based
	As			Compensation			Other			Tax			As
	Reported			Adjustments			Adjustments			Adjustments			Restated
	(in thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents	$	69,948		$	—		$	—		$	—		$	69,948
Marketable securities		86,288			—			—			—			86,288
Restricted cash, current portion		319			—			—			—			319
Accounts receivable		60,062			—			(46	)		—			60,016
Unbilled revenues		16,849			—			—			—			16,849
Prepaid expenses and other current assets		10,483			—			(86	)		—			10,397

Total current assets		243,949			—			(132	)		—			243,817
Restricted cash, net of current portion		1,217			—			—			—			1,217
Property and equipment, net		20,561			—			—			—			20,561
Purchased intangible assets, net		2,940			—			—			—			2,940
Goodwill		11,770			—			—			—			11,770
Other assets		5,746			—			—			—			5,746

Total assets	$	286,183		$	—		$	(132	)	$	—		$	286,051


LIABILITIES, REDEEMABLE COMMON STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,396		$	—		$	—		$	—		$	5,396
Accrued compensation		24,403			—			—			934			25,337
Accrued restructuring costs, current portion		6,565			—			—			—			6,565
Deferred revenue, current portion		5,537			—			22						5,559
Other accrued liabilities		21,264						168			—			21,432

Total current liabilities		63,165			—			190			934			64,289
Accrued restructuring costs, net of current portion		15,010			—			—			—			15,010
Deferred revenues, net of current portion		1,154			—			—			—			1,154
Other long-term liabilities		3,548			—			(41	)		—			3,507

Total liabilities		82,877			—			149			934			83,960
Commitments and contingencies
Redeemable common stock		671			—			—			—			671
Stockholders’ equity:
Preferred stock		—			—			—			—			—
Common stock		1,304			—			—			—			1,304
Additional paid-in-capital		494,556			47,472			—			—			542,028
Treasury stock		(18,601	)		—			—			—			(18,601	)
Deferred compensation		(11,489	)		(438	)		—			—			(11,927	)
Accumulated other comprehensive income		1,046			—			5			—			1,051
Accumulated deficit		(264,181	)		(47,034	)		(286	)		(934	)		(312,435	)

Total stockholders’ equity		202,635			—			(281	)		(934	)		201,420

Total liabilities, redeemable common stock and stockholders’ equity	$	286,183		$	—		$	(132	)	$	—		$	286,051

SAPIENT CORPORATION

UNAUDITED CONSOLIDATED AND CONDENSED STATEMENTS OF CASH FLOWS


	For the Six Months Ended June 30, 2005
	(in thousands)
	(1)			Stock Based			Other			Tax			As
	As Reported			Adjustmens			Adjustments			Adjustments			Restated
Cash flows from operating activities:
Net income	$	8,915		$	(225	)	$	(486	)	$	572		$	8,776
Adjustments to reconcile net income to net cash provided by operating activities:
Loss recognized on disposition of fixed assets		1			—			—			—			1
Depreciation expense		2,791			—			—			—			2,791
Amortization of purchased intangible assets		341			—			1			—			342
Deferred income taxes		188			—			—			—			188
Recovery of allowance for doubtful accounts, net		(609	)		—			—			—			(609	)
Stock-based compensation expense		44			225			—			—			269
Changes in operating assets and liabilities, net of acquisition:
Restricted Cash		2,190			—			(2,190	)		—			—
Accounts receivable		2,858			—			—			—			2,858
Unbilled revenues		(7,894	)		—			(122	)		—			(8,016	)
Prepaid expenses and other current assets		(4,582	)		—			210			—			(4,372	)
Other assets		5			—			—			—			5
Accounts payable		886			—			—			—			886
Other accrued liabilities		(739	)		—			184			—			(555	)
Accrued compensation		1,043			—						(572	)		471
Accrued restructuring costs		(129	)		—			241			—			112
Deferred revenues		(4,686	)		—			—			—			(4,686	)
Other long-term liabilities		1,385			—			132			—			1,517

Net cash provided by (used in) operating activities		2,008			—			(2,030	)		—			(22	)

Cash flows from investing activities:
Cash paid for acquisitions, including transaction costs, net of cash received		(13,334	)		—			—			—			(13,334	)
Purchases of property and equipment and cost of internally developed software		(9,187	)		—			(160	)		—			(9,347	)
Sales and maturities of marketable securities		39,542			—			—			—			39,542
Purchase of marketable securities		(35,959	)		—			—			—			(35,959	)
Restricted cash		—			—			2,190			—			2,190

Net cash used in investing activities		(18,938	)		—			2,030			—			(16,908	)

Cash flows from financing activities
Proceeds from stock option and purchase plans		3,211			—			—			—			3,211
Repurchases of common stock		(2,604	)		—			—			—			(2,604	)

Net cash provided by financing activities		607			—			—			—			607
Effect of exchange rate changes on cash and cash equivalents		(216	)		—			—			—			(216	)

Decrease in cash and cash equivalents		(16,539	)		—			—			—			(16,539	)
Cash and cash equivalents, at beginning of period		66,779			—			—			—			66,779

Cash and cash equivalents, at end of period	$	50,240		$	—		$	—		$	—		$	50,240

Supplemental cash flow information:
Non-cash financing transaction:
Issuance of common stock with acquisition	$	3,310		$	—		$	—		$	—		$	3,310


(1)		As reported amounts have been adjusted to account for discontinued operations related to HWT, see footnote 15.

SAPIENT CORPORATION

3. Acquisitions

On January 3, 2006, the Company purchased 100% of the outstanding shares of Planning Group International, Inc (“PGI”) which specializes in online, off-line and multi-channel marketing strategies and programs. As part of the acquisition, the Company was able to significantly expand its presence regarding marketing services to include advertising, brand development, direct marketing, data mining, paid search, and media planning and buying. As a result of the acquisition, the Company formed a new business unit called Experience Marketing. The acquisition added approximately 160 employees, all of whom became part of the Company’s Experience Marketing operating segment.

Consideration for the acquisition totaled $35.6 million, including transaction costs of $570,000. The consideration consisted of approximately $29.2 million in cash paid at closing and the issuance of 1,306,908 shares of common stock valued at $5.9 million. The acquisition has been treated as a taxable transaction, therefore intangible assets including goodwill are deductible for tax purposes.

The $5.9 million of common stock consideration related to the issuance of 1,306,908 shares of common stock was measured based on the market price of the Company’s common shares ($5.83 per share), adjusted for the resale restriction placed on these common shares. The stock issued as partial consideration for the acquisition contains restrictions as to tradability which lapse with the passage of time at rates of 50%, 25% and 25% on the first, second and third anniversaries, respectively, of the acquisition date. The present value of these restrictions is estimated at approximately $1.8 million.

The Company has recorded the acquisition using the purchase method of accounting and, accordingly, the results of operations of the acquired business have been included in the financial statements of the Company since the date of acquisition.

The final purchase price allocation is as follows:


	Amount
	(in thousands)
Total purchase consideration:
Cash consideration	$	29,215
Fair value of shares issued		5,855
Transaction costs		570

Total purchase consideration	$	35,640


Allocation of the purchase consideration:
Cash	$	3,304
Other current assets		4,459
Property and equipment		2,195
Identifiable intangible assets		8,170
Goodwill		26,168

Total assets acquired	$	44,296


Accounts payable, accrued expenses and other liabilities	$	(7,373	)
Deferred revenue		(1,283	)

Total liabilities assumed	$	(8,656	)

Total allocation of purchase consideration	$	35,640

The following are the identifiable intangible assets acquired and the respective weighted-average useful life over which the assets will be amortized. The order backlog and the non-compete agreements are amortized on a straight-line basis and the customer relationships are being amortized on a revenue-based accelerated model.

SAPIENT CORPORATION


			Weighted -
			Average Useful
	Amount		Life
	(in thousands)		(in years)
Customer relationships	$	5,800		3.5
Order backlog		1,200		1
Non-compete agreements		1,170		5

	$	8,170

The amount assigned to identifiable intangible assets acquired was based on their respective fair values determined using the income approach as of the acquisition date. The income approach is based upon the economic principle of anticipation in that the value of the property is the present value of the expected income that can be generated through the ownership of that property. The excess of the purchase price over the tangible and identifiable intangible assets was recorded as goodwill and amounted to $26.2 million. In accordance with Statement of Financial Accounting Standards (“SFAS”) Statement No. 142, Goodwill and Other Intangible Assets, the goodwill is not being amortized and will be tested for impairment as required at least annually.

The following unaudited pro forma information for the three and six months ended June 30, 2005 assumes the PGI acquisition occurred as of the beginning of that year:


	Three Months Ended
(pro forma, unaudited, in thousands, except per share data)	June 30, 2005

	As Restated
Service revenues	$	81,138
Income from continuing operations	$	2,177
Net income	$	2,124
Basic income per share from continuing operations	$	0.02

Diluted income per share from continuing operations	$	0.02

Basic net income per share	$	0.02

Diluted net income per share	$	0.02


	Six Months Ended
(pro forma, unaudited, in thousands, except per share data)	June 30, 2005

	As Restated
Service revenues	$	162,610
Income from continuing operations	$	6,967
Net income	$	7,281
Basic income per share from continuing operations	$	0.06

Diluted income per share from continuing operations	$	0.05

Basic net income per share	$	0.06

Diluted net income per share	$	0.06

The pro forma information is presented for information purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.

In the second quarter of 2006, the Company paid an additional $183,000 in purchase price consideration related to its acquisition of Business Information Systems, LLC (“BIS”) consummated in June of 2005. The additional consideration is the first of three annual installments. In addition, the Company recorded a current liability and additional goodwill of approximately $991,000 in the second quarter of 2006 related to contingent earn-out consideration associated with the BIS acquisition. This obligation is classified as current and is included in accrued expenses in the accompanying consolidated balance sheet. Lastly, approximately 28.5% of the redeemable common stock, or 89,474 shares, issued as part of the total purchase consideration for BIS vested during the second quarter of 2006 and as a result the Company has reclassified approximately $191,000 of redeemable common stock to additional paid-in capital during the second quarter of 2006.

In May of 2007, the Company amended the terms of its earn-out arrangement with the former owners of BIS. Due to our integration of BIS with our existing segments, we agreed to amend the earn-out, in order to facilitate the calculation of the amount based on what discrete SAP related revenue information is readily available. The amendment provides for year two and year three payments of $700,000 in each period. These payments are due on June 1, 2007 and 2008 with additional potential for performance based payouts of $233,000 per year to be made based on performance against set revenue goals. The amendment approximates what management believes the BIS stockholders would have earned under the original amount if the information to calculate those amounts were readily available. The guaranteed payments will be recorded as an increase to goodwill by $1.4 million as of the execution of the amendment in May of 2007. Additional payments, if any, earned as a result of the performance based payments will results in increase to goodwill at the time of payments. On June 1, 2007 , the Company made a cash payments of $700,000 to the former owners of BIS, decreasing the remaining maximum potential future consideration to $1.2 million.

SAPIENT CORPORATION

4. Stock-Based Compensation

Prior to January 1, 2006, the Company accounted for those plans under the recognition and measurement provisions of APB No. 25. Accordingly, the Company generally recognized compensation expense for employee stock options only when it granted options with an exercise price that was less than the fair market value at the measurement date. Any resulting compensation expense was recognized ratably over the associated service period, which was generally the option vesting term.

Prior to January 1, 2006, the Company provided pro forma disclosure amounts in accordance with SFAS Statement No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure (“SFAS 148”), as if the fair value method defined by SFAS No. 123 had been applied to its stock-based compensation.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R, using the modified prospective application transition method and therefore has not restated prior periods’ results for the transition to SFAS No. 123R. Under this transition method, stock-based compensation expense for the three and six months ended June 30, 2006 includes compensation expense for all stock-based compensation awards granted prior to, but not yet vested, as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS Statement No. 123. Stock-based compensation expense for all share-based payment awards granted since January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R.

The Company recorded the following stock-based compensation expense for the periods set forth below under SFAS 123R in 2006 and APB 25 in 2005:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2005		2006		2005
	As Restated				As Restated
	(In thousands)				(In thousands)
Project personnel	$	1,404	$	53	$	2,814	$	118
Selling and marketing		609		24		1,212		53
General and administrative		623		55		1,533		98

	$	2,636	$	132	$	5,559	$	269

The Company’s unearned stock-based compensation balance of $11.9 million as of January 1, 2006, which was accounted for under APB No. 25, was reclassified against additional paid-in-capital upon the adoption of SFAS No. 123R. The unrecognized expense of restricted awards and employee stock option awards not yet vested at December 31, 2005 will be recognized as expense in operations in the periods after that date, based on their fair value which was determined under the original provisions of SFAS No. 123, as disclosed in the Company’s previous filings.

Stock-based compensation expense associated with our capitalizable costs related to internally developed software was not material for both the three and six months ended June 30, 2006. The Company uses the Black-Scholes valuation model for estimating the fair value of the stock options granted with the following weighted-average assumptions:


	Six Months Ended
	June 30,
	2006
Dividend yield	None
Expected volatility		63.2	%
Average risk-free interest rate		4.79	%
Expected life	6.25 years

The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility is based on the historical volatility of the Company’s common stock over the period commensurate with the expected life of the options. The risk-free interest rate is the U.S. Treasury rate in effect at the time of grant, commensurate with the expected life of the instrument. The expected life calculation is based on the exercise behavior that different employee groups exhibited historically. The fair value per share of the Restricted Awards is equal to the quoted market price of the Company’s common stock on the date of grant. There were no stock options granted during the second quarter of 2006.

SAPIENT CORPORATION

Based on the above assumptions, the weighted-average fair value of stock options granted under the Company’s stock option plans was $3.77 for the first quarter of 2006. There were no stock options granted during the second quarter of 2006. The weighted-average fair value of Restricted Awards grants, measured using the intrinsic value method, was $6.00 for both the three and six months ended June 30, 2006.

The Company recognizes these compensation costs net of a forfeiture rate and recognizes the compensation costs for only those shares expected to vest on a straight-line basis over the requisite service period of the award, which is generally the award’s vesting term of 4 years. The Company estimated the forfeiture rate for the three and six months ended June 30, 2006 based on its historical experience.

The Company has assumed an annualized forfeiture rate based on historical experience. The Company will record additional expense if the actual forfeitures are lower than estimated and will record a recovery of prior expense if the actual forfeitures are higher than estimated. Upon the adoption of SFAS No. 123R, the Company calculated the estimated forfeitures for previously recorded stock-based compensation expense. As a result of this calculation, the Company recorded a cumulative effect of the accounting change that resulted in income of $154,000 and was recognized in the statement of operations in the first quarter of fiscal year 2006.

SFAS No. 123R requires the presentation of pro forma information for the comparative period prior to the adoption as if the Company had accounted for all its employee stock options under the fair value method of the original SFAS No. 123; See Note 2.

SAPIENT CORPORATION

The following table summarizes activity under all stock option plans for the six months ended June 30, 2006:


						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term (years)		Value (1)
	(in thousands, except per share data and years)
Outstanding as of December 31, 2005		18,645		$	10.76		5.93	$	15,998
Options granted		6			5.96
Options exercised		(944	)		3.45
Options forfeited/cancelled		(924	)		14.46

Outstanding as of June 30, 2006		16,783			10.97		5.41	$	13,587

Exercisable as of June 30, 2006		12,260			12.88		3.80	$	9,526


Vested as of June 30, 2006 and expected to become exercisable		15,742		$	11.31		4.26	$	12,852


(1)		The aggregate intrinsic value on this table was calculated based on the positive difference between the closing market value of the Company’s common stock on June 30, 2006 ($5.30) and the exercise price of the underlying options.

During the six months ended June 30, 2006, the total intrinsic value of stock options exercised was $3.7 million and total cash received from exercise of options was $3.3 million. The unamortized fair value of stock options as of June 30, 2006 was $13.3 million with a weighted average remaining recognition period of 2.2 years.

The table below summarizes activity relating to Restricted Units in the six months ended June 30, 2006 :


	Six months ended
	June 30, 2006
	Number of Shares
	Underlying			Weighted Average
	Restricted Units			Grant Date Fair Value
	(in thousands)
Outstanding as of December 31, 2005		1,654		$	7.98
Restricted units granted		514			6.00
Vesting		(1	)		7.94
Restricted units forfeited/cancelled		(125	)		7.94

Outstanding as of June 30, 2006		2,042		$	7.49


Expected to become vested and issued		1,318
Weighted average contractual term	3.2 years
Aggregate intrinsic value of units outstanding (1)	$	10,825
Aggregate intrinsic value of units	$	—


(1)		The aggregate intrinsic value on this table was calculated based on the positive difference between the closing market value of the Company’s common stock on June 30, 2006 ($5.30) and the exercise price of the Restricted Units ($0.00).

As of June 30, 2006, the unamortized fair value of Restricted Units was $12.9 million. The purchase price for vested Restricted Units is $0.00 per share and 675 shares have become unrestricted during the six months ended June 30, 2006. The weighted-average contractual term of the Restricted Units, calculated based on the service-based term of each instrument, is 3.2 years.

As of June 30, 2006 the Company also had 57,250 outstanding Restricted Stock awards with a weighted-average grant date fair value of $1.54 per share. All of these awards are expected to become unrestricted in the current fiscal year. There were no grants, vesting or forfeitures during the three or six months ended June 30, 2006.

SAPIENT CORPORATION

5. Income (Loss) per Share from Continuing Operations and Net Income (Loss) Per Share

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2005		2006			2005
			As Restated					As Restated
	(Unaudited)
	(in thousands, except share and per share data)
Income (loss) from continuing operations, before discontinued operations and cumulative effect of accounting change	$	178	$	2,925	$	(1,050	)	$	8,462
Basic income (loss) per share from continuing operations:
Weighted average common shares outstanding		124,373		124,427		124,273			124,304

Basic income (loss) per share from continuing operations, before discontinued operations and cumulative effect of accounting change	$	0.00	$	0.02	$	(0.01	)	$	0.07

Diluted income (loss) per share from continuing operations:
Weighted average common shares outstanding		124,373		124,427		124,273			124,304
Weighted average dilutive common share equivalents		2,725		5,424		—			5,559

Weighted average common shares and dilutive common share equivalents		127,098		129,851		124,273			129,863

Diluted income (loss) per share from continuing operations, before discontinued operations and cumulative effect of accounting change	$	0.00	$	0.02	$	(0.01	)	$	0.07


Net income	$	4,947	$	2,872	$	3,505		$	8,776
Basic net income per share:
Weighted average common shares outstanding		124,373		124,427		124,273			124,304

Basic net income per share	$	0.04	$	0.02	$	0.03		$	0.07

Diluted net income per share:
Weighted average common shares outstanding		124,373		124,427		124,273			124,304
Weighted average dilutive common share equivalents		2,725		5,424		—			5,559

Weighted average common shares and dilutive common share equivalents		127,098		129,851		124,273			129,863

Diluted net income per share	$	0.04	$	0.02	$	0.03		$	0.07

Anti-dilutive options and share based awards		11,333		7,663		11,025			7,576

SAPIENT CORPORATION

6. Commitments and Contingencies

The Company has certain contingent liabilities that arise in the ordinary course of its business activities. 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 in which the damages claimed under such actions, in the aggregate, total approximately $3.3 million. The Company has an accrual at June 30, 2006 of approximately $792,000 related to certain of these items. The Company is also subject to various administrative audits, each of which has arisen in the ordinary course of business. The Company intends to defend these matters vigorously, however the ultimate outcome of these items is uncertain and the potential loss, if any, may be significantly higher or lower than the amounts that the Company has accrued.

On August 17, 2006 a derivative action, captioned as Alex Fedoroff, Derivatively on Behalf of Nominal Defendant Sapient Corporation v. Jerry A. Greenberg, J. Stuart Moore, Susan D. Johnson, et al., was filed in the Superior Court for Middlesex County, Massachusetts, against Sapient as a nominal defendant and sixteen of Sapient’s current and former directors and officers. On August 31, 2006, a nearly identical complaint, captioned as Jerry Hamilton, Derivatively on Behalf of Nominal Defendant Sapient Corporation v. Jerry A. Greenberg, J. Stuart Moore, Susan D. Johnson, et al., was filed in the same court by a different Company shareholder. Both plaintiffs claim breaches of fiduciary duty by all defendants for allegedly backdating stock options between 1997 and 2002. The Plaintiffs also claim that some of the defendants were unjustly enriched by receipt of purportedly backdated stock options, and seek unspecified damages, disgorgement of “backdated” stock options and any proceeds received from the exercise and sale of any “backdated” options, costs and attorneys’ fees. Neither of the plaintiffs made a pre-suit demand on Sapient’s Board of Directors, as required by Delaware law (Sapient’s state of incorporation) prior to filing their respective actions.

On October 13, 2006, the Superior Court for Middlesex County, Massachusetts, entered an order consolidating the foregoing derivative actions under the caption In re Sapient Corporation Derivative Litigation. On February 20, 2007, the consolidated complaint was transferred into the Business Litigation Session of the Suffolk Superior Court, Massachusetts under docket number 07-0629 BLS1. On April 25, 2007, the defendants filed a motion to dismiss, which was heard by the Court on May 23, 2007. The Company is awaiting notice on the results of this hearing.

On October 27, 2006 and October 31, 2006, three additional shareholder derivative actions were filed in the United States District Court for the District of Massachusetts; Mike Lane, Derivatively on Behalf of Sapient Corporation v. J. Stuart Moore, Jerry A. Greenberg, Sheeroy D. Desai, et al. and Sapient Corporation; Marc Doyle, Derivatively on Behalf of Sapient Corporation v. J. Stuart Moore, Jerry A. Greenberg, Sheeroy D. Desai, et al. and Sapient Corporation; and Laurence Halaska, Derivatively on Behalf of Sapient Corporation v. Jerry A. Greenberg, J. Stuart Moore, Scott J. Krenz, et al. and Sapient Corporation. The federal derivative actions are substantially similar to the state derivative actions, except that federal derivative actions assert violations of Sarbanes-Oxley and violations of Sections 10(b), 14(a) and 20(a) of the Securities Exchange Act.

On November 30, 2006, the Securities and Exchange Commission (“SEC”) notified us that it had commenced a formal inquiry into our historical stock-based compensation practices. Subsequently, on March 8, 2007, we received a subpoena from the SEC requesting several documents relating to this matter. We are cooperating fully with the SEC and will continue to do so as the inquiry moves forward. At this point, we are unable to predict what, if any, consequences the SEC investigation may have on us. However, the investigation could result in considerable legal expenses, divert management’s attention from other business concerns and harm our business. If the SEC were to commence legal action, we could be required to pay significant penalties and/or fines and could become subject to an administrative order and/or a cease and desist order. The filing of our restated financial statements to correct the discovered accounting errors will not resolve the SEC investigation.

In connection with the independent investigation into the Company’s historical stock-based compensation practices, the Company reviewed the payroll withholding tax effect associated with certain stock options. Certain stock options were originally intended to be Incentive Stock Options (“ISOs”), under U.S. tax regulations. However, by definition, ISOs may not be granted with an exercise price less than the fair market value of the underlying stock on the date of grant. Due to the impact of the measurement date changes on the qualified status of affected ISOs, they may no longer qualify as ISOs under the regulations. Therefore, the affected ISOs were accounted for as if these options were non-qualified stock options for payroll tax accounting purposes. The Company recorded a liability for the unpaid income and employment taxes plus potential penalties and interest based upon the change in status of the affected options. The Company recorded a liability for the taxes, penalties and interest due based upon the change in status of the options in the amount of $17.8 million. The Company recorded reversals of this accrual in the amount of $16.5 million between 2003 and 2006 due to the expiration of the tax statute of limitations. These adjustments resulted in a net charge to income of $1.3 million over the period 1996 to 2006, which represent management’s best estimate of the Company’s liability.

The Company has recorded approximately $406,000 of estimated interest and penalties associated with remittances of withholding taxes in certain of its jurisdictions related to stock based awards.

7. Restructuring and Other Related Charges

The Company recorded restructuring and other related charges of $334,000 and $5.4 million during the three months ended June 30, 2006 and 2005, respectively, and $1.1 million and $5.5 million during the six months ended June 30, 2006 and 2005, respectively.

2006-Restructure Event

During the first quarter of 2006, the Company initiated a restructuring plan in the United Kingdom to better position itself to capitalize on market opportunities. As a result, 28 employees were terminated and the Company recorded $240,000 and $572,000 during the three and six months ended June 30, 2006, respectively, in restructuring and other related charges for severance and termination benefits in accordance with SFAS Statement No. 112, Employers’ Accounting for Postemployment Benefits. These charges were recorded in the United Kingdom segment in the Results by Operating Segment. The Company paid approximately $400,000 through the second quarter of 2006 and paid the remainder during the third quarter of 2006. The Company does not expect to make any further payments related to this restructuring event.

SAPIENT CORPORATION


	Workforce
	(in thousands)
2006 provision	$	572
Cash utilized		(400	)

Balance, June 30, 2006	$	172

2005-Restructure Event

During the fourth quarter of 2005, the Company initiated a restructuring plan to streamline general and administrative (“G&A”) activities. This initiative included the transfer of certain finance, human resources, and internal IT functions to India. This initiative resulted in charges of approximately $99,000 and $299,000 during the three and six months ended June 30, 2006, respectively, to restructuring and other related charges related to severance and termination benefits and stay-bonuses in accordance with SFAS No. 112 and SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. These charges were not recorded to a segment because they impacted an area of the business that supports all business units, but are included in ‘Reconciling items’ in the Company’s Results by Operating Segment. The Company paid approximately $166,000 related to this liability as of June 30, 2006 and the remainder is expected to be paid by the end of the second quarter of 2007.


	Workforce
	(in thousands)
Balance at December 31, 2005	$	300
2006 provision		299
Cash utilized		(166	)

Balance at June 30, 2006	$	433

2001, 2002 and 2003 Restructure 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 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 sublease income.

During the three and six months ended June 30, 2006, the Company recorded restructuring charges (benefit) of approximately (5,000) and $277,000, respectively, primarily due to changes in assumptions associated with the Company’s various restructured locations.

During the three and six months ended June 30, 2005, the Company recorded restructuring charges of approximately $5.4 million and $5.5 million respectively, due to a decrease in estimated sublease income on its restructured Santa Monica, California location.


	Facilities
	(in thousands)
Balance at December 31, 2005	$	21,275
2006 provision		277
Cash utilized		(3,785	)
Non-cash utilized		(260	)

Balance at June 30, 2006	$	17,507

As of June 30, 2006, the total remaining accrued restructuring costs for all events were $18.1 million, of which the cash outlay over the next 12 months is expected to be $5.1 million, and the remainder will be paid through 2011.

SAPIENT CORPORATION

8. Income Taxes

The Company has deferred tax assets that have arisen primarily as a result of net operating losses incurred in 2001, 2002 and 2003, as well as other temporary differences between book and tax accounting. Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Significant management judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against the net deferred tax assets, as a result of net operating losses incurred from 2001 through 2003, and uncertainty as to the extent, and timing of profitability in future periods. At June 30, 2006 the Company has continued to record a valuation allowance against its deferred tax assets in the United States. For the quarters ended June 30, 2006 and 2005, the Company has recorded an income tax provision of approximately $4.1 million and $550,000, respectively. For the six months ended June 30, 2006 and 2005, the Company recorded an income tax provision of approximately $3.8 million and $1.5 million, respectively. The Company’s income tax provision is primarily related to foreign, federal alternative minimum tax and state tax obligations. As of June 30, 2006, and reflected in the tax provision, is a deferred tax liability of approximately $1.0 million that has been recorded as a result of the goodwill acquired in connection with the BIS and PGI acquisitions.

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.

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					Six Months Ended
	June 30,					June 30,
	2006		2005			2006		2005
			As Restated					As Restated
	(Unaudited)
Net income	$	4,947	$	2,872		$	3,505	$	8,776
Foreign currency translation gain (loss)		323		(703	)		980		(1,443	)
Unrealized gain on investments		137		316			358		6

Comprehensive income	$	5,407	$	2,485		$	4,843	$	7,339

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. Beginning with the first quarter of 2006, the Company combined its Financial Services, Automotive, Consumer and Energy, Technology, Education, Communications and Health Care business unit and its Canada business unit into one business unit, which is now named North America Commercial. In addition, Experience Marketing became a standalone business unit. The Company’s three business units in North America are now: (i) North America Commercial (“NAC”), (ii) Government Services and (iii) Experience Marketing. In addition, the Company has two European business units: United Kingdom and Germany. The Company has reported its results by operating segments accordingly, and quarterly results for operating segments for 2005 have been reclassified to reflect these changes.

Prior to the first quarter of 2006, the Company allocated certain selling, marketing and general and administrative expenses to its business units in the United Kingdom, Germany and Canada as these activities had been managed within the business unit, however, the Company had not allocated these expenses to the business units in the United States. Beginning in the first quarter of 2006, the Company does not allocate certain marketing and general and administrative expenses to its NAC, United Kingdom, Germany and Experience Marketing business unit segments because these activities are managed separately from the business units. However, the Company does allocate certain marketing and general and administrative expenses to its Government Services business unit as these activities are managed within the business unit. Quarterly results for operating segments for 2005 have been restated to reflect these changes. The Company did not allocate the costs associated with its restructuring events across all operating segments for internal measurement purposes, given that the substantial majority of the restructuring costs were related to the initiative to reengineer general and administrative activities and the consolidation of facilities. The Company did allocate the workforce reduction costs associated with the United Kingdom’s 2006 restructuring plan due to the specific identification of the terminated employees to their respective business unit. Asset information by operating segment is not

SAPIENT CORPORATION

reported to or reviewed by the chief operating decision makers and, therefore, the Company has not disclosed asset information for each operating segment.

The tables below present the service revenues and income from continuing operations before income taxes, discontinued operations and cumulative effect of accounting change attributable to these operating segments for the periods presented.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
				As Restated						As Restated
				(In thousands)
Service Revenues
North America Commercial	$	63,349		$	45,869		$	116,935		$	89,068
Government Services		3,656			6,225			8,833			10,963
Experience Marketing		7,159			—			11,673			—
United Kingdom		15,932			16,164			33,323			35,217
Germany		7,907			6,682			14,333			14,966

Consolidated total	$	98,003		$	74,940		$	185,097		$	150,214


Income (loss) From Continuing Operations
North America Commercial (1)	$	19,681		$	17,062		$	36,778		$	31,481
Government Services (1)		128			3,384			1,300			5,608
Experience Marketing (1)		609			—			(332	)		—
United Kingdom (1)		1,172			3,419			4,856			8,752
Germany (1)		2,954			3,443			5,136			7,308

Total Reportable Segments (1)		24,544			27,308			47,738			53,149
Reconciling Items (2)		(20,624	)		(23,833	)		(45,284	)		(43,154	)

Consolidated income from continuing operations, before income taxes, discontinued operations and cumulative effect of accounting change	$	3,920		$	3,475		$	2,454		$	9,995


(1)		Reflects only the direct controllable expenses of each business unit segment. It does not represent the total operating results for each business unit as it does not contain an allocation of certain corporate and general and administrative expenses incurred in support of the business unit segments.

(2)		Adjustments that are made to the total of the segments’ operating income in order to arrive at consolidated income before income taxes include the following:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
				As Restated						As Restated
				(in thousands)
Centrally managed functions	$	17,741		$	18,727		$	37,991		$	38,238
Restructuring and other related charges		334			5,367			1,148			5,491
Amortization of intangible assets		844			212			1,881			342
Stock-based compensation expense		2,637			129			5,559			269
Interest and other income		(2,160	)		(1,125	)		(3,540	)		(2,139	)
Unallocated expenses (3)		1,228			523			2,245			953

	$	20,624		$	23,833		$	45,284		$	43,154


(3)		Includes costs controlled directly by corporate headquarters.

SAPIENT CORPORATION

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 income and the consolidated and condensed balance sheets:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2005		2006		2005
			As Restated				As Restated
			(in thousands)
Service revenues:
United States	$	66,519	$	47,874	$	123,903	$	91,101
International		31,484		27,066		61,194		59,113

Total service revenues	$	98,003	$	74,940	$	185,097	$	150,214


	June 30,		Deember 31,
	2006		2005
			As Restated
	(in thousands)
Long-lived assets:
United States	$	12,956	$	8,765
International		21,176		18,759

Total long-lived assets	$	34,132	$	27,524

12. Goodwill and Purchased Intangible Assets

The following is a summary of goodwill allocated to the Company’s business segments as of June 30, 2006 and December 31, 2005:


	North America		Experience
	Commercial		Marketing		Total
			(in thousands)
Goodwill as of December 31, 2005	$	11,770	$	—	$	11,770
Goodwill acquired during the period		—		26,168		26,168
Contingent consideration issued during the period (1)		991		—		991

Goodwill as of June 30, 2006	$	12,761	$	26,168	$	38,929

(1) The Company has agreed to pay additional consideration related to the contingent earn-out consideration associated with the BIS acquisition. The payments will be made annually over a three-year period based upon the attainment by BIS of defined operating objectives. The Company does not accrue contingent consideration obligations prior to the attainment of the objectives. At June 30, 2006, the maximum potential future consideration pursuant to such arrangements is approximately $3.9 million. The Company, at its sole discretion, can elect to pay the additional consideration in cash or by issuing common stock shares. Any such payments will result in an increase in goodwill at the time of payment. The Company recorded approximately $991,000 of estimated earn-out consideration to goodwill in the second quarter of 2006.

The following is a summary of intangible assets as of June 30, 2006 and December 31, 2005:

SAPIENT CORPORATION


	June 30, 2006
	Gross					Net
	Carrying		Accumulated			Book
	Amount		Amortization			Value
	(in thousands)
Marketing assets, customer lists and customer contracts	$	8,100	$	(1,038	)	$	7,062
SAP license agreement		1,100		(582	)		518
Non-compete agreements		1,170		(117	)		1,053
Order backlog		1,200		(600	)		600

Total purchased intangibles	$	11,570	$	(2,337	)	$	9,233


	December 31, 2005
	Gross					Net
	Carrying		Accumulated			Book
	Amount		Amortization			Value
	(in thousands)
Marketing assets, customer lists and customer contracts	$	2,966	$	(811	)	$	2,155
SAP license agreement		1,100		(321	)		779
Developed technology		1,454		(1,448	)		6

Total purchased intangibles	$	5,520	$	(2,580	)	$	2,940

Amortization expense related to the purchased intangible assets was $844,000 and $212,000 for the three months ended June 30, 2006 and 2005, respectively, and $1.9 million and $342,000 for the six months ended June 30, 2006 and 2005, respectively.

The estimated future amortization expense of purchased intangible assets as of June 30, 2006, is as follows (in thousands):


2006	$	1,683
2007		2,038
2008		1,850
2009		1,785
2010		788
2011		363
2012		363
2013		363

Total	$	9,233

13. Foreign Currency Translation

Foreign exchange gains of approximately $822,000 and foreign exchange losses of approximately $896,000 for the three months ended June 30, 2006 and 2005, respectively, are included in general and administrative expenses in the consolidated and condensed statements of operations. Foreign exchange gains of approximately $793,000 and foreign exchange losses of approximately $1.8 million for the six months ended June 30, 2006 and 2005, respectively, 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 were of a short-term nature.

14. Stock Buyback

On November 16, 2004, the Company’s Board of Directors authorized up to $25.0 million in funds for use in the Company’s common stock repurchase program. On February 10, 2006 the Board of Directors authorized an additional $25.0 million in funds for use in such programs. The Company has announced that it will repurchase shares on the open market or in private transactions from time to time depending on market conditions. Each authorization is for a period of two years from its inception or until it is discontinued by the Board of Directors. Under the Company’s buyback program no shares were repurchased in 2004 and approximately 3.0 million shares were repurchased in 2005 at an average price of $5.84 per share for an aggregate purchase price of $17.6 million. The Company repurchased approximately 1.0 million shares of its common stock at an average price of $5.98 per share for an aggregate purchase price of approximately $6.2 million during the first quarter of 2006 and approximately 2.2 million shares at an average price of $4.99 per share for an aggregate purchase price of $10.7 million during the second quarter of 2006.

SAPIENT CORPORATION

15. Discontinued Operations

On May 2, 2006, the Company sold 100% of its investment in HWT, Inc. (“HWT”), the Company’s majority-owned, fully consolidated subsidiary, for net cash proceeds of approximately $5.4 million. Net assets sold included cash of approximately $274,000. During 2007, we received additional cash proceeds of approximately $530,000 related to holdback and escrow in accordance with the terms of the agreement. The Company has recorded a receivable for $1.4 million related to the holdback and escrow payments, which is recorded in prepaid expenses and other current assets on the Company’s consolidated and condensed balance sheet at June 30, 2006, and has recorded a payable of $213,000 in other current liabilities, representing the portion of the escrow and holdback that is due to minority stockholders. In addition, the Company could receive up to $4.0 million in earn-out payments over 2007 and 2008, which will be recorded when and if earned. The Company has reflected HWT’s historical results as discontinued operations in the consolidated and condensed financial statements for the three and six months ended June 30, 2006 and 2005. The sale of HWT resulted in a net gain on disposal (after tax) of $4.8 million. Gross revenues for HWT were $338,000 and $1.3 million for the three months ended June 30, 2006 and 2005, respectively, and $1.3 million and $3.0 million for the six months ended June 30, 2006 and 2005, respectively. Net (loss) income of the discontinued operation was ($65,000) and ($53,000) for the three months ended June 30, 2006 and 2005, respectively, and ($433,000) and $314,000 for the six months ended June 30, 2006 and 2005, respectively. The gross revenue and net (loss) income figures noted above for HWT for the three and six months ended June 30, 2006 only include amounts recorded through April 30, 2006, as HWT was disposed of on May 2, 2006.

16. Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN No. 48”), which clarifies the accounting for uncertainty in income tax recognized in an enterprise’s financial statements in accordance with SFAS No. 109. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company has evaluated FIN No. 48 and determined that there is no material impact from the adoption of this interpretation.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effect of Prior Year Misstatements when Qualifying Misstatements in Current Year Financial Statements (“SAB No. 108”). SAB No. 108 provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 is effective for companies with fiscal years ending after November 15, 2006 and is required to be adopted in the year ending December 31, 2006. The adoption of SAB No. 108 did not have a material impact on the Company’s financial position or results of operations.

In September 2006, the FASB issued SFAS Statement No. 157, Fair Value Measurement (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company has not yet determined the effect, if any, that the application of SFAS No. 157 will have on its consolidated financial statements.

In February 2007, the FASB issued SFAS Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. If the fair value option is elected, a business entity shall report unrealized gains and losses on elected items in earnings at each subsequent reporting date. Upon initial adoption of this Statement an entity is permitted to elect the fair value option for available-for-sale and held-to-maturity securities previously accounted for under SFAS Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. The effect of reclassifying those securities into the trading category should be included in a cumulative-effect adjustment of retained earnings and not in current-period earnings and should be separately disclosed. SFAS No. 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. The Company has not yet determined the effect, if any, that the application of SFAS No. 159 will have on its consolidated financial statements.

17. Prepaid Expenses and other current Assets, other Assets, and other Accrued Liabilities

The following is a table summarizing the components of selected balance sheet items as of June 30, 2006 and December 31, 2005.

The following is a table summarizing the components of selected balance sheet items.


	June 30, 2006		December 31, 2005
	(in thousands)
Prepaid expenses and other current assets
Deferred tax assets, current portion	$	389	$	112
Prepaid insurance		131		1,078
Prepaid media		9,994		—
Prepaid rent		1,313		1,742
VAT tax receivable		1,639		906
Other current assets		7,162		6,559

	$	20,628	$	10,397


Other Assets
Deferred tax assets, net of current portion	$	5,305	$	5,030
Other assets		3,767		716
	$	9,072	$	5,746


Other accrued liabilities
Accrued media	$	14,382	$	—
Other accrued expenses		24,619		17,178
Income taxes payable		6,042		4,093
Deferred tax liabilities, current portion		171		161

	$	45,214	$	21,432

SAPIENT CORPORATION

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

Overview

In connection with the internal review of our stock-based compensation granting process from 1996 through 2006, we have restated our consolidated financial statements for the years ended December 31, 2005, 2004 and all quarterly periods in 2005 as well as the three months ended March 31, 2006. The net impact of this restatement and the related tax effects include the impact of adjustments related to historical stock option practices as well as other unrelated immaterial adjustments that were previously unrecorded. These unrelated immaterial adjustments consist primarily of corrections to restructuring related lease obligations, adjustments to interest income and other miscellaneous adjustments. (See Footnote 2 of the financial statements).

Sapient helps clients innovate their businesses in the areas of marketing, business operations and technology. Leveraging a unique approach, breakthrough thinking and disciplined execution, Sapient strives to deliver the right business results on time and on budget. Founded in 1991, Sapient is headquartered in Cambridge, Massachusetts, and has offices throughout the United States and Canada, and in Germany, the Netherlands, India and the United Kingdom.

On January 3, 2006, we acquired Planning Group International, Inc. (“PGI”). Through this acquisition we have enhanced our strengths in advertising, digital and direct marketing, brand development, data mining, customer acquisition and loyalty, paid search, and media planning and buying strategies and services. We believe that our acquisition of PGI expands our opportunities to help our clients exploit the possibilities created by the rapid evolution of media, advertising, and technology and derive measurable value from their marketing investments.

Our service revenues for the second quarter of 2006 were $98.0 million, a 31% increase compared to service revenues for the second quarter of 2005. The growth in service revenues year over year is due to an increase in service revenues in all geographies. The increase in service revenues in North America was also driven by our Experience Marketing (“EM”) business unit, which contributed $7.2 million for the quarter. The growth in EM was primarily driven by our acquisition of PGI in January 2006. The North America service revenue also includes one month of revenue in the second quarter of 2005 and six months of revenue in 2006 from our acquisition of Business Information Solutions, LLC (“BIS”) in June of 2005.

Currently, we are retaining subcontractors in certain cases to fill specific project needs. If we are not successful in maintaining effective staffing levels, our ability to achieve our service revenue and profitability objectives will be adversely affected. Our ability to effectively staff our engagements and achieve the desired staffing mix depends heavily on our ability to keep turnover at appropriate levels. Our voluntary turnover for the second quarter of 2006 increased to 25.0% compared to 21.6% in the first quarter of 2006. We also continue to modify and upgrade critical internal systems that we require to manage client projects and our business. Our operations and business results will be adversely impacted if we do not successfully and efficiently implement these system changes, as necessary.

Our Global Distributed Delivery (“GDD”) methodology continues to be important to our clients’ success. This proprietary methodology allows us to provide high-quality, cost effective solutions under accelerated project schedules. By engaging our staff in India, which is comprised of researchers, project managers, creative designers and technologists, 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 methodology to provide application management services. Our billable days, or level of effort, incurred by our India people as a percentage of total Company billable days increased for the second quarter of 2006 to 55% compared to 52% for the first quarter of 2006. This was as a result of the Company increasing its people count in India over the second quarter as a result of our hiring efforts, allowing us to increase our billable days.

For the second quarter of 2006, we reported income from continuing operations of $178,000 compared to $2.9 million in the second quarter of 2005 and we reported net income of $4.9 million compared to $2.9 million in the second quarter of 2005. For the six months ended June 30, 2006, we reported a $1.1 million loss from continuing operations compared to $8.5 million of income from continuing operations for the six months ended June 30, 2005 and we reported net income of $3.5 million compared to $8.8 million for the six months ended June 30, 2005. Our net income for the six months ended June 30, 2006 includes $1.6 million related to insurance proceeds included in interest and other income, a $154,000 gain for the cumulative effect of accounting change related to the implementation of Statement of Financial Accounting Standards (“SFAS”) Statement No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”), and a gain of $4.8 million, net of tax, related to the sale of our HWT unit.

During the second quarter of 2006, we continued progress on our strategic initiative of reengineering our general and administrative functions. In addition, to better position ourselves to capitalize on market opportunities in the United Kingdom, and better align our operations to those opportunities we announced a plan to align our workforce and skill set with our current and expected future needs. This plan will result in a reduction of approximately 28 people in our United Kingdom-based workforce and

SAPIENT CORPORATION

resulted in a restructuring charge of approximately $332,000 during the first quarter of 2006 and an additional charge of approximately $240,000 during the second quarter of 2006. We believe our proposed action will create a strong and profitable foundation upon which we can invest in our chosen areas and grow the business significantly over the remainder of 2006.

The economic outlook, as always, is subject to change. Any decline in our service revenues will have a significant impact on our financial results, particularly because a significant portion of our operating costs (such as personnel, rent, depreciation and amortization of intangible assets) are fixed in advance of a particular quarter. In addition, our future operating segment and overall Company revenues and operating results may fluctuate from quarter to quarter based on the number, size and scope of projects in which we are engaged, the contractual terms and degree of completion of such projects, any delays incurred in connection with a project, employee utilization rates, the adequacy of provisions for losses, the use of estimates of resources required to complete ongoing projects, general economic conditions and other factors.

Summary of Critical Accounting Policies; Significant Judgments and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated and Condensed Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are regularly monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ substantially from our estimates.

A summary of those accounting policies, significant judgments and estimates that we believe are most critical to fully understanding and evaluating our financial results is set forth below. This summary should be read in conjunction with our Consolidated Condensed Financial Statements and the related Notes included elsewhere in this Form 10-Q and in our Annual Report on Form 10-K.

	•		Revenue Recognition and Allowance for Doubtful Accounts. We recognize revenue from the provision of professional services, digital marketing services and offline printing and production services arrangements with our clients when persuasive evidence of an arrangement exists, services or product have been provided to the customer, the fee is fixed or determinable and collectibility is reasonably assured. In instances where the customer, at its discretion, has the right to reject the services or product prior to final acceptance, revenue is deferred until such acceptance occurs.

			We recognize revenues from our fixed-price technology implementation consulting contracts using the percentage-of-completion method pursuant to Statement of Position 81-1, Accounting for Performance of Construction Type and Certain Production Type Contracts. Revenues generated from fixed-price non-technology implementation contracts, except for support and maintenance contracts, are recognized based upon a proportional performance model in accordance with Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements, (“SAB No. 101”) as amended by SAB No. 104, Revenue Recognition (“SAB No. 104”). Our percentage-of-completion method and our proportional performance method of accounting calculates revenue based on the percentage of labor incurred to estimated total labor. This method is used because reasonably dependable estimates of the revenues and labor applicable to various stages of an arrangement can be made, based on historical experience and milestones set in the contract. Revenue from time-and-material contracts is recognized as services are provided. Revenue generated from staff augmentation and support contracts are recognized ratably over the arrangement’s term.

			Our project delivery and business unit finance personnel continually review labor incurred and estimated total labor, which may result in revisions to the amount of recognized revenue under an arrangement. Certain arrangements provide for revenue to be generated based upon the achievement of certain performance standards. Revenue related to the achievement of performance standards was immaterial for any of the periods presented in our consolidated financial statements.

			Revenues from arrangements with multiple elements are allocated based on the fair value of the elements in accordance with EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, (“EITF No. 00-21”). For these arrangements, we evaluate all deliverables in the arrangement to determine whether they represent separate units of accounting. Fair value is determined based on reliable evidence of the fair value of each deliverable. Revenues are recognized in accordance with our accounting policies for the separate elements when the services have value on a stand-alone basis, fair value of the separate elements exists and, in arrangements that include a general right of refund relative to the delivered element, performance of the undelivered element is considered probable and substantially under our control. This evaluation is performed at the inception of the arrangement and as each item in the arrangement is delivered. The evaluation involves significant judgments regarding the nature of the services and deliverables being provided, whether these services and deliverables can reasonably be divided into the separate units of accounting and the fair value of the separate elements determined.

SAPIENT CORPORATION

			Revenues related to our digital marketing media sales are recorded as the net amount of our gross billings less pass-through expenses charged to a client. In most cases, the amount that is billed to clients significantly exceeds the amount of revenue that is earned and reflected in our financial statements, because of various pass-through expenses such as production and media costs. In compliance with EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, (“EITF No. 99-19”) we assess whether the agency or the third-party supplier is the primary obligor. We evaluate the terms of our client agreements as part of this assessment. In addition, we give appropriate consideration to other key indicators such as latitude in establishing price, discretion in supplier selection and credit risk to the vendor. Because we broadly operate as an advertising agency based on our primary lines of business and given the industry practice to generally record revenue on a net versus gross basis, we believe that there must be strong evidence in place to overcome the presumption of net revenue accounting. Accordingly, we record revenue net of pass-through charges as we believe the key indicators of the business suggest we generally act as an agent on behalf of our clients in our primary lines of business. In those businesses where the key indicators suggest we act as a principal, we record the gross amount billed to the client as revenue.

			Our marketing services help our client’s optimize their cross platform marketing effectively to track behavior and improve conversion rates through data-driven analysis. These services are provided in exchange for monthly retainer fees and license fees and are recognized as the monthly services are provided.

			Revenue from offline printing and production services are recognized at the time title of the related items transfers to our customers given all other revenue recognition criteria have been met.

			If we do not accurately estimate the resources required or the scope of work to be performed for an arrangement or we do not manage the project properly within the planned time period, then we may recognize a loss on the arrangement. Provisions for estimated losses on uncompleted arrangements are made on an arrangement-by-arrangement basis and are recognized in the period in which such losses are identified. We have committed unanticipated additional resources to complete projects in the past, which has resulted in lower than anticipated profitability or losses on those arrangements. We expect that we will experience similar situations in the future. In addition, we may fix the price for some projects at an early stage of the process, which could result in a fixed-price that is too low and, therefore, a correct estimation could adversely affect our business, financial condition and results of operations.

			We recognize revenue for services when collection from the client is reasonably assured, and our fees are fixed or determinable. We establish billing terms at the time project deliverables and milestones are agreed. Our normal payment terms are thirty days from invoice date. Revenues recognized in excess of the amounts invoiced to clients are classified as unbilled revenues. Amounts invoiced to clients in excess of revenue recognized are classified as deferred revenues. Our project delivery and business unit finance personnel continually monitor timely payments from our clients and assess any collection issues. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our clients to make required payments. We base our estimates on our historical collection and write-off experience, current trends, credit policy, detailed analysis of specific client situations and percentage of our accounts receivable by aging category. While such credit losses have historically been within our expectations and the allowances we established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. If the financial condition of our clients were to deteriorate, resulting in an impairment of their ability to make payment, additional allowances may be required. Our failure to accurately estimate the losses for doubtful accounts and ensure that payments are received on a timely basis could have a material adverse effect on our business, financial condition and results of operations.

	•		Stock-Based Compensation Expense. Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123R, using the modified prospective transition method, and therefore have not restated prior periods’ results for the implementation of 123R. Under this method we recognize compensation expense for all share-based payments granted after January 1, 2006 and the portion of awards granted prior to January 1, 2006 but not yet vested as of January 1, 2006, in accordance with SFAS No. 123R. Under the fair value recognition provisions of SFAS No. 123R, we recognize stock-based compensation net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest on a straight-line basis over the requisite service period of the award. Prior to SFAS No. 123R’s adoption, we accounted for share-based payments under APB No. 25 and accordingly, generally recognized compensation expense only when we granted options with a discounted exercise price.

			Based on historical experience the Company has assumed an annualized forfeiture rate of 7% for awards granted to its senior executives and directors, and a 20% forfeiture rate for its remaining employees. The Company will record additional expense if the actual forfeitures are lower than estimated and will record a recovery of prior expense if the actual forfeitures are higher than estimated. The actual expense recognized over the vesting period will only be for those shares that vest. The cumulative effect of the accounting change to reflect forfeiture assumption for stock-based compensation recorded in prior periods resulted in income of $154,000 and was recognized in the statement of operations for the three-month period ending March 31, 2006.

SAPIENT CORPORATION

			Determining the appropriate fair value model and calculating the fair value of share-based payment awards requires the input of highly subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. Management determined that using historical volatility of its own stock is an indicator of expected volatility. Therefore, expected volatility for 2006 option grants was based on the daily closing prices of our common stock during the 6.25-year period ended December 31, 2005. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if circumstances change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period. See Note 4 to the Consolidated Condensed Financial Statements for a further discussion on stock-based compensation.

	•		Accounting for Income Taxes. Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, (SFAS No. 109) requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We evaluate all available evidence, such as recent and expected future operating results by tax jurisdiction, current and enacted tax legislation and other temporary differences between book and tax accounting, to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. As a result of operating losses incurred in 2001, 2002 and 2003, and uncertainty as to the extent and timing of profitability in future periods, we have recorded a valuation allowance of approximately $109 million as of June 30, 2006 relating to the deferred tax assets in the United States. Having assessed the ability to realize the deferred tax assets in certain foreign jurisdictions, we believe that future taxable income will be sufficient to realize the deferred tax benefit of the deferred tax assets in Canada, the United Kingdom, and Germany. The establishment and amount of the valuation allowance requires significant estimates and judgment and can materially affect our results of operations. If the realization of deferred tax assets in the future is considered more likely than not, an adjustment to the deferred tax assets would increase net income in the period such determination was made. Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss, 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

			In July 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which clarifies the accounting for uncertainty in income tax recognized in an enterprise’s financial statements in accordance with SFAS No. 109. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company has evaluated FIN 48 and determined that there is no material impact of this interpretation.

	•		Valuation of Long-Lived Assets and Intangible Assets In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, (“SFAS No. 144”) long-lived assets are reviewed for impairment on a regular basis for the existence of facts and circumstances that may suggest that the carrying amount of an asset, or group of assets, may not be recoverable. Recoverability of long-lived assets or groups of assets is assessed based on a comparison of the carrying amount to the estimated undiscounted future cash flows. If estimated future undiscounted net cash flows are less than the carrying amount, the asset is considered impaired and expense is recorded at an amount required to reduce the carrying amount to fair value. Determining the fair value of long-lived assets includes significant judgment by management, and different judgments could yield different results.

	•		Valuation of Goodwill In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, (“SFAS No. 142”) requires, among other things, the discontinuance of goodwill amortization. The standard also includes provisions for the assessment of the useful lives of existing recognized intangible assets and the identification of reporting units for purposes of assessing potential future impairments of goodwill. Factors we consider important which could trigger an impairment review include:

	•		significant underperformance relative to historical or projected future operating results;

	•		significant changes in the manner of or use of the acquired assets or the strategy for our overall business;

	•		identification of other impaired assets within a reporting unit;

	•		disposition of a significant portion of an operating segment;

SAPIENT CORPORATION

	•		significant negative industry or economic trends;

	•		significant decline in our stock price for a sustained period; and

	•		a decline in our market capitalization relative to net book value.

			Determining whether a triggering event has occurred includes significant judgment from management.

			The goodwill impairment test prescribed by SFAS No. 142 requires us to identify reporting units and to determine estimates of the fair value of our reporting units as of the date we test for impairment. The Company’s reporting units are consistent with the reportable segments identified in Note 10 of our consolidated financial statements. Assets and liabilities, including goodwill were allocated to reporting units based on factors such as specific identification and percentage of revenue. To conduct a goodwill impairment test, the fair value of the reporting unit is compared to its carrying value. If the reporting unit’s carrying value exceeds its fair value, we record an impairment loss to the extent that the carrying value of goodwill exceeds its implied fair value. Management estimates the fair value of its’ reporting units using discounted cash flow valuation models. Those models require estimates of future revenue, profits, capital expenditures and working capital for each unit. We estimate these amounts by evaluating historical trends, current budgets and operating plans. We performed the annual assessment during the fourth quarter of 2006 and determined that goodwill was not impaired. We complete goodwill impairment analysis at least annually, or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. Determining fair value of reporting units and goodwill includes significant judgment by management and different judgments could yield different results.

	•		Costs Incurred to Develop Computer Software for Internal Use. We account for costs incurred to develop computer software for internal use in accordance with SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (“SOP 98-1”). As required by SOP 98-1, the Company capitalizes the costs incurred during the application development stage, which include costs to design the software configuration and interfaces, coding, installation and testing. Costs incurred for internal use computer software during the preliminary project stage and through post-implementation stages of internal use computer software are expensed as incurred. The capitalization and ongoing assessment of recoverability of development cost requires considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility, and estimated economic life. Capitalized software is included in property and equipment and is depreciated over its estimated life, which is typically three years.

	•		Restructuring and Other Related Charges. We established exit plans for each of the restructuring activities in 2001 and 2002 and accounted for these plans in accordance with EITF Issue No. 94-3, Liability Recognition for Certain Employee Benefits and Other Costs to Exit an Activity (including Certain Costs incurred in a Restructuring) (“EITF No. 94-3”). These exit plans required that we make estimates as to the nature, timing and amount of the exit costs that we specifically identified. The consolidation of facilities required us to make estimates, which included contractual rental commitments or lease buy-outs for office space vacated and related costs, offset by estimated sub-lease income. We review on a regular basis our sub-lease assumptions and lease buy-out assumptions. These estimates include lease buy-out costs, anticipated rates to be charged to a sub-tenant, other terms and conditions in sub-lease contracts, and the timing of these sub-lease arrangements. If the rental markets continue to change, our lease buy-out, sub-lease and space requirement assumptions may not be accurate and changes in these estimates could materially affect our financial condition and results of operations. If any future adjustments are required to the restructuring initiatives recorded under the provisions of EITF No. 94-3, such adjustments will be measured in accordance with EITF No. 94-3. SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, (“SFAS No. 146”) was effective for exit or disposal activities that are initiated after December 31, 2002. SFAS No. 146 requires that a liability associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 supersedes the guidance in EITF No. 94-3 and includes a rebuttable presumption that if an entity has a past practice of providing similar termination benefits to employees, the benefit arrangement is presumed to be an ongoing benefit arrangement that should be accounted for under SFAS No. 112, Employers’ Accounting for Postemployment Benefits (SFAS No. 112”). SFAS No. 112 prescribes the accounting for the estimated cost of benefits, including severance benefits, provided by an employer to former or inactive employees after employment but before retirement. A liability is recognized when the severance amounts relate to prior services rendered, the payment of the amount is probable and the amount can be reasonably estimated. Since the second quarter of 2003, we have accounted for severance-related restructuring charges in accordance with SFAS No. 112 because we have a history of paying similar severance benefits since 2001.

	•		Contingent Liabilities. We have certain contingent liabilities that arise in the ordinary course of our business activities. We accrue contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. We are subject to various legal claims totaling approximately $3.3 million and various administrative audits, each of which have arisen in the ordinary course of our business. We have an accrual at June 30, 2006 of approximately $792,000 related to certain of these items. We intend to defend these matters vigorously, although

SAPIENT CORPORATION

			the ultimate outcome of these items is uncertain and the potential loss, if any, may be significantly higher or lower than the amounts we have previously accrued.

	•		Accounting for Acquisitions. Our accounting for acquisitions involves significant judgments and estimates primarily, but not limited to: the fair value of certain forms of consideration, the fair value of acquired intangible assets, which involve projections of future revenues and cash flows, the fair value of other acquired assets and assumed liabilities, including potential contingencies, and the useful lives and, as applicable, the reporting unit, of the assets. The impact of prior or future acquisitions on our financial position or results of operations may be materially impacted by the change in or initial selection of assumptions and estimates. Additionally, under SFAS No. 142, we determine the fair value of the reporting unit, for purposes of the first step in our annual goodwill impairment test based on a discounted future cash flows approach. If prior or future acquisitions are not accretive to our results of operations as expected, or the fair value of a reporting unit declines dramatically, we may be required to complete the second step which requires significant judgments and estimates and which may result in material impairment charges in the period in which they are determined.

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						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
				As Restated						As Restated
Revenues:
Service revenues		100	%		100	%		100	%		100	%
Reimbursable expenses		3	%		3	%		3	%		4	%
Total gross revenues		103	%		103	%		103	%		104	%

Operating expenses:
Project personnel expenses		68	%		57	%		67	%		59	%
Reimbursable expenses		3	%		3	%		3	%		4	%

Total project personnel expenses		71	%		60	%		71	%		63	%
Selling and marketing expenses		5	%		5	%		6	%		5	%
General and administrative expenses		25	%		28	%		26	%		28	%
Restructuring and other related charges		0	%		7	%		1	%		4	%
Amortization of intangible assets		1	%		0	%		1	%		0	%

Total operating expenses		102	%		100	%		104	%		99	%

Income (loss) from operations		2	%		3	%		(1	%)		5	%
Interest and other income		2	%		2	%		2	%		1	%

Income from continuing operations before income taxes, discontinued operations and cumulative effect of accounting change		4	%		5	%		1	%		7	%
Provision for income taxes		4	%		1	%		2	%		1	%

Income (loss) from continuing operations before discontinued operations and cumulative effect of accounting change		0	%		4	%		(1	%)		6	%
Income (loss) from discontinued operations		0	%		0	%		0	%		0	%
Gain on disposal of discontinued operations		5	%		0	%		3	%		0	%

Income before cumulative effect of accounting change		5	%		4	%		2	%		6	%
Cumulative effect of accounting change		0	%		0	%		0	%		0	%

Net income		5	%		4	%		2	%		6	%

Three and Six Months Ended June 30, 2006 Compared to Three and Six Months Ended June 30, 2005

Service Revenues

Our service revenues for the three and six months ended June 30, 2006 and 2005 were as follows:


	Three Months Ended
	June 30,						Percentage
	2006		2005		Increase		Increase
			As Restated
	(in thousands, except percentages)
Service revenues	$	98,003	$	74,940	$	23,063		31	%

SAPIENT CORPORATION


	Six Months Ended
	June 30,						Percentage
	2006		2005		Increase		Increase
			As Restated
			(in thousands, except percentages)
Service revenues	$	185,097	$	150,214	$	34,883		23	%

Our service revenues represent revenues from our consulting service arrangements with our clients. Our service revenues increased by 31% during the three months ended June 30, 2006 compared to the same period in 2005 and by 23% during the six months ended June 30, 2006 compared to the same period in 2005. The increase in service revenues in both periods is due to an increase in service revenues in all geographies primarily due to organic growth not related to acquisitions. In addition, the increase in North America includes revenue related to our 2006 acquisition and includes six months of revenue related to our 2005 acquisition compared to one month of revenue in 2005. Our recurring revenues were 30% of our service revenues in the second quarter of 2006, compared to 38% in the second quarter of 2005. Recurring revenues are revenue commitments of one year or more in which the client has committed spending levels to us or chosen us as an exclusive provider of certain services.

In the second quarter of 2006, our five largest clients accounted for approximately 23% of our service revenues in the aggregate, which was unchanged from the second quarter of 2005. No client accounted for more than 10% of our service revenues in the second quarters of 2006 and 2005.

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 expenses represent the most significant costs we incur in providing our services.


	Three Months Ended
	June 30,								Percentage
	2006			2005			Increase		Increase
				As Restated
				(in thousands, except percentages)
Project personnel expenses	$	66,232		$	42,465		$	23,767		56	%
Project personnel expenses as a percentage of service revenues		68	%		57	%		11

	Six Months Ended
	June 30,								Percentage
	2006			2005			Increase		Increase
				As Restated
				(in thousands, except percentages)
Project personnel expenses	$	124,173		$	87,912		$	36,261		41	%
Project personnel expenses as a percentage of service revenues		67	%		59	%		8

The increase in project personnel expenses for the three and six months ended June 30, 2006 as compared to the three and six months ended June 30, 2005, was due to an increase in project personnel compensation and benefits expense, which was driven by an increase in the number of delivery people worldwide. As of June 30, 2006, we employed 3,159 delivery people worldwide, of which 1,766 were India-based. By comparison, as of June 30, 2005, we employed 2,358 delivery people worldwide, of which 1,324 were India-based.

Project personnel expenses, before reimbursable expenses, increased quarter-over-quarter and year-over-year as a percentage of service revenues due to the inclusion of approximately $1.4 million and $2.8 million of stock-based compensation for the three and six months ended June 30, 2006, respectively, as a result of the adoption of SFAS 123R on January 1, 2006 and bonuses that were accrued during the second quarter of 2006 that were higher than the second quarter of 2005. For the second quarter of 2006, our utilization increased to 78% as compared to 73% for the second quarter of 2005.

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.

SAPIENT CORPORATION


	Three Months Ended
	June 30,								Percentage
	2006			2005			Increase		Increase
				As Restated
				(in thousands, except percentages)
Selling and marketing expenses	$	4,589		$	3,720		$	869		23	%
Selling and marketing expenses as a percentage of service revenues		5	%		5	%		—


	Six Months Ended
	June 30,								Percentage
	2006			2005			Increase		Increase
				As Restated
				(in thousands, except percentages)
Selling and marketing expenses	$	11,422		$	7,260		$	4,162		57	%
Selling and marketing expenses as a percentage of service revenues		6	%		5	%		1

The increase in selling and marketing expenses for the three months ended June 30, 2006 as compared to the three months ended June 30, 2005 is due to the inclusion of approximately $599,000 of stock-based compensation as a result of the adoption of SFAS 123R. The increase in selling and marketing expenses in absolute dollars for the six months ended June 30, 2006 as compared to the six months ended June 30, 2005 is due to the inclusion of salaries and benefits of certain delivery personnel who focused on sales pursuits during the first quarter of 2006, as well as the inclusion of approximately $1.2 million of stock-based compensation as a result of the adoption of SFAS 123R and compensation expense related to restricted stock units. The number of selling and marketing personnel increased to 56 people at the end of the second quarter of 2006 compared to 52 people at the end of the second quarter of 2005.

General and Administrative Expenses

General and administrative expenses relate principally to salaries and employee benefits associated with our management, legal, finance, information technology, hiring, training and administrative groups, and depreciation and occupancy expenses.


	Three Months Ended
	June 30,						(Decrease)			Percentage
	2006			2005			Increase			Increase
				As Restated
				(in thousands, except percentages)
General and administrative expenses	$	24,244		$	20,826		$	3,418			16	%
General and administrative expenses as a percentage of service revenues		25	%		28	%		(3	)


	Six Months Ended
	June 30,						(Decrease)			Percentage
	2006			2005			Increase			Increase
				As Restated
				(in thousands, except percentages)
General and administrative expenses	$	47,559		$	41,353		$	6,206			15	%
General and administrative expenses as a percentage of service revenues		26	%		28	%		(2	)

General and administrative expenses have increased in absolute dollars due to an increase in compensation and benefits expense, which was driven by an increase in the number of people worldwide. As of June 30, 2006, we employed 536 general and administrative people worldwide, of which 317 were India-based. By comparison, as of June 30, 2005, we employed 447 people worldwide, of which 228 people were India-based. General and administrative expenses have decreased as a percentage of service revenues due to the transition of certain functions to our India office, which has resulted in lower compensation costs per person and enabled us to leverage these costs over higher service revenues. General and administrative expenses for the three months ended June 30, 2006 and 2005 include approximately $822,000 of foreign exchange gains and approximately $896,000 of foreign exchange losses, respectively. General and administrative expenses for the six months ended June 30, 2006 and 2005 include approximately $793,000 of foreign exchange gains and approximately $1.8 million of foreign exchange losses, respectively. Additionally, general and administrative expenses include approximately $623,000 of stock-based compensation for the three months ended June 30, 2006 and $1.5 million of stock-based compensation for the six months ended June 30, 2006 as a result of the adoption of SFAS 123R and compensation expense related to restricted stock units. General and administrative expenses for the three months ended June 30, 2006 and 2005 include approximately $927,000 for provision for doubtful accounts and a recovery of allowance for doubtful accounts of approximately $282,000, respectively. General and administrative expenses for the six months ended June 30, 2006 include approximately $1.3 million for provision for doubtful accounts and a recovery of allowance for doubtful accounts of approximately $609,000.

SAPIENT CORPORATION

Restructuring and Other Related Charges

We recorded restructuring and other related charges of $334,000 and $5.4 million during the three months ended June 30, 2006 and 2005, respectively, and $1.1 million and $5.5 million during the six months ended June 30, 2006 and 2005, respectively.

2006-Restructure Event

During the first quarter of 2006, we initiated a restructuring plan in the United Kingdom to better position us to capitalize on market opportunities. As a result, 28 employees were terminated and we recorded $240,000 and $572,000 during the three and six months ended June 30, 2006, respectively, in restructuring and other related charges for severance and termination benefits in accordance with SFAS Statement No. 112, Employers’ Accounting for Postemployment Benefits. These charges were recorded in the United Kingdom segment in the Results by Operating Segment. We paid approximately $400,000 through the second quarter of 2006 and paid the remainder during the third quarter of 2006. We do not expect to make any further payments related to this restructuring event.


	Workforce
	(in thousands)
2006 provision	$	572
Cash utilized		(400	)

Balance, June 30, 2006	$	172

2005-Restructure Event

During the fourth quarter of 2005, we initiated a restructuring plan to streamline general and administrative (“G&A”) activities. This initiative included the transfer of certain finance, human resources, and internal IT functions to India. This initiative resulted in charges of approximately $99,000 and $299,000 during the three and six months ended June 30, 2006, respectively, to restructuring and other related charges related to severance and termination benefits and stay-bonuses in accordance with SFAS No. 112 and SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. These charges were not recorded to a segment because they impacted an area of the business that supports all business units, but are included in ‘Reconciling items’ in the Company’s Results by Operating Segment. We paid approximately $166,000 related to this liability as of June 30, 2006 and the remainder is expected to be paid by the end of the second quarter of 2007.


	Workforce
	(in thousands)
Balance at December 31, 2005	$	300
2006 provision		299
Cash utilized		(166	)

Balance at June 30, 2006	$	433

2001, 2002 and 2003 Restructure Events

As a result of the decline in the demand for advanced technology consulting services that began in 2000, we restructured our workforce and operations in 2001, 2002 and 2003. The restructuring 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 sublease income.

During the three and six months ended June 30, 2006, we recorded restructuring charges (benefit) of approximately (5,000) and $277,000, respectively, primarily due to changes in assumptions associated with our various restructured locations.

During the three and six months ended June 30, 2005, we recorded restructuring charges of approximately $5.4 million and $5.5 million respectively, due to a decrease in estimated sublease income on our restructured Santa Monica, California location.

SAPIENT CORPORATION


	Facilities
	(in thousands)
Balance at December 31, 2005	$	21,275
2006 provision		277
Cash utilized		(3,937	)
Non-cash utilized		(108	)

Balance at June 30, 2006	$	17,507

Amortization of Intangible Assets

During the three and six months ended June 30, 2006, amortization of intangible assets consisted primarily of amortization of intangible assets including: non-compete and non-solicitation agreements, customer list and backlog related to the 2006 PGI acquisition, SAP license agreement and customer list relating to the 2005 BIS acquisition and customer contracts and developed technology resulting from prior acquisitions. During the three and six months ended June 30, 2005, amortization of intangible assets consists primarily of amortization of customer contracts and developed technology resulting from prior acquisitions. Amortization expense related to intangible assets was $844,000 and $212,000 for the three months ended June 30, 2006 and 2005, respectively, and $1.9 million and $342,000 for the six months ended June 30, 2006 and 2005, respectively. The increase in amortization was due to the 2005 and 2006 acquisitions.

Interest and Other Income

Interest and other income is derived primarily from investments in U.S. government securities, tax-exempt, short-term municipal bonds and commercial paper.


	Three Months Ended
	June 30,						Percentage
	2006		2005		Increase		Increase
			As Restated
			(in thousands, except percentages)
Interest and other income	$	2,160	$	1,125	$	1,035		92	%

	Six Months Ended
	June 30,						Percentage
	2006		2005		Increase		Increase
			As Restated
			(in thousands, except percentages)
Interest and other income	$	3,540	$	2,139	$	1,401		65	%

During the three months ended June 30, 2006, other income included approximately $1.2 million of insurance proceeds. During the six months ended June 30, 2006 interest and other income included approximately $1.6 million of insurance proceeds. Included in these amounts are business interruption proceeds of approximately $394,000 in the first quarter of 2006 and $283,000 in the second quarter of 2006. These amounts were received in connection with a fire that occurred in our Gurgaon, India office during the first quarter of 2005. The fire did not have a material effect on our business or in our ability to serve our clients. The percentage increase for the three months and six months ended June 30, 2006 and 2005 was primarily due to the increase in other income, offset by lower interest income due to a lower average cash balance in 2006 compared to 2005.

Provision for Income Taxes

We have deferred tax assets which have arisen primarily as a result of net operating losses incurred in 2001, 2002 and 2003, as well as other temporary differences between book and tax accounting. SFAS No. 109, requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We evaluate all available

SAPIENT CORPORATION

evidence, such as recent and expected future operating results by tax jurisdiction, current and enacted tax legislation and other temporary differences between book and tax accounting, to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. As a result of operating losses incurred in 2001, 2002 and 2003, and uncertainty as to the extent and timing of profitability in future periods, we have recorded a valuation allowance as of June 30, 2006 relating to the deferred tax assets in the United States. Having assessed the ability to realize the deferred tax assets in certain foreign jurisdictions, we believe that future taxable income will be sufficient to realize the deferred tax benefit of the deferred tax assets in Canada, the United Kingdom, and Germany. The establishment and amount of the valuation allowance requires significant estimates and judgment and can materially affect our results of operations. If the realization of deferred tax assets in the future is considered more likely than not, an adjustment to the deferred tax assets would increase net income in the period such determination was made.

Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss, 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.

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 concerning which separate financial information is available to manage resources and evaluate performance. Beginning with the first quarter of 2006, we combined our Financial Services, Automotive, Consumer and Energy business unit, our Technology, Education, Communications and Health Care business unit and our Canada business unit into one business unit, which is now named North America Commercial. In addition, Experience Marketing became a standalone business unit. Our three business units in North America are now: (i) North America Commercial (“NAC”), (ii) Government Services and (iii) Experience Marketing (“EM”). In addition, we have two European business units: United Kingdom and Germany. We have reported our results by operating segments accordingly, and quarterly results for operating segments for 2005 have been reclassified to reflect these changes.

Prior to the first quarter of 2006, we allocated certain selling, marketing and general and administrative expenses to our business units in the United Kingdom, Germany and Canada as these activities had been managed within those business units, but we had not allocated these expenses to the business units in the United States. Beginning in the first quarter of 2006, we do not allocate certain marketing and general and administrative expenses to our NAC, United Kingdom, Germany and EM business unit segments because these activities are managed separately from the business units. We do allocate certain marketing and general and administrative expenses to our Government Services business unit as these activities are managed within the business unit. Quarterly results for operating segments for 2005 have been reclassified to reflect these changes. We did not allocate the costs associated with our restructuring events across our operating segments for internal measurement purposes, given that the substantial majority of the restructuring costs were related to the initiative to reengineer general and administrative activities and the consolidation of facilities. We allocated the workforce reduction costs associated with the United Kingdom’s 2006 restructuring plan due to the specific identification of the terminated employees to their respective business unit. Asset information by operating segment is not reported to or reviewed by the chief operating decision maker and, therefore, we have not disclosed asset information for each operating segment.

SAPIENT CORPORATION


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
				As Restated						As Restated
	(In thousands)
Service Revenues
North America Commercial	$	63,349		$	45,869		$	116,935		$	89,068
Government Services		3,656			6,225			8,833			10,963
Experience Marketing		7,159			—			11,673			—
United Kingdom		15,932			16,164			33,323			35,217
Germany		7,907			6,682			14,333			14,966

Consolidated total	$	98,003		$	74,940		$	185,097		$	150,214

Income From Continuing Operations
North America Commercial (1)	$	19,681		$	17,062		$	36,778		$	31,481
Government Services (1)		128			3,384			1,300			5,608
Experience Marketing (1)		609			—			(332	)		—
United Kingdom (1)		1,172			3,419			4,856			8,752
Germany (1)		2,954			3,443			5,136			7,308

Total Reportable Segments (1)		24,544			27,308			47,738			53,149
Reconciling Items (2)		(20,624	)		(23,833	)		(45,284	)		(43,154	)

Consolidated income from continuing operations, before income taxes, discontinued operations and cumulative effect of accounting change	$	3,920		$	3,475		$	2,454		$	9,995


(1)		Reflects only the direct controllable expenses of each business unit segment. It does not represent the total operating results for each business unit as it does not contain an allocation of certain corporate and general and administrative expenses incurred in support of the business unit segments.

(2)		Adjustments that are made to the total of the segments’ operating income in order to arrive at consolidated income before income taxes include the following:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
				As Restated						As Restated
	(in thousands)
Centrally managed functions	$	17,741		$	18,727		$	37,991		$	38,238
Restructuring and other related charges		334			5,367			1,148			5,491
Amortization of intangible assets		844			212			1,881			342
Stock-based compensation expense		2,637			129			5,559			269
Interest and other income		(2,160	)		(1,125	)		(3,540	)		(2,139	)
Unallocated expenses (3)		1,228			523			2,245			953

	$	20,624		$	23,833		$	45,284		$	43,154


(3)		Includes costs controlled directly by corporate headquarters.

Service Revenues by Operating Segments

Consolidated service revenues for the second quarter of 2006, compared to the second quarter of 2005, increased 31% in U.S. dollars and 26% in local currency terms. Our NAC business unit increased service revenues $17.5 million, or 38%, in the second quarter of 2006 compared to the second quarter of 2005. The increase in our NAC business unit for the six months ended June 30, 2006 as compared to the six months ended June 30, 2005 was primarily a result of organic revenue combined with revenue related to our 2005 acquisition. For the six months ended June 30, 2006 and 2005, there were six months and one month of revenue included from our 2005 acquisition, respectively. Our Government Services business unit service revenues decreased 41%, or $2.6 million, in the second quarter of 2006 compared to the second quarter of 2005. The decrease in Government Services revenue is due to demand for services in this segment being lower than anticipated due to the timing of funding between our Government Services clients and the U.S. Government. Our United Kingdom business unit reported a decrease in service revenues for the six months ended June 30, 2006 as compared to the six months ended June 30, 2005 of 1% or $232,000, or 1% in local currency. Germany’s service revenues increased 18% or $1.2 million, or 19% in local currency, in the second quarter of 2006 compared to the second quarter of 2005. Our EM business unit reported service revenues of $7.2 million for the second quarter of 2006. Our EM business unit is a new business unit for 2006 and is primarily attributable to our PGI acquisition.

Consolidated service revenues for the six months ended June 30, 2006, compared to the same period in 2005, increased 23% in U.S. dollars and 24% in local currency terms. Our NAC business unit increased service revenues $27.9 million, or 31%, during

SAPIENT CORPORATION

the six months ended June 30, 2006 compared to the same period in 2005. The increase in our NAC business unit for the six months ended June 30, 2006 as compared to the six months ended June 30, 2005 was primarily a result of organic revenue growth not related to acquisitions combined with revenue related to our 2005 acquisition. Our Government Services business unit service revenues decreased 19%, or $2.1 million, during the six months ended June 30, 2006 compared to the same period in 2005. The decrease in Government Services revenue is due to demand for services in this segment being lower than anticipated due to the timing of funding between our Government Services clients and the U.S. Government. Our United Kingdom business unit reported a decrease in service revenues for the six months ended June 30, 2006 as compared to the six months ended June 30, 2005 of 5% or $1.9 million, or 1% in local currency. Germany’s service revenues decreased 4% or $633,000, or less than 1% in local currency, during the six months ended June 30, 2006 compared to the same period in 2005. Our EM business unit reported service revenues of $11.7 million for the six months ended June 30, 2006.

Operating Income by Operating Segments

Our NAC business unit increased operating income $2.6 million, or 15%, in the second quarter of 2006 compared to the second quarter of 2005. Our Government Services, United Kingdom and Germany operating segments did not have improved operating results during the second quarter of 2006 compared to the second quarter of 2005. Our Government Services business unit operating income decreased $3.3 million in the second quarter of 2006 compared to the second quarter of 2005 primarily because of a decrease in revenue due to timing of funding between our Government Services clients and the U.S. Government. Our United Kingdom business unit operating income decreased $2.2 million during the second quarter of 2006 compared to the second quarter of 2005. Germany’s operating income decreased $489,000 in the second quarter of 2006 compared to the second quarter of 2005. Our EM business unit reported operating income of $609,000 in the second quarter of 2006.

Our NAC business unit increased operating income $5.3 million, or 17%, during the six months ended June 30, 2006 compared to the same period in 2005. Our Government Services, United Kingdom and Germany operating segments did not have improved operating results during the six months ended June 30, 2006 compared to the same period in 2005. Government Services business unit operating income decreased $4.3 million during the six months ended June 30, 2006 compared to the same period in 2005. Our United Kingdom business unit operating income decreased $3.9 million during the six months ended June 30, 2006 compared to the same period in 2005, while Germany’s operating income decreased $2.2 million during the six months ended June 30, 2006 compared to the same period in 2005. Our EM business unit reported an operating loss of $332,000 during the six months ended June 30, 2006.

Liquidity and Capital Resources

During the six months ended June 30, 2006, we experienced a use of cash from operations of $20.6 million. We invest our excess cash predominantly in instruments that are highly liquid, investment grade securities. At June 30, 2006, we had approximately $97.3 million in cash, cash equivalents, restricted cash and marketable investments, compared to $157.8 million at December 31, 2005.

We have deposited approximately $1.6 million with various banks as collateral for letters of credit and performance bonds and have classified this cash as restricted on the accompanying consolidated and condensed balance sheet at June 30, 2006.

In our Annual Report on the Form 10-K for the year ended December 31, 2005, under the heading Liquidity and Capital Resources, we outlined our contractual obligations. For the quarter ended June 30, 2006, there have been no material changes in our contractual obligations.

Cash used in operating activities was $20.6 million for the six months ended June 30, 2006. This resulted primarily from an increase in accounts receivable of $19.6 million, an increase in prepaid expenses and other current assets of $ 8.0 million, an increase in unbilled revenues of $12.6 million, a decrease in accounts payable of $2.0 million, a decrease in accrued restructuring of $3.4 million, a decrease in our accrued compensation of $4.0 million and a gain on disposal of HWT of approximately $4.8 million, primarily offset by net non-cash charges of $14.0 million, including depreciation and amortization of $6.6 million, stock compensation expense of $5.6 million, provision for doubtful accounts of $1.3 million and deferred taxes of $0.5 million. An increase in other accrued liabilities of $19.6 million also contributed to offset cash used in operations. Cash flows from operations included approximately $220,000 of cash generated from operations by HWT through the date of disposal. Days sales outstanding (“DSO”) is calculated based on actual three months of total revenue and period end receivables, unbilled and deferred revenue balances. DSO for accounts receivable increased to 93 days in the second quarter of 2006 from 85 days in the first quarter of 2006, primarily due to delays in billings throughout the quarter as a result of transitioning the billing function to India. Additionally, the transition of the billing function to India took focus away from our collection efforts. Approximately 52% of our services revenue for the second quarter of 2006 was derived from time and materials arrangements as compared to 38% for the second quarter of 2005. Because of the growing trend in revenue generated from time and materials arrangements and the fact that they are billed one month in arrears, we expect our unbilled revenue balance to increase at the end of a fiscal quarter as our service revenues increase. We expect our unbilled revenues to be short-term in nature, with a majority being billed within 90 days.

Cash provided by investing activities was $11.2 million for the six months ended June 30, 2006. This was due primarily to net cash inflows of $38.8 million from the net sales and maturities of marketable securities and $5.1 million of proceeds from the sale

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of our HWT business unit, offset by cash paid for the PGI acquisition, net of cash received in the acquisition, of approximately $26.5 million, additional cash consideration related to our BIS acquisition of $183,000 and capital expenditures of $6.1 million.

Cash used in financing activities was $12.5 million for the six months ended June 30, 2006, as a result of the repurchase of our common stock shares for approximately $17.0 million, partially offset by $4.5 million of cash proceeds provided from the exercise of employee stock options and sale of common stock under our employee stock purchase plan.

On November 16, 2004, our Board of Directors authorized up to $25.0 million in funds for use in our common stock repurchase program. On February 10, 2006 the Board of Directors authorized an additional $25.0 million in funds for use in such programs. We announced that we will repurchase shares on the open market or in private transactions from time to time depending on market conditions. Each authorization shall continue for a period of two years from its inception or until it is discontinued by the Board of Directors. Under our buyback program no shares were repurchased in 2004 and 3.0 million shares were repurchased in 2005 at an average price of $5.84 per share for an aggregate purchase price of $17.6 million. We repurchased approximately 1.0 million shares of our common stock at an average price of $5.98 per share for an aggregate purchase price of approximately $6.2 million during the first quarter of 2006 and approximately 2.2 million shares at an average price of $4.99 per share for an aggregate purchase price of $10.7 million during the second quarter of 2006. Subsequent to June 30, 2006 we repurchased approximately 245,000 shares of our common stock at an average price of $4.71 per share for an aggregate purchase price of $1.2 million.

During the first quarter of 2005, a fire occurred in our Gurgaon, India office. The fire did not have a material effect on our business or in our ability to serve our clients. In connection with the fire, we received business interruption insurance proceeds of approximately $394,000 in the first quarter of 2006 and $283,000 in the second quarter of 2006.

In connection with the acquisition of BIS in June of 2005, we have agreed to pay additional cash consideration totaling approximately $550,000 over a three year period, paid in equal installments within ten days of the first, second, and third anniversary of the Closing Date. We have agreed to pay additional consideration based upon the attainment by the acquired entity of defined operating objectives. The maximum potential future consideration pursuant to such arrangements, to be resolved over a three year period, is $3.9 million. We recorded approximately $991,000 to goodwill in the second quarter of 2006 and paid this amount in the third quarter of 2006.

We believe that our existing cash, cash equivalents, restricted cash and marketable investments will be sufficient to meet our working capital, capital expenditures, restructuring requirements and stock repurchase initiatives for at least the next 12 months.

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. In the opinion of management, the Company does not have a potential liability related to any current legal proceedings and claims that would individually or in the aggregate have a material adverse effect on its financial condition, liquidity or results of operations. 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 $3.2 million and various administrative audits, each of which have arisen in the ordinary course of our business. The Company has an accrual at December 31, 2006 of approximately $800,000 related to certain of these items. The Company intends to defend these matters vigorously, although the ultimate outcome of these items is uncertain and the potential loss, if any, may be significantly higher or lower than the amounts that the Company has previously accrued. The pending derivative actions do not assert a claim against the Company for specific monetary damages and, accordingly, the amounts described herein are exclusive of any potential future monetary damages that the company may incur as a result of the derivative actions.

On October 27, 2006 and October 31, 2006, three additional shareholder derivative actions were filed in the United States District Court for the District of Massachusetts; Mike Lane, Derivatively on Behalf of Sapient Corporation v. J. Stuart Moore, Jerry A. Greenberg, Sheeroy D. Desai, et al. and Sapient Corporation; Marc Doyle, Derivatively on Behalf of Sapient Corporation v. J. Stuart Moore, Jerry A. Greenberg, Sheeroy D. Desai, et al. and Sapient Corporation; and Laurence Halaska, Derivatively on Behalf of Sapient Corporation v. Jerry A. Greenberg, J. Stuart Moore, Scott J. Krenz, et al. and Sapient Corporation. The federal derivative actions are substantially similar to the state derivative actions, except that federal derivative actions assert violations of Sarbanes-Oxley and violations of Sections 10(b), 14(a) and 20(a) of the Securities Exchange Act. None of the foregoing derivative actions asserts a claim against the Company for specific monetary damages.

On November 30, 2006, the Securities and Exchange Commission (“SEC”) notified us that it had commenced a formal inquiry into our historical stock-based compensation practices. Subsequently, on March 8, 2007, we received a subpoena from the SEC requesting documents relating to this matter, and responded by producing documents. We are cooperating fully with the SEC and will continue to do so as the inquiry moves forward. At this point, we are unable to predict what, if any, consequences the SEC investigation may have on us. However, the investigation could result in considerable legal expenses, divert management’s attention from other business concerns and harm our business. If the SEC were to commence legal action, we could be required to pay significant penalties and/or fines and could become subject to an administrative order and/or a cease and desist order. The filing of our restated financial statements to correct the discovered accounting errors will not resolve the SEC investigation.

Recent Accounting Pronouncements

In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which clarifies the accounting for uncertainty in income tax recognized in an enterprise’s financial statements in accordance with SFAS No. 109. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 31, 2006. The adoption of FIN 48 did not have a material impact on the Company’s financial position or results of operations.

In September 2006, the SEC issued SAB No. 108, Considering the Effect of Prior Year Misstatements when Qualifying Misstatements in Current Year Financial Statements (“SAB No. 108”). SAB No. 108 provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 is effective for companies with fiscal years ending after November 15, 2006 and was adopted in the year ending December 31, 2006. The adoption of SAB No. 108 did not have a material impact on the Company’s financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company has not yet determined the effect, if any, that the application of SFAS No. 157 will have on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. If the fair value option is elected, a business entity shall report unrealized gains and losses on elected items in earnings at each subsequent reporting date. Upon initial adoption of this Statement an entity is permitted to elect the fair value option for available-for-sale and held-to-maturity securities previously accounted for under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. The effect of reclassifying those securities into the trading category should be included in a cumulative-effect adjustment of retained earnings and not in current-period earnings and should be separately disclosed. SFAS No. 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. The Company has not yet determined the effect, if any, that the application of SFAS No. 159 will have on its consolidated financial statements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

During the three and six months ended June 30, 2006, no changes in our market risk exposure occurred. For quantitative and qualitative disclosures about market risk affecting Sapient, see Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

Item 4. Controls and Procedures

Background

During 2006 there were numerous changes to our accounting personnel. This has led to an insufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of accounting principles generally accepted in the United States commensurate with our financial reporting requirements. The turnover in accounting personnel described above is a result of the significant disruption to the financial accounting organization, processes and workload incurred during 2006 as follows:

	•		the transition of key accounting and administrative functions and processes to India during 2006;

	•		the changes in the finance organization and resultant significant turnover in the Company’s finance and accounting staff, including three different Chief Financial Officers during 2006; and

	•		the investigation and restatement of the Company’s financial statements relating to historic stock option practices, requiring significant financial research, analysis and incremental recordkeeping.

Evaluation of Disclosure Controls and Procedures

Under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness, as of June 30, 2006, of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). Our evaluation has identified the following material weakness in our internal control over financial reporting. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement to the annual or interim financial statements will not be prevented or detected.

Control Environment. We did not maintain an effective control environment as we did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of accounting principles generally accepted in the United States commensurate with our financial reporting requirements. This control deficiency could result in a misstatement to our financial statement accounts and disclosures that would result in a material misstatement to the annual or interim financial statements that would not be prevented or detected. This control deficiency could also impede our ability to complete our financial reporting process and prepare financial statements on a timely basis. Accordingly, management has concluded that this control deficiency constitutes a material weakness.

Based on the evaluation of this material weakness, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of June 30, 2006 to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Plan for Remediation of the Material Weakness in Internal Control Over Financial Reporting

During the second half of 2006, we began adding members to our accounting and finance staff and implementing additional review procedures in our financial statement close processes to address these issues. While the impact of these enhancements to the internal control over financial reporting were positive, management’s assessment of our internal control over financial reporting for 2006 indicated that additional resources, training, and experience were necessary for certain of these controls to operate effectively.

Management’s actions to further address these issues in 2007 include:

	•		assigning the new Chief Administrative Officer direct responsibility for resolving the issues with the core transaction team in India;

	•		adding a significant number of resources to help stabilize the accounting and finance team in India and providing additional training to ensure the processes and controls there are being followed; and

	•		hiring and training of additional key personnel in corporate accounting, purchasing, financial planning and analysis, Sarbanes-Oxley compliance and other open roles.

Changes in Internal Control Over Financial Reporting

No changes in our internal control over financial reporting occurred during the fiscal quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION


Item 1.	*Legal Proceedings*

Regulatory Proceedings

On November 30, 2006, the SEC notified us that it had commenced a formal inquiry into our historical stock-based compensation practices. Subsequently, on March 8, 2007, we received a subpoena from the SEC requesting documents relating to this matter and responded by providing documents. We have been cooperating with the SEC as it continues its investigation. We are cooperating fully with the SEC and will continue to do so as the inquiry moves forward. At this point, we are unable to predict what, if any, consequences the SEC investigation may have on us. However, the investigation could result in considerable legal expenses, divert management’s attention from other business concerns and harm our business. If the SEC were to commence legal action, we could be required to pay significant penalties and/or fines and could become subject to an administrative order and/or a cease and desist order. The filing of our restated financial statements to correct the discovered accounting errors likely will not resolve the SEC investigation.

Private Litigation

We are subject to certain legal proceedings and claims, as discussed below. We are also subject to certain other legal proceedings and claims that have arisen in the course of business and that have not been fully adjudicated. In the opinion of management, we do not have a potential liability related to any current legal proceedings and claims that would individually or in the aggregate have a material adverse effect on our financial condition, liquidity or results of operations. However, the results of legal proceedings cannot be predicted with certainty. Should we fail to prevail in any of these legal matters or should several of these legal matters be resolved against us in the same reporting period, the operating results of a particular reporting period could be materially adversely affected.

None of the foregoing derivative actions asserts a claim against the Company for specific monetary damages.

Item 1A. Risk Factors

Risk Factors

The following important factors, among others, could cause our actual business and financial results to differ materially from those contained in forward-looking statements made in this Quarterly Report or presented elsewhere by management from time to time.

Our business, financial condition and results of operations may be materially impacted by economic conditions and related fluctuations in customer demand for business, technology and other consulting services.

The market for our consulting services and the technologies used in our solutions historically have tended to fluctuate with economic cycles — particularly those cycles in the United States and the United Kingdom, where we earn the majority of our revenues. During economic cycles in which many companies are experiencing financial difficulties or uncertainty, clients and potential clients may cancel or delay spending on technology and other business initiatives. Military actions in Iraq and elsewhere, global terrorism, natural disasters and political unrest are among the factors that may adversely impact regional and global economic conditions and, concomitantly, client investments in our services. Although economic conditions in our industry have been improving in recent years, a sudden or gradual downturn in these conditions may cause large companies to cancel or delay consulting initiatives for which they have engaged us. Further, if the rate of cancellations or delays significantly increases, our business, financial condition and results of operations could be materially and adversely impacted.

Our market is highly competitive and we may not be able to continue to compete effectively.

The markets for the services we provide are highly competitive. We believe that we compete principally with large systems consulting and implementation firms, offshore outsourcing companies, and clients’ internal information systems departments. Other competitors include interactive and traditional advertising agencies and, to a lesser extent, boutique consulting firms that maintain specialized skills and/or are geography based. With respect to our Government Services practice, we both compete and partner with large defense contractors. Some of our competitors have significantly greater financial, technical and marketing resources, and generate greater revenues and have greater name recognition, than we do. Often, these competitors offer a larger and more diversified suite of products and services than we offer. These competitors may win client engagements by significantly discounting their services in exchange for a client’s promise to purchase other goods and services from the competitor, either concurrently or in the future. If we cannot keep pace with the intense competition in our marketplace, our business, financial condition and results of operations will suffer.

Our international operations and Global Distributed Delivery,( “GDD”) model subject us to increased risk.

We currently have offices in the United Kingdom, Germany, the Netherlands, India and Canada. Our international operations are a significant percentage of our total revenues, and our GDD model is a key component of our ability to deliver our services successfully. Our international operations are subject to inherent risks, including:

	•		economic recessions in foreign countries;

	•		fluctuations in currency exchange rates or impositions of restrictive currency controls;

	•		political instability, war or military conflict;

	•		changes in regulatory requirements;

	•		complexities and costs in effectively managing multi-national operations and associated internal controls and procedures;

	•		significant changes in immigration policies or difficulties in obtaining required immigration approvals for international assignments;

	•		restrictions imposed on the import and export of technologies in countries where we operate; and

	•		reduced protection for intellectual property in some countries.

In particular, our GDD model depends heavily on our offices in New Delhi and Bangalore, India. Any escalation in the political or military instability in India or Pakistan or the surrounding countries, or a business interruption resulting from a natural disaster, such as an earthquake, could hinder our ability to successfully utilize GDD, and could result in material adverse effects to our

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business, financial condition and results of operations. Furthermore, the delivery of our services from remote locations causes us to rely on data, phone, power and other networks which are not as reliable as those in other countries where we operate. Any failures of these systems could affect the success of our GDD model. Remote delivery of our services also increases the complexity and risk of delivering our services, which could affect our ability to satisfy our clients’ expectations or perform our services within the estimated time frame and budget for each project.

If we do not attract and retain qualified professional staff, we may be unable to perform adequately our client engagements and could be limited in accepting new client engagements.

Our business is people intensive, and our success depends upon our ability to attract, retain, train and motivate highly skilled employees. The improvement in demand for business, marketing and technology consulting services has further increased the need for employees with specialized skills or significant experience in business, marketing and technology consulting, particularly at senior levels. We have been expanding our operations in all locations, and these expansion efforts will be highly dependent on attracting a sufficient number of highly skilled people. We may not be successful in attracting enough employees to achieve our desired expansion or staffing plans. Furthermore, the industry turnover rates for these types of employees are high, and we may not be successful in retaining, training and motivating the employees we attract. Any inability to attract, retain, train and motivate employees could impair our ability to manage adequately and complete existing projects and to bid for or accept new client engagements. Such inability may also force us to increase our hiring of expensive independent contractors, which may increase our costs and reduce our profitability on client engagements. We must also devote substantial managerial and financial resources to monitoring and managing our workforce and other resources. Our future success will depend on our ability to manage the levels and related costs of our workforce and other resources effectively.

We earn revenues, incur costs and maintain cash balances in multiple currencies, and currency fluctuations affect our financial results.

We have significant international operations, and we frequently earn our revenues and incur our costs in various foreign currencies. Our international revenues were $31.5 million for the three months ended June 30, 2006 and $61.2 million for the six months ended June 30, 2006. Doing business in these foreign currencies exposes us to foreign currency risks in numerous areas, including revenues, purchases, payroll and investments. We also have a significant amount of foreign currency net asset exposures. Certain foreign currency exposures, to some extent, are naturally offset within an international business unit, because revenues and costs are denominated in the same foreign currency, and certain cash balances are held in U.S. dollar denominated accounts. However, due to the increasing size and importance of our international operations, fluctuations in foreign currency exchange rates could materially impact our financial results. Our GDD model also subjects us to increased currency risk, because we frequently incur a significant portion of our project costs in Indian rupees and earn revenue from our clients in other currencies. Currently, we do not hold any derivative contracts that hedge our foreign currency risk, but we may adopt such strategies in the future.

Our cash position includes amounts denominated in foreign currencies. We manage our worldwide cash requirements considering available funds from our subsidiaries and the cost effectiveness with which these funds can be accessed. The repatriation of cash balances from certain of our subsidiaries outside the United States could have adverse tax consequences and be limited by foreign currency exchange controls. However, those balances are generally available without legal restrictions to fund ordinary business operations. We have transferred, and will continue to transfer, cash from those subsidiaries to the parent company, and to other international subsidiaries, when it is cost effective to do so. However, any fluctuations in foreign currency exchange rates could materially impact the availability and size of these funds for repatriation or transfer.

We have significant fixed operating costs, which may be difficult to adjust in response to unanticipated fluctuations in revenues.

A high percentage of our operating expenses, particularly personnel, rent, depreciation and amortization of intangible assets, are fixed in advance of any particular quarter. As a result, an unanticipated decrease in the number or average size of, or an unanticipated delay in the scheduling for, our projects may cause significant variations in operating results in any particular quarter and could have a material adverse effect on operations for that quarter.

An unanticipated termination or decrease in size or scope of a major project, a client’s decision not to proceed with a project we anticipated or the completion during a quarter of several major client projects could require us to maintain underutilized employees and could have a material adverse effect on our business, financial condition and results of operations. Our revenues and earnings may also fluctuate from quarter to quarter because of such factors as:

	•		the contractual terms and timing of completion of projects, including achievement of certain business results;

	•		any delays incurred in connection with projects;

	•		the adequacy of provisions for losses and bad debts;

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	•		the accuracy of our estimates of resources required to complete ongoing projects;

	•		loss of key highly skilled personnel necessary to complete projects; and

	•		general economic conditions.

We may lose money if we do not accurately estimate the costs of fixed-price engagements.

Many of our projects are based on fixed-price contracts, rather than contracts in which payment to us is determined on a time and materials basis. Our failure to accurately estimate the resources and schedule required for a project, or our failure to complete our contractual obligations in a manner consistent with the project plan upon which our fixed-price contract was based, could adversely affect our overall profitability and could have a material adverse effect on our business, financial condition and results of operations. We are consistently entering into contracts for large projects that magnify this risk. We have been required to commit unanticipated additional resources to complete projects in the past, which has resulted in losses on those contracts. We will likely experience similar situations in the future. In addition, we may fix the price for some projects at an early stage of the process, which could result in a fixed price that is too low and, therefore, this incorrect estimation could adversely affect our business, financial condition and results of operations.

Our profitability will be adversely impacted if we are unable to maintain our pricing and utilization rates as well as control our costs.

Our profitability derives from and is impacted by three factors, primarily: (i) the prices for our services; (ii) our consultants’ utilization or billable time, and (iii) our costs. To achieve our desired level of profitability our utilization must remain at an appropriate rate, and we must contain our costs. Should we reduce our prices in the future as a result of pricing pressures, or should we be unable to achieve our target utilization rates and costs, our profitability could be adversely impacted and the price of our securities could decline materially.

We partner with third parties on certain complex engagements in which our performance depends upon, and may be adversely impacted by, the performance of such third parties.

Certain complex projects may require that we partner with specialized software or systems vendors or other partners to perform our services. Often in these circumstances, we are liable to our clients for the performance of these third parties. Should the third parties fail to perform timely or satisfactorily, our clients may elect to terminate the projects or withhold payment until the services have been completed successfully. Additionally, the timing of our revenue recognition may be affected or we may lose revenue or realize lower profits if we incur additional costs due to delays or because we must assign additional personnel to complete the project. Furthermore, our relationships with our clients and our reputation generally may suffer harm as a result of our partners’ unsatisfactory performance.

Our clients could unexpectedly terminate their contracts for our services.

Some of our contracts can be canceled by the client with limited advance notice and without significant penalty. A client’s termination of a contract for our services could result in a loss of expected revenues and additional expenses for staff that were allocated to that client’s project. We could be required to maintain underutilized employees who were assigned to the terminated contract. The unexpected cancellation or significant reduction in the scope of any of our large projects, or client termination of one or more recurring revenue contracts, could have a material adverse effect on our business, financial condition and results of operations.

We may be liable to our clients for damages caused by unauthorized disclosures of confidential information or by our failure to remedy system failures.

We frequently receive confidential information from our clients, including confidential customer data, that we use to develop solutions. If any person, including a Company employee, misappropriates client confidential information, or if client confidential information is inappropriately disclosed due to a breach of our computer systems, system failures or otherwise, we may have substantial liabilities to our clients or client customers.

Further, many of our projects involve technology applications or systems that are critical to the operations of our clients’ businesses and handle very large volumes of transactions. If we fail to perform our services correctly, we may be unable to deliver applications or systems to our clients with the promised functionality or within the promised time frame, or to satisfy the required service levels for support and maintenance. While we have taken precautionary actions to create redundancy and back-up systems, any such failures by us could result in claims by our clients for substantial damages against us.

Although we attempt to limit the amount and type of our contractual liability for breaches of confidentiality and defects in the applications or systems we provide, and carry insurance coverage which mitigates these liabilities in certain instances, we cannot be assured that these limitations and insurance coverages will be applicable and enforceable in all cases. Even if these limitations and insurance coverages are found to be applicable and enforceable, our liability to our clients for these types of claims could be

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material in amount and affect our business, financial condition and results of operations. Additionally, such claims may harm our reputation and cause us to lose clients.

Our services may infringe the intellectual property rights of third parties, and create liability for us as well as harm our reputation and client relationships.

The services that we offer to clients may infringe the intellectual property (“IP”) rights of third parties and result in legal claims against our clients and Sapient. These claims may damage our reputation, adversely impact our client relationships and create liability for us. Moreover, although we generally agree in our client contracts to indemnify the clients for expenses or liabilities they incur as a result of third party IP infringement claims associated with our services, the resolution of these claims, irrespective of whether a court determines that our services infringed another party’s IP rights, may be time-consuming, disruptive to our business and extraordinarily costly. Finally, in connection with an IP infringement dispute, we may be required to cease using or developing certain IP that we offer to our clients. These circumstances could adversely impact our ability to generate revenue as well as require us to incur significant expense to develop alternative or modified services for our clients.

We may be unable to protect our proprietary methodology.

Our success depends, in part, upon our proprietary methodology and other intellectual property rights. We rely upon a combination of trade secrets, nondisclosure and other contractual arrangements, and copyright and trademark laws to protect our proprietary rights. We enter into confidentiality agreements with our employees, subcontractors, vendors, consultants and clients, and limit access to and distribution of our proprietary information. We cannot be certain that the steps we take in this regard will be adequate to deter misappropriation of our proprietary information or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights.

Our stock price is volatile and may result in substantial losses for investors.

The trading price of our common stock has been subject to wide fluctuations. Our trading price could continue to be subject to wide fluctuations in response to:

	•		quarterly variations in operating results and achievement of key business metrics by us or our competitors;

	•		changes in operating results estimates by securities analysts;

	•		any differences between our reported results and securities analysts’ published or unpublished expectations;

	•		announcements of new contracts or service offerings made by us or our competitors;

	•		announcements of acquisitions or joint ventures made by us or our competitors; and

	•		general economic or stock market conditions.

In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of their securities. The commencement of this type of litigation against us could result in substantial costs and a diversion of management’s attention and resources.

Our former Co-Chairman and Co-Chief Executive Officers have significant voting power and may effectively control the outcome of any stockholder vote.

Jerry A. Greenberg, our former Co-Chairman of the Board and Co-Chief Executive Officer of the Company and J. Stuart Moore, our former Co-Chairman of the Board and Co-Chief Executive Officer and current member of our Board of Directors, own, in the aggregate, approximately 33% of our outstanding common stock. As a result, they have the ability to substantially influence and may effectively control the outcome of corporate actions requiring stockholder approval, including the election of directors. This concentration of ownership may also have the effect of delaying or preventing a change in control of Sapient, even if such a change in control would benefit other investors.

We are dependent on our key employees.

Our success depends in large part upon the continued services of a number of key employees. Our employment arrangements with our key personnel provide that employment is terminable at will by either party. The loss of the services of any of our key personnel could have a material adverse effect on our business, financial condition and results of operations. In addition, if our key employees resign from Sapient to join a competitor or to form a competing company, the loss of such personnel and any resulting loss of existing or potential clients to any such competitor could have a material adverse effect on our business, financial condition and results of operations. Although, to the extent permitted by

SAPIENT CORPORATION

law, we require our employees to sign agreements prohibiting them from joining a competitor, forming a competing company or soliciting our clients or employees for certain periods of time, we cannot be certain that these agreements will be effective in preventing our key employees from engaging in these actions or that courts or other adjudicative entities will substantially enforce these agreements. Furthermore, for those employees whom we involuntarily terminated in connection with our restructuring actions, we have waived the non-competition clause of their agreements in exchange for releases of claims. We granted these waivers only in connection with the restructuring actions, and our general practice is not to waive the non-competition obligations of departing employees.

We may be unable to achieve anticipated benefits from acquisitions and joint ventures.

The anticipated benefits from any acquisitions or joint ventures that we may undertake might not be achieved. For example, if we acquire a company, we cannot be certain that clients of the acquired business will continue to conduct business with us, or that employees of the acquired business will continue their employment or integrate successfully into our operations and culture. The identification, consummation and integration of acquisitions and joint ventures require substantial attention from management. The diversion of management’s attention, as well as any difficulties encountered in the integration process, could have an adverse impact on our business, financial condition and results of operations. Further, we may incur significant expenses in completing any such acquisitions, and we may assume significant liabilities, some of which may be unknown at the time of such acquisition. We note, in particular, our current efforts to integrate and assimilate our Experience Marketing business unit, following our acquisition of PGI in early 2006. Failure to complete this initiative in a timely and efficient basis may adversely impact our business, financial condition and results of operations.

If we do not effectively improve our operational and financial processes, our ability to achieve efficiencies and cost savings may be delayed and our results of operations may be adversely impacted.

To streamline our general and administrative infrastructure and costs as a percentage of revenue, and ensure that we can appropriately scale as our business expands, we are redesigning many operational processes and transitioning certain internal, non-billable roles to our India office. The activities principally relate to finance, human resources and certain IT functions, and have resulted, and will result, in the elimination of certain general and administrative jobs in the United States, United Kingdom, Germany and Canada. If we do not timely, efficiently and effectively upgrade or replace systems, redesign processes and implement the preceding role transitions and necessary training as our business requires, we may be unable to support our growth effectively or realize cost savings as quickly as expected and maintain effective internal controls over financial reporting. Additionally, the quality of our services may decline pending the successful completion of these initiatives. Consequently, our results of operations may be adversely impacted. As indicated below in this Item 1A and Item 4, the transition of several finance functions to our offices in India is a principal reason that management is reporting that a material weakness exists in the Company's internal control over financial reporting.

The failure to successfully and timely implement certain financial system changes to improve operating efficiency and enhance our reporting controls could harm our business.

In parallel with the foregoing operational process redesign and role transition activities, we have implemented and continue to install several upgrades and enhancements to our financial systems. We expect these initiatives to enable us to achieve greater operating and financial reporting efficiency and also enhance our existing control environment through increased levels of automation of certain processes. Failure to successfully execute these initiatives in a timely, effective and efficient manner could result in the disruption of our operations, the inability to comply with our Sarbanes-Oxley obligations and the inability to report our financial results in a timely and accurate manner.

Management’s determination that a material weakness exists in our internal controls over financial reporting could have a material adverse impact on the Company.

We are required to maintain internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles. In Item 4 of this Quarterly Report, management reports that a material weakness exists in the Company’s internal control over financial reporting, principally related to the Company’s transition of several Company finance functions to our offices in India. Specifically, in 2006 the Company lacked a sufficient complement of senior financial accounting and reporting personnel possessing competencies commensurate with the Company’s financial reporting requirements Due to this material weakness, management has concluded that as of the end of the period, the Company’s disclosure controls and procedures were not effective. Consequently, and pending the Company’s remediation of the matters that have caused the control deficiencies underlying the material weakness, our business and results of operations could be harmed, we may be unable to report properly or timely the results of our operations, and investors may lose faith in the reliability of our financial statements. Accordingly, the price of our securities may be adversely and materially impacted.

We face risks related to the restatement of our financial statements and the ongoing SEC investigation regarding our historical stock-based compensation practices.

SAPIENT CORPORATION

requesting several documents relating to this matter. We are cooperating fully with the SEC and will continue to do so as the inquiry moves forward. At this point, we are unable to predict what, if any, consequences the SEC investigation may have on us. However, the investigation could result in considerable legal expenses, divert management’s attention from other business concerns and harm our business. If the SEC were to commence legal action, we could be required to pay significant penalties and/or fines and could become subject to an administrative order and/or a cease and desist order. The filing of our restated financial statements to correct the discovered accounting errors will not resolve the SEC investigation. Further, the resolution of the SEC investigation could require the filing of additional restatements of our prior financial statements, and/or our restated financial statements, or require that we take other actions not presently contemplated.

Our corporate governance provisions may deter a financially attractive takeover attempt.

Provisions of our charter and by-laws may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including a transaction in which stockholders would receive a premium for their shares. These provisions include the following:

	•		our Board of Directors has the authority, without further action by the stockholders, to fix the rights and preferences of and issue shares of preferred stock;

	•		any action that may be taken by stockholders must be taken at an annual or special meeting and may not be taken by written consent;

	•		stockholders must comply with advance notice requirements before raising a matter at a meeting of stockholders or nominating a director for election; and

	•		a Chairman of the Board or a Chief Executive Officer are the only persons who may call a special meeting of stockholders.

Provisions of Delaware law may also discourage, delay or prevent someone from acquiring us or merging with us.

SAPIENT CORPORATION

PART II. OTHER INFORMATION

Item 6. Exhibits

10.1* Sapient Corporation Winning Performance Plan

10.2* 2006 Global Performance Bonus Plan

10.3* Form of Restricted Stock Units Agreement for initial grant to newly appointed members of the Board of Directors

10.4* Form of Restricted Stock Units Agreement for annual grants to reelected members of the Board of Directors

31.1* Certification of Alan J. Herrick pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2* Certification of Joseph S. Tibbetts, Jr. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1* Certification of Alan J. Herrick pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2* Certification of Joseph S. Tibbetts, Jr. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


*		Exhibits filed herewith

SAPIENT CORPORATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SAPIENT CORPORATION


Signature	Title	Date

/s/ ALAN J. HERRICK Alan J. Herrick	President Chief Executive Officer	June 12, 2007

/s/ JOSEPH S. TIBBETTS, JR. Joseph S. Tibbetts, Jr.	Chief Financial Officer	June 12, 2007

EX-10.1 2 b65658q2exv10w1.txt EX-10.1 SAPIENT CORPORATION WINNING PERFORMANCE PLAN Exhibit 10.1 CONFIDENTIAL MATERIALS OMITTED - ASTERISKS (*) DENOTE OMISSIONS SAPIENT 2006 WINNING PERFORMANCE PLAN I. INTRODUCTION In this plan, the terms "we," "us," and "our" mean Sapient Corporation and its subsidiaries. The terms "you" and "your" mean the employee who participates in this plan (the "Plan"). This Plan may not be shared with anyone outside of Sapient, and each person is required to keep this Plan and its contents confidential at all times. Except as otherwise permitted by law, disclosure of this Plan to anyone not an employee of Sapient is a violation of whichever of the following agreements has been signed by the Participant: Sapient Nondisclosure, Nonsolicitation and Noncompete Agreement; Agreement Re: Nondisclosure, Nonsolicitation and Noncompetition; Employment Agreement; Confidentiality Agreement and/or any agreement between the Participant and Sapient pertaining to nondisclosure of confidential information (collectively, "Employee NDA"). II. PURPOSE The Plan's overall purpose is to reward qualified, eligible employees who achieve certain results. As such, the Plan is designed to attract, compensate and retain top performing people who support our business and drive behaviors that: - Achieve extraordinary results; - Lead us to outperform the competition and drive the consulting market by 2012; and - Make us a great company that makes our Strategic Context/Our Future Happen The Winning Performance Plan is different from Sapient's other bonus plans because payout is based on INDIVIDUAL PERFORMANCE, not Sapient's or a business unit's performance. III. EFFECTIVE DATE This Plan is effective January 1, 2006, and covers the period from January 1, 2006 through December 31, 2006 (the "Plan Period"), unless modified or terminated earlier as provided for in this Plan. All prior bonus, compensation, commission and/or incentive plans applicable to you have expired of their own terms or have been revoked and withdrawn. This Plan supersedes all prior written or oral bonus, compensation, commission and/or incentive plans, promises, agreements, practices, understandings, negotiations and/or incentive arrangements. IV. ELIGIBILITY To be eligible to participate in this Plan, you must meet ALL of the following criteria during the Plan Period: A. You are actively employed by us and (1) have a Client Contribution Profit (CCP) target of at least $2 million, and (2) work in a Client Executive (CE) role, a Business Lead (BL) role, or a Business Unit (BU) Lead role. If you hold a position other than those listed above and/or have a CCP target lower than $2M, your BU Lead may nonetheless, in his or her discretion, recommend your participation in the Plan to the Plan Committee. B. You are employed by us in an eligible title during the entire Plan Period and from the end of the Plan Period through the date any payout is made under this Plan (except in the circumstances described below when a prorated or adjusted CCP may be allowed). If you are otherwise eligible to participate in this Plan but start or continue an expatriate assignment during the Plan Period, we may, in our sole discretion, (i) vary or change the terms of this Plan as they pertain to you, or (ii) assign you to another plan. C. You are not on a Get Well Plan or a performance improvement plan at any time during the Plan Period, unless an exemption is approved in writing by the People Success Lead. D. You are in full compliance with all obligations under your agreement with us pertaining to nondisclosure, nonsolicitation and/or noncompetition (if applicable). E. If you (i) have received any loan or advance from us, (ii) have been paid any excess draw from any prior bonus or incentive plans which remains unpaid as of the day payouts are made under this Plan, or (iii) have any outstanding repayment obligations with respect to an expatriate assignment or tax equalization as of the day payouts are made under this Plan, you must (a) have agreed in writing to regular payroll deductions for repayment of the loan, advance or excess draw, and (b) prior to the payout of any bonus under this Plan, have repaid the full amount of the loan, advance, excess draw or repayment obligation. In our sole discretion, we may allow you to be eligible to participate in this Plan even if (b) has not been met, provided that you agree in writing to apply the total amount of any bonus payment under the Plan toward repayment of such loan, advance, excess draw or repayment obligation. F. You are not participating in any other bonus plan. G. You have signed your Target Client Contribution Profit Statement (Target CCP Statement) generated by People Success and returned it to the Global People Center (i) before July 15, 2006, (ii) if you were hired and started active work in 2006, before your Page 2 first day of work for Sapient, (iii) if you entered the Plan after the start of the Plan Period, prior to the effective date of your entry into this Plan, or (iv) if your Client Contribution Profit target is modified within the Plan Period, within 10 days after the Business Unit Lead ("BU Lead"), or his or her designate, provides you with a copy of a modified Target CCP Statement. V. PLAN COMPONENTS A. WINNING PERFORMANCE SCORE Your bonus under this Plan will be determined by your Winning Performance Score (WPS). Your WPS measures your holistic personal performance during the Plan Period and is based largely on your contribution to the company's profit along with other strategic, non-monetary factors. Your WPS is calculated by multiplying two components: Your Strategic Context Score (SCS) and your Value Creation Score (VCS). Your VCS is a calculation of your CCP and your Value Factor (VFactor). All these factors are explained in more detail below. WPS = SCS x VCS VFactor x CCP See Appendix 1 for WPS calculation examples. B. STRATEGIC CONTEXT SCORE Your Strategic Context Score (SCS) measures your connection to and alignment with our Strategic Context. Your SCS also measures the connection and alignment of the people you manage or supervise to our Strategic Context. 1) How is your SCS determined? Your SCS is made up of: (1) the ratings you attained in Sapient's performance feedback processes; (2) the SCS of you and of the people you manage or supervise; and (3) other measures such as morale, turnover and your compliance with Sapient's policies and procedures, such as Sapient's client contracts process. 2) Who determines your SCS? Your SCS is determined by the people you work with, including your managees, your Business Lead, your Business Unit Lead, the Chief Operating Officer, and the Chief Executive Officer (as applicable). 3) Possible Range of Your SCS You will receive one of three possible SCSs: *%, *%, or *%. Page 3 C. VALUE CREATION SCORE Your Value Creation Score (VCS) measures the value you create for Sapient and our clients. The VCS is comprised of two components: Your Value Factor (VFactor) and your Client Contribution Profit (CCP). a. V Factor 1) How is your VFactor determined? Your VFactor is based on your performance in certain areas during the entire Plan Period. Your VFactor will range from a minimum score of *% up to a maximum score of *%. Everyone will begin the Plan Period with a VFactor of *%. Throughout the year, you will have the opportunity to increase your VFactor in 2% increments to a maximum of *% if you achieve any of the VFactor components referenced in the next section. 2) VFactor Components Your VFactor calculation will move up the range from *% in separate increments of 2%, if you achieve one or more of the following VFactors:

- --------- (1) For the purposes of any calculation this Plan involving revenue, revenue must be "recognized revenue" as provided in Appendix 3 attached. (2) This will be determined by a subset of Sapient's Leadership Team. Page 4

3) Who determines your VFactor? Your achievement of objective VFactor components will be determined by our books and records, while your achievement of subjective VFactor components will be determined by a subset of Sapient's Leadership Team. It is your responsibility to communicate your VFactor achievements to the Global People Center so that we can ensure their proper tracking. Please email this information to People Success-Compensation&Benefits@sapient.com. D. CLIENT CONTRIBUTION PROFIT (CCP) You will be given a CCP target for the Plan Period as detailed on your Target CCP Statement. CCP measures the revenue generated from a particular client during the Plan Period less our direct cost to sell and deliver the work to the client. Direct costs are those costs billed against the project identification number (PID) plus any applicable costs under related sales support PIDs. CCP is the best measure of Sapient's performance and how much our clients value what we do. 1) Calculating Your CCP Your CCP is calculated from the profit generated on the client projects that you are responsible for. Winning Performance requires collaboration and partnership to deliver extraordinary results for our clients. To encourage collaboration and partnership, in certain situations, the CCP from a client may be split between two people. For example, if two CEs bring in a project resulting in $* of CCP and both agree to split the CCP equally, each CE would receive a $* credit towards his or her Target CCP. In general, the total CCP of a BL will be the total of the respective CCPs of the CEs in his or her team, in addition to any CCP applicable to the BL in his or her own right. Likewise, the total CCP of a BU Lead will be the total of the respective CCPs of the BLs in his or her BU, in addition to any CCP applicable to the BU Lead in his or her own right. So, in the example above, the BU lead and each respective BL for each CE would also receive $* of credit towards his or her CCP for the Plan Period. - --------- (3) This will be determined by a subset of Sapient's Leadership Team. (4) Your return is calculated by dividing your CCP by cost. Page 5 CCP splits should be agreed upon by both individuals and any dispute involving the splitting of CCP will be resolved by the Plan Committee. If, however, the payout is to be split throughout three different levels (such as a BU Lead, a Business Lead and a Client Executive), you must seek advance approval from the Plan Committee. E. CONVERTING YOUR WINNING PERFORMANCE SCORE TO A PAYOUT Your WPS will be calculated at the end of the Plan Period and is based on all the factors previously discussed in this Plan. Your WPS is then measured against your Target CCP to determine your bonus payment. If your final WPS is less than *% of your CCP target, you will not receive any bonus payment. If your WPS is 30% or more of your CCP Target, you will receive one of three payouts depending on which of the following ranges your WPS falls into: - Your WPS is between *% and *% of your CCP target; - Your WPS is between *% and *% of your CCP target; or - Your WPS is *% or more of your CCP target. For illustration purposes, the payout card in Appendix 2 shows the respective payouts for each of these three ranges at certain WPSs. If your WPS falls between the amounts noted on the payout card, your payout is not shown on the payout card but will be calculated accordingly, e.g., for a WPS between $* and $* that is less than *% of your Target CCP, you would receive a payout between $* and $*. VI. TIMING OF PAYOUTS; CCP ADJUSTMENT; CURRENCY A. TIMING At the start of the Plan Period, you will receive your annual CCP Target, as identified on your Target CCP Statement. For tracking purposes, your CCP achievement will be calculated quarterly. Your WPS and subsequent payout will be calculated annually. Following the close of the Plan Period, we will calculate your WPS. Any annual payouts will be made in the Sapient pay period following our completion of your WPS calculation. B. CCP ADJUSTMENT The Plan Committee may, in its sole discretion, adjust your Target CCP during the Plan Period for any of the following circumstances: - Certain title changes (as described below); - Certain movement among BU's (as described below); - Qualified leave of absence, disability or death of participant (as discussed below); - Other reasons as determined by the Plan Committee. Page 6 C. CURRENCY All amounts in this Plan are expressed in U.S. dollars, unless stated otherwise in this Plan or on your Target CCP Statement. In performing any necessary currency conversions, we may, in our sole discretion, apply commercial exchange rates. VII. TITLE CHANGES If your employment with us ends for any reason or you change to a Sapient title or role not eligible to participate in this Plan, your participation in this Plan will terminate and you will not be eligible to receive any payout under this Plan. Additionally, if at any time during the Plan Period you wish to remove yourself from this Plan, you will not be eligible to receive any payout under this Plan. VIII. MOVEMENT AMONG BUs If your regular BU assignment changes within the Plan Period (as approved by the Plan Committee and recorded in the Company's HRMS system), your CCP will be adjusted to include the time spent in each BU or team, as determined by the Plan Committee. IX. TERMINATION OF EMPLOYMENT A. EFFECT OF TERMINATION If your employment terminates for any reason, whether voluntarily or involuntarily, before the day payouts are made under the Plan, you will not be eligible for any payout under this Plan. B. NO EXTENSION Your right to receive a payment or to participate in this Plan will not be extended beyond your last day of active employment because you receive pay in lieu of notice in accordance with your Employment Agreement, or for any other reason. X. LEAVES OF ABSENCE If you take an approved leave of absence during the Plan Period for fewer than 30 calendar days, no adjustment will be made to your Target CCP. If your leave of absence extends for 30 calendar days or more during the Plan Period, you may be eligible for a Target CCP adjustment, subject to the other terms of this Plan. Any payments will be made on the same date that all other participants receive payment. For purposes of determining whether you are eligible for a Target CCP adjustment, a leave of absence begins on the date that the leave of absence begins as noted in Sapient's records. Page 7 XI. SHORT TERM DISABILITY, LONG TERM DISABILITY AND DEATH In the event of a medical leave under Sapient's Short-Term Disability policy, no adjustment will be made to your Target CCP. In the event of a medical leave under Sapient's Long-Term Disability policy or death, you may be eligible for an adjustment of your Target CCP. For determining eligibility for a Target CCP adjustment, active service ends when you are no longer paid regular wages through payroll for work performed. Any payments will be made on the same date that all other participants receive payment or, in Sapient's sole discretion, on an earlier date. XII. LOANS, ADVANCES OR DRAWS Loans or advances against potential payments will not be made under this Plan. If you have an outstanding advance or loan from us or have an outstanding obligation to repay us money related to an expatriate assignment or tax equalization, all or a portion of any payout under this Plan will be first applied to the outstanding balance of such advance, loan or obligation related to an expatriate assignment or tax equalization, as permitted by law. Upon Sapient's request, you agree to sign and deliver a written instrument to Sapient authorizing the application of your payout to any outstanding loan, advance or other obligation. XIII. FORMS OF PAYMENT As permitted by law, Sapient may, with your agreement, pay a bonus in whole or in part, in cash, stock options, stock, warrants or other equity instruments (or any combination thereof), in such amounts and under such terms and conditions to which you and Sapient may agree. XIV. PLAN ADMINISTRATION AND MANAGEMENT A Plan Committee will administer this Plan. The Plan Committee will be composed of the Chief Executive Officer, Chief Financial Officer, Chief Operating Officer People Success Lead and selected executive leaders of the BUs. The Plan Committee will have full and absolute discretion with respect to administration of all aspects of this Plan, including, without limitation, determining Plan payouts, interpreting this Plan and ruling on special situations. Further, the Plan Committee, in its sole discretion and with or without notice or cause, may, to the extent authorized by the Compensation Committee of the Board of Directors of the Company, modify, amend or terminate this Plan or take other actions affecting Plan Participants without advance notice to you of such actions, unless such changes are not permitted by applicable local laws. The Company's books and records are the exclusive source of data for administration of this Plan. The Plan Committee's interpretation of the books and records is final. If you wish to dispute a WPS payout, calculation or decision which affects you, you must request reconsideration in writing. The request must be given to the People Success Lead within 60 days from the date that you receive notice of the disputed decision. Page 8 By participating in this Plan, you agree that a failure to properly request reconsideration of any payout or calculation decision or other decision within this 60-day period constitutes agreement with Sapient's decision. If the reconsideration request is properly submitted, the People Success Lead will make a recommendation concerning the disputed decision upon review of the circumstances and of the available documentation and submit his or her recommendation to the Plan Committee for review. The decision of the Plan Committee will be final. XV. MISCELLANEOUS Unless required by law or court order, you may not assign this Plan or any bonus payment or right to payment. If any provision of this Plan is found invalid, illegal or unenforceable, the other provisions of this Plan will remain in full force and effect, and such invalid, illegal or unenforceable provision will be reformed as necessary to make it valid, legal and enforceable to the maximum extent possible under law (or, if such reformation is impossible, such provision will be severed from this Plan). All payouts under this Plan are subject to applicable withholdings and deductions as required by law. If you are employed by Sapient Corporation, Sapient Government Services, Inc., or Sapient Private Limited, you continue to be an "at will" employee, and Sapient has the right to terminate your employment and/or participation in the Plan at any time, with or without cause or prior notice. If you are employed by Sapient Canada Inc., Sapient GmbH, Sapient Limited or Sapient Netherlands B.V., you continue to be employed in accordance with the terms of your employment agreement (the "Employment Agreement"). Sapient has the right to terminate your employment and/or participation in this Plan at any time, with or without cause or prior notice, subject to the terms of your Employment Agreement and as permitted by local applicable law. Nothing in this Plan shall be construed to create or imply the guarantee or the creation of a contract of employment or a right to continued employment for any specified period of time between you and us. This Plan supersedes all prior understandings, negotiations and agreements, whether written or oral, between you and Sapient as to the subject matter covered by this Plan. In the event of any conflict between this Plan and any presentations, documents, statements or other communications concerning the subject matter of this Plan, this Plan will control. This Plan describes the sole and exclusive bonuses or incentives we are offering to you during the Plan Period; provided, however, that nothing in this Plan will prevent Sapient from paying any individual a discretionary bonus or incentive payment at any time or from time to time if authorized in advance by the Compensation Committee. Sapient has no obligation to pay anyone a discretionary bonus or incentive at any time. A person who is not a participant in this Plan will not have any right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term or provision of this Plan. Page 9 APPENDIX 1: SAMPLE CALCULATIONS WPS = SCS x VCS (*%, *% or *%) VFactor X CCP (*% + each applicable *%) * The following are sample calculations of Winning Performance Scores. Scenario 1: 1. Joe C.E. has a Target CCP of $* and fully achieves his target. 2. Joe does not achieve any of the VFactor components so receives a *% VFactor. 3. VCS = *% x $* 4. Joe receives a SCS of *% 5. WPS = *% x (*% x $*) Therefore, Joe's WPS = $* 6. Joe's payout at this WPS (which is *% of his Target CCP) is $*. See Payout Card in Appendix 2. Scenario 2: 1. Deepak B.L. has a Target CCP of $* but only achieves an actual CCP of $*. 2. Deepak also achieves 4 of the VFactor components so he receives a VFactor of *% (*% for each component). 3. VCS = *% x $* 4. Deepak receives a SCS of *% 5. WPS = *% x (*% x $*) Therefore, Deepak's WPS = $* 6. Deepak's payout at this WPS (which is *% of his Target CCP) is $*. See Payout Card in Appendix 2. Page 10 Scenario 3: 1. Jack C.E. has a Target CCP of $* but only achieves an actual CCP of $*. 2. Jack does not achieve any of the VFactor components so receives a *% VFactor. 3. VCS = *% x $* 4. Jack receives a SCS of *% SCS = *% 5. WPS = *% x (*% x $*) Therefore, Jack's WPS = $* 6. Jack's payout at this WPS (which is *% of his Target CCP) is $*. See Payout Card in Appendix 2. Page 11 APPENDIX 2 - PAYOUT CARD * Page 12 APPENDIX 3: REVENUE RECOGNIZED REVENUE DEFINED. (a) For Winning Performance Plan Participants Revenue will be "Recognized Revenue" under this Plan if it meets all of the following requirements: (1) Sapient has received a binding written contract, commitment letter or Purchase Order for the revenue for the project, and the revenue for services rendered qualifies to be recorded and has been recorded on Sapient's books as recognized revenue for services for the applicable Plan Period; provided however, that appropriate reserves, as determined by Sapient in its sole discretion, and all amounts to be paid by Sapient as reimbursable expenses and project materials (including but not limited to travel, entertainment and living expenses, amounts to be paid for third party hardware, software, servers and equipment and amounts to be paid to subcontractors or other third parties, and any other materials and equipment mutually agreed by Sapient and the client to be purchased or licensed for the engagement) will be excluded from "Recognized Revenue" for purposes of this Plan; (NOTE: In the event that a project is sold with a mark-up by Sapient on third-party hardware, software or materials, the Plan Committee will determine on a case-by-case basis, based upon the margin of the project, in his sole discretion, the amount, if any, of such mark-up to be included in "Recognized Revenue" for such project under this Plan); (2) Project work corresponding to the revenue must be completed and delivered to the client; (3) The revenue is accurately assigned to the Participant in Pyramid and approved by the BU Lead; and (4) If any revenue is from a discounted project, the discount must have been approved by the BU Lead prior to communication of the discount to the client. No revenue will qualify as Recognized Revenue if the discount for it was not approved by the BU Lead prior to communication of the discount to the client. (b) All revenue from qualified sales and/or services, whether from a Fusion workshop, design, development or implementation, support or maintenance, license fees or other services, is includable and will be given equal weight if it meets the other terms and conditions of this Plan. Page 13 EX-10.2 3 b65658q2exv10w2.txt EX-10.2 2006 GLOBAL PERFORMANCE BONUS PLAN Exhibit 10.2 CONFIDENTIAL MATERIALS OMITTED - ASTERISKS (*) DENOTE OMISSIONS 2006 GLOBAL PERFORMANCE BONUS PLAN I. INTRODUCTION THIS 2006 GLOBAL PERFORMANCE BONUS PLAN (THE "PLAN") CONTAINS HIGHLY CONFIDENTIAL INFORMATION ABOUT THE REVENUE AND OPERATIONS OF SAPIENT CORPORATION AND ITS CONSOLIDATED SUBSIDIARIES (INDIVIDUALLY OR COLLECTIVELY, THE "COMPANY" OR "SAPIENT"). THIS PLAN MAY NOT BE SHARED WITH ANYONE OUTSIDE OF SAPIENT, AND EACH PERSON IS REQUIRED TO KEEP THIS PLAN AND ITS CONTENTS CONFIDENTIAL AT ALL TIMES. EXCEPT AS OTHERWISE PERMITTED BY LAW, DISCLOSURE OF THIS PLAN TO ANYONE NOT AN EMPLOYEE OF SAPIENT IS A VIOLATION OF WHICHEVER OF THE FOLLOWING AGREEMENTS HAS BEEN SIGNED BY THE PARTICIPANT: SAPIENT NONDISCLOSURE, NONSOLICITATION AND NONCOMPETE AGREEMENT; AGREEMENT RE: NONDISCLOSURE, NONSOLICITATION AND NONCOMPETITION; EMPLOYMENT AGREEMENT; CONFIDENTIALITY AGREEMENT AND/OR ANY AGREEMENT BETWEEN THE PARTICIPANT AND SAPIENT PERTAINING TO NONDISCLOSURE OF CONFIDENTIAL INFORMATION (COLLECTIVELY, "EMPLOYEE NDA"). II. PHILOSOPHY & PURPOSE The purpose of this Plan is to reward qualified, eligible Participants who achieve certain Company, group and individual goals during a period when the Company and/or its Business Units ("BUs") have also achieved certain financial performance goals. This Plan is designed to: - Drive Winning Performance across the Company - Promote a mindset of company success as well as BU/team success - Provide a clear connection between people's everyday actions and company success - Promote Alignment with the Company's Strategic Context - Differentiate payout based on individual performance - Provide for holistic assessment, taking into account various performance aspects, including client satisfaction, revenue, client margin, recurring revenue, fostering Strategic Context connection, morale, turnover, leadership, etc. Receipt of a bonus under this Plan is not guaranteed, but rather depends on Company, group and individual performance. The Company is optimistic that, during periods when the Company and BUs achieve their financial performance goals, Participants will have the opportunity to earn a bonus. However, if achievement of individual, group or Company performance falls short of expectations, Participants may qualify for a limited bonus, or possibly no bonus, as described below and as determined by the Company in its sole discretion. For the avoidance of doubt, nothing in this Plan entitles any Participant to a contractual right to any bonus. III. EFFECTIVE DATE This Plan is effective January 1, 2006, and covers the period from January 1 through December 31, 2006 (the "Plan Period"), and for the purpose of determining eligibility only (as setout in Sections IV and IX below) through the day payouts are made under this Plan, in each case, inclusive, unless modified or terminated earlier as provided for in this Plan. All prior bonus plans have expired of their own terms or have been revoked and withdrawn. This Plan supersedes all prior written or oral bonus plans, promises, agreements, practices, understandings, negotiations and/or incentive arrangements. IV. ELIGIBILITY A person who is eligible to participate in this Plan (a "Participant") must meet the following criteria during the Plan Period and from the end of the Plan Period through the date payouts are made: A. He or she must be assigned one of the following titles by Sapient: Associate, Senior Associate, Specialist, Senior Specialist, Manager, Senior Manager, Director, Vice President, Client Executive ("CE"), Senior Vice President, Executive Vice President, Executive Officer, and may not be assigned a Relationship Management, Relationship Development or Business Development title. In addition, people participating in any other bonus plan are not eligible to participate in this Plan, except as it applies to people participating in the 2006 Government Services Bonus Plan. B. He or she must be employed in a position that is determined by Sapient to be non-overtime-eligible, e.g. non-exempt role; C. He or she must be actively employed by Sapient in an eligible title during the entire Plan Period and from the end of the Plan Period through the date any payout is made under this Plan, except for people who are hired and commence employment with Sapient in 2006 (as discussed below) and in certain other circumstances where a pro rata bonus may be paid (as discussed below). A person who is hired and commences employment with Sapient during 2006 is eligible as a Plan Participant for a pro rata portion of any bonus or incentive deemed earned and payable under this Plan by the Company, if he or she is hired and actively working at Sapient on or before December 15, 2006 and he or she otherwise remains actively employed by the Company through the date any payout is made under this Plan. Notwithstanding anything to the contrary, in the event a person who is otherwise eligible under this Plan is on an expatriate assignment or an assignment outside his or her home office country, the Company may vary or change the terms of this Plan in its sole discretion for that individual as it believes circumstances warrant, or the Company may in its sole discretion assign the person to another plan. No contractors are eligible to participate in this Plan, whether or not they have signed contracts with the Company, and regardless of whether any court or administrative governmental body makes any kind of determination as to their status as other than contractor; D. He or she was not or is not on a Get Well Plan or a performance improvement plan at any time during the Plan Period, unless an exemption is approved in writing by the People Success Lead; E. He or she has complied and is complying with all of his or her obligations under his or her Employee NDA or Employment Agreement, as the case may be; F. He or she (i) has not received any loan or advance from Sapient, (ii) has not been paid an excess draw from any prior bonus or incentive plans which remains unpaid as of the day payouts are made under this Plan or (iii) does not have any outstanding repayment obligations with respect to an expatriate assignment or tax equalization as of the day payouts are made under this Plan, UNLESS he or she (a) has agreed in writing to regular payroll deductions for repayment of the loan, advance or excess draw, and (b) prior to the payout of any bonus or incentive under this Plan repays Sapient the full amount of the loan, advance or excess draw, or in Sapient's sole discretion agrees in writing to apply the amount of any then-current bonus or incentive payout toward repayment of such loan, advance or excess draw; G. For CE Participants, the CE must have filed his or her CE Objectives Statement (as that term is defined below) with the applicable BU Finance Lead and Marketing Lead. H. He or she is not an employee entitled to the protections of the (Indian) Payment of Bonus Act, 1965 (as the same may be amended). Page 2 V. PLAN COMPONENTS The components of this Plan include: (A) funding of a pool available for bonuses based on Company performance, and (B) distribution to individuals of any bonus pool made available to BUs, India or GSS Teams based on team and personal performance against criteria determined by the Company, BUs, India and/or GSS Teams. A. FUNDING AND ALLOCATION OF BONUS POOL 1. FUNDING AND ALLOCATION MECHANISMS. Funding and allocation of a bonus pool to BUs, and GSS Teams and receipt of bonuses under this Plan are all contingent on the Company's achieving a satisfactory level of financial performance in the Plan Period. If the Company determines that it can fund and allocate a pool for bonuses under this Plan, the Company determines in its sole discretion the size of the pool. Any level of full or partial bonus pool funding will be determined by the Company in its sole discretion. If the Company exceeds its annual operating margin target, then the Company will determine in its sole discretion whether or not it will increase bonus pool funding. In any event, *% of pre-bonus operating margin is the maximum amount available for a bonus pool under this Plan. a. ALLOCATION TO EM, NAC, GOVERNMENT SERVICES, INDIA, EUROPE AND GSS TEAMS. Whether or not the EM, NAC, Government Services, India, Europe or GSS Teams receive funding and allocation of a bonus pool under this Plan, if any, is contingent on the Company's 2006 achievement of operating margin, measured in dollars, against its 2006 operating margin target (the "Company Margin Component"). Note that if total allocations and payouts would take Sapient into a loss position or to a level of profitability determined unacceptable by the Company in its sole discretion, then the Company will reduce funding and allocation and prorate such reduction across the BUs accordingly. Also, BUs may not pay bonuses under this Plan in excess of their funding and allocations. b. EXAMPLES AND SCENARIOS IN APPENDIX 1. For illustration purposes, only, the examples contained in Appendix 1 show various scenarios for allocations under this Plan. c. ADDITIONAL FUNDING AND ALLOCATION INFORMATION. The determinations of Company operating margin profitability or loss (if any) shall be made by the Company in its sole discretion. The Company, acting in its sole discretion, will set Company operating margin dollar targets and contribution margin percent targets for the Plan Period. The CEO, COO and CFO have the discretion to approve different revenue growth goals, a different operating margin target for the Company and different contribution margin percent. In such event, the applicable formulas in this Plan will be revised for and this Plan amended accordingly. After allocations, if any, have been made to BUs, India and GSS Teams, the amount of any allocation remaining, if any, after calculation of individual distributions will then be returned to the Company and may be used for discretionary bonuses to individuals in the Company (in India or any one or more BUs, or on any one or more GSS Teams, as determined by the Company in its sole discretion); provided that such individual discretionary bonus payouts are approved by the Compensation Committee of the Board of Directors. 2. INTERIM PAYOUT. In the event that the Company makes an interim payout as determined at the Company's discretion, the funding and allocation to BUs, India and US GSS Teams and payouts to Participants will be based on the Company's progress toward 2006 financial goals and be made generally in accordance with the terms of this Plan, except that Plan terms and conditions will relate to the time period through the payout period's effective date and provisions relating to eligibility and employment termination will apply with respect to the date any payout is made, rather than the date of payout for the Plan Period. Also, to be eligible for an interim payout, a Participant must have started employment with the Company prior to January 1, 2006. In the event that the Company does an interim payout, any amount paid to any Participant in connection with an interim payout will be deducted from any bonus payout made under this Plan after the close of the Plan Period. Page 3 3. POTENTIAL SCENARIO OF NO FUNDING OR ALLOCATION. Although the Company is optimistic that it will continue to operate profitably in 2006, the Company will not fund or allocate any bonus pool or pay any bonuses under this Plan if the Company has an annual loss for 2006 (after accounting for bonuses and including 2006 restructuring costs, if any), notwithstanding anything to the contrary and regardless of the performance of any person, team, BU, India or US GSS Team. The Company will consider whether its financial performance justifies the funding of a pool available for payment of any bonuses under this Plan. The determination of Company profitability or loss (if any) shall be made by the Company in its sole discretion. B. DISTRIBUTION TO INDIVIDUALS 1. TARGET BONUS OPPORTUNITY TRACKS. This Plan features three "tracks" at the level of individual distributions based on Plan metrics. Participants in this Plan who are not Directors, VPs or higher may be on Track A or Track B. Participants in this Plan who are Directors, VPs and higher are on the Director/VP Track. Subject to funding and allocation to the applicable BU or to India or GSS Team, the range of individual bonus payouts is based on Track assignment and dependent on each individual's "Individual Payout Percentage" (as that term is defined below). Subject to funding and allocation, target bonus opportunities for each of the tracks are as follows: - Track A Participants have a target bonus opportunity of *% of base salary - Track B Participants have a target bonus opportunity of *% of base salary - Director/VP Track Participants have individual set amounts for their target bonus opportunity (expressed in their local currency) When a Participant's entry into this Plan becomes effective, he or she will be informed of his or her applicable Track, or for Directors and VPs, his or her set amount for target bonus opportunity. The base salary used in the calculation of bonus payout is a Participant's base salary in his or her home office country, unless the applicable BU Lead, GSS Lead or VP in charge of India ("India Lead") determines otherwise. Changes between tracks are not permitted during the Plan Period except in the event of a promotion or title change, in which event the Participant's BU Lead, India Lead or GSS Team Lead will determine which track is appropriate for the Participant. 2. ASSESSMENT AND DETERMINATION OF INDIVIDUAL PERFORMANCE PERCENTAGE ACHIEVED. Subject to funding and allocation to BUs, India and GSS Teams, distributions to Participants within those groups that receive funding and allocation will be made based on a Participant's Track assignment and his or her respective BU Lead's, India Lead's or GSS Team Lead's assessment of the Participant's performance in certain categories, which vary by title, and in some cases by individual. a. CLIENT EXECUTIVES. For each CE within the BU that is participating under this Plan, BU Leads will establish performance targets and/or goals. Specific metric targets are not required, and the criteria and/or goals may be set by title groups or at the individual level. Performance will be determined by the BU Lead and may be based on the following criteria: - Client Recognized Revenue - Client Contribution Margin - Client Satisfaction - Fostering Strategic Context connection - Leadership - People Satisfaction and Turnover - Winning Performance Score The CE performance targets and/or goals may also include other performance goals as established by BU Leads. Additional information on the above-listed criteria is provided below. After the close of the Plan Period, each BU Lead will assess the performance of the CEs in his or her BU. The BU Lead may select objective and/or subjective goals for each CE Participant within the BU and set the relative weights for each goal. After the close of the Plan Period, BU Leads will assess the Page 4 performance of each CE in their BU against the established targets and/or goals and assign that Participant a preliminary percentage representing his or her level of achievement as follows: - All CEs may receive a bonus funding percentage which ranges plus or minus * basis points with the Company funding percentage as a starting point. Any deviation from the Company funding percentage will be a result of the individual's achievement against his or her CE metrics and or the BU Lead's discretion. If the Company achieves *% funding, the range will be *% to *% funding based on the individual's performance assessment by the BU Lead. Directors and VPs whose individual performance falls significantly outside this range may be assessed above or below the range. - The average Individual Performance Percentage for a BUs CEs will correlate to overall performance of the individual's BU. The BU Leads will report the preliminary percentages for each CE to the Marketing Lead, COO and CEO, who will review and modify the percentages, exercising sole discretion. The percentage level of achievement approved by the Marketing Lead, COO and CEO will be the "Individual Payout Percentage" for that CE. b. OTHER TITLES. BU Leads, the India Lead and GSS Team Leads will establish performance criteria and/or goals for each non-CE Participant in their respective groups. Specific metric targets are not required, and the criteria and/or goals may be set by title groups or at the individual level. The performance criteria and/or goals for all Participants in non-CE titles may include the following: - Client Satisfaction - Client and/or Engagement Recognized Revenue - Client Contribution Margin and/or Engagement Margin - People Satisfaction and Turnover - Fostering Strategic Context connection - Leadership - Winning Performance Score BU Leads, the India Lead and GSS Team Leads may also establish other performance criteria and/or goals for Participants in their BUs, India or on their teams, respectively. Individual assessment is holistic (e.g., includes metrics as well as team building, leadership, fostering our Strategic Context, building a great business, etc.) and discretionary, NOT formulaic or based solely on targets or metrics. Additional information on the above-listed criteria is provided below. Individual performance criteria and/or goals are subject to change in the BU Lead's, India Lead's or GSS Team Lead's sole discretion. Subject to the terms and conditions of this Plan, a BU Lead, India Lead or GSS Team Lead may assign various levels of priority to the performance criteria and/or goals in the list above (and other criteria and/or goals as determined by the BU Lead, India Lead or GSS Team Lead). After the close of the Plan Period, BU Leads, the India Lead and GSS Team Leads will assess each person's performance against the criteria and/or goals set by the BU Lead, India Lead or GSS Team Lead and assign that Participant a percentage representing his or her level of achievement (the "Individual Performance Percentage"). The Individual Performance Percentages may range between *% and *% of Company Funding at *% funding level of the bonus, depending on a participant's individual performance. The average Individual Performance percentages will closely, if not exactly, correlate to the overall performance of that BU or GSS team, most significantly at senior career stages. - Junior career stages across the company will average the company average - Individual assessment is holistic 3. SPECIFIC INFORMATION ON PERFORMANCE CRITERIA/GOALS. Page 5 a. CLIENT SATISFACTION. Client satisfaction will be the primary consideration in assessing the performance of Participants with Associate and Senior Associate titles, and will be important in assessing the performance of all Participants. For project delivery Participants within the BUs and India, the Client Satisfaction assessment is based on the time-weighted average of all approved and unadjusted client satisfaction scores (in Pyramid) pertaining to completed client projects and internal delivery projects for the Company to which a Participant was assigned during the Plan Period, as determined by the Company. The performance target for Client Satisfaction is *. Listed below is some guidance on using Client Satisfaction scores under this Plan: - Project leadership in the BUs is required to enter Client Satisfaction scores into the Company's Pyramid system within 60 days after the completion of the project (90 days for Implementation projects). If the unadjusted Client Satisfaction score for a project is not entered into Pyramid within the applicable time limit set forth above, the project will be recognized with a score of * (*) in this Plan Period. - If a Participant spent time in between client project assignments "on the beach" and worked on an internal project for the Company during his or her beach time, then a Client Satisfaction score needs to be obtained from the executive owner of the internal project. If no internal project was available for a Participant's beach time, then the BU Lead or India Lead may, in his or her discretion, elect to use the applicable BUs average score for a Participant's beach time. - No estimated scores will be included in the time-weighted average of Client Satisfaction scores, unless approved by the CEO or COO. If interim Client Satisfaction scores are obtained from a client prior to the completion of a project and the project is not completed within 60 days before the end of the Plan Period, the interim scores may be used. b. RECOGNIZED REVENUE. To determine performance by CEs on Client Recognized Revenue, BU Leads will use the definition of Recognized Revenue in the 2006 Global Business Development Plan. For other, non-CE titles, BU Leads and the India Lead may use that definition of Recognized Revenue or may assess a Participant's impact on revenue generation. c. CLIENT CONTRIBUTION MARGIN OR ENGAGEMENT MARGIN. CEs are evaluated on the basis of Client Contribution Margin for the clients assigned to them, based on the costs of selling and delivering projects and services to those clients. Other non-CE VPs, Directors, Senior Managers and Managers may be evaluated on Client Contribution Margin for clients assigned to them or the profit margins of the projects assigned to them. Participants in other titles may also be evaluated on their contributions to improved client and/or engagement margins. The determination of costs associated with clients and specific projects and/or services and sales, and the determination of margin in each case, shall be made by the Company acting in its sole discretion. d. PEOPLE SATISFACTION AND TURNOVER. CEs, VPs, Directors, Senior Managers and Managers may be evaluated on the morale of their teams (which can be determined using morale surveys or other means) and on rates of employment turnover for people in their BUs, India or on the teams on projects assigned to them, as applicable. Participants in other titles may be evaluated on their contributions to BU, India and/or team morale. e. OTHER PERFORMANCE GOALS. All Participants will be evaluated on their Winning Performance Score (WPS). In addition to the WPS, BU Leads, the India Lead and GSS Team Leads may set other performance criteria and/or goals for one or more Participants, as the BU Leads, India Lead and GSS Team Leads determine is appropriate for their units, the business of the Company and the applicable Participants. For example, GSS Team members may be evaluated on their team's performance to budget. Executive leadership may also set performance targets and/or goals for Executive VPs and Sr. VPs that include the criteria listed in this section as well as other performance targets and/or goals. 4. INDIVIDUAL DISTRIBUTIONS. Provided that a BU, India or GSS Team receives bonus funding and an allocation, and subject to pool and allocation size, a Participant's bonus will be calculated based on his or Individual Page 6 Payout Percentage (calculated as described below) and his or her Track Assignment. The Individual Payout Percentage is calculated as follows: Individual Payout = Company Allocation +/- up to * basis points Percentage Percentage A Participant's bonus is then calculated based on a Participant's Individual Payout Percentage and Track Assignment. If the bonus pool is not fully funded, or if a Participant's BU, India or GSS Team receives less than full allocation, then payouts will be proportionately lower, even if individual performance is at or above *%. 5. EXAMPLES AND SCENARIOS IN APPENDIX 1. For illustration purposes only, the examples contained in Appendix 1 show various scenarios for calculating Individual Payout Percentages. VI. TIMING OF PAYOUTS; PRORATIONS; CURRENCY A. TIMING Following the closing of the Plan Period, a number of calculations need to be made by the Company to determine individuals' bonus or incentive results. Accordingly, any annual payouts will be made in the Sapient pay period following completion of the calculations. B. PRORATIONS If a prorated bonus or incentive is payable, the following rule applies: Proration will be calculated on the basis of 0.083 for each full calendar month of eligibility, as outlined in the following table:

To the extent any bonuses or incentives are paid under this Plan, if a date is not otherwise specified in this Plan for a proration, then for a month to be included in a proration calculation, the event giving rise to the proration must occur on or before the 15th of a month. If such event occurs after the 15th of a month, the next calendar month will be considered the first month of the occurrence for purposes of proration. In the event of any proration of year-to-date amounts, any previous payouts will be deducted. The circumstances that may warrant pro rata payment include but are not limited to: - Base compensation changes; - Target bonus opportunity changes; - Bonus Track changes; - Commencement of employment and new entrance into this Plan; - Certain title changes (as described below); - Certain re-assignment among BUs (as described below); and Page 7 - Qualified leave of absence, disability or death of Participant (as discussed below). C. CURRENCY All currency figures in this Plan are expressed in U.S. dollars, unless stated otherwise in this Plan, but payout calculations and payments are done in local currency. In performing currency conversions, if any, Sapient will apply commercial exchange rates determined by Sapient in its sole discretion. VII. TITLE CHANGES A person ceases to participate in this Plan if he or she changes to a Sapient title or job that is not eligible under this Plan. If a person remains employed by the Company but moves to a title or job that is not eligible under this Plan, then the time the person is considered eligible under this Plan will be pro-rated subject to the proration rules of this Plan. If a Participant remains on this Plan for the entire Plan Period but during that time switches to a different title also covered by this Plan, then the time spent in each title will be prorated, as applicable, subject to the proration rules of this Plan. If a Participant's regular BU assignment changes within the Plan Period (as approved by appropriate BU management and recorded in the Company's HRIS system), at the end of the Plan Period, then the time spent in each BU will be prorated subject to the proration rules of this Plan. IX. TERMINATION OF EMPLOYMENT A. EFFECT OF TERMINATION Participants must be employed by the Company in an eligible title through the entire Plan Period and through the day payouts are made for the Plan Period to receive a payout under this Plan. Therefore, employees whose employment terminates for any reason, whether voluntarily or involuntarily, before the end of the Plan Period or the day payouts are made for the Plan Period are not eligible for any payout under this Plan. B. NO EXTENSION A Participant's right to receive payment or participate in this Plan shall not be extended beyond his or her last day of active employment because he or she receives pay in lieu of notice in accordance with his or her Employment Agreement. X. LEAVES OF ABSENCE AND SHORT TERM DISABILITY If a Participant takes an approved leave of absence (including a medical leave under the Company's Short-Term Disability Program) during the Plan Period for fewer than 30 days, no adjustment will be made in the payout calculation or in the Participant's metrics. If such leave of absence extends for more than 30 days during the Plan Period, the Participant may be eligible for a pro rated payout calculated in accordance with the above table and the other terms of this Plan. All payments (if any) will be paid on the same date that active Participants receive payment. For purposes of determining whether the payment may be pro rated, a leave of absence begins on the date that the leave of absence begins as noted in the Company's records (or in the case of short term disability, on the same date that short term disability benefits begin). Page 8 XI. DEATH AND LONG TERM DISABILITY In the event of long-term disability or death, a pro rated payment based on the length of service during the Plan Period will be paid in accordance with the above table and other terms of this Plan. All such payments (if any) will be paid on the same date that active Participants receive payment or, at the Company's discretion, at an earlier date. "Long-term disability" is defined as eligibility to receive long-term disability benefits under the Company's LTD Policy. For proration purposes, active service ends when the employee is no longer paid regular wages through payroll for work performed. XII. LOANS, ADVANCES OR DRAWS Loans or advances against potential payments will not be made under this Plan. If a Participant has an outstanding advance or loan from the Company or has an outstanding obligation to repay to the Company money related to an expatriate assignment or tax equalization, all or a portion of any bonus or incentive payout under this Plan may be first applied to the outstanding balance of such advance, loan or obligation related to an expatriate assignment or tax equalization, as permitted by law. Upon request by the Company, any Participant with such an outstanding loan, advance or other obligation will sign and deliver a written instrument authorizing such application of any payout. XIII. FORMS OF PAYMENT As permitted by law, Sapient may, with the agreement of a Participant, pay a bonus or incentive in whole or in part, in cash, stock options, stock, warrants or other equity instruments (or any combination thereof), in such amounts and under such terms and conditions to which Sapient and a Participant may agree. XIV. PLAN ADMINISTRATION AND MANAGEMENT A Plan Committee will administer this Plan. The Plan Committee will be composed of the CEO, CFO, COO, General Counsel and selected executive leaders of BUs, India and/or GSS Teams. The Plan Committee will have full and absolute discretion with respect to administration of all aspects of this Plan, including, without limitation, determining Plan payouts, interpreting this Plan and ruling on special situations. Further, the Plan Committee, in its sole discretion and with or without notice or cause, may, to the extent authorized by the Compensation Committee of the Board of Directors of the Company (the "Compensation Committee"), modify, amend or terminate this Plan or take other actions affecting Plan Participants without advance notice to Participants of such actions. While this Plan will be administered in accordance with applicable law, nothing in this Plan is a guarantee of current or future compensation or income. The Company's books and records are the exclusive source of data for administration of this Plan. The Plan Committee's interpretation of the books and records is final. If a Participant wants to dispute a bonus or incentive payout or calculation decision affecting the Participant or any other decision affecting the Participant, that Participant must request reconsideration in writing. The request must be given to the People Success Lead within 60 days after the date of the disputed decision. By participating in this Plan, each Participant agrees that a failure to properly request reconsideration of any payout or calculation decision or other decision within this 60-day period constitutes agreement with such decision made by the Company. If the reconsideration request is properly submitted, the People Success Lead will resolve the disputed decision upon review of the circumstances and of the available documentation and submit his or her initial determination to the Plan Committee for review. The decision of the People Success Lead as to such dispute will be final. Page 9 XV. MISCELLANEOUS Unless required by law or court order, a Participant may not assign this Plan or any bonus or incentive payment or right to payment. If a provision of this Plan is found invalid, illegal or unenforceable, the other provisions of this Plan shall remain in full force and effect, and such invalid, illegal or unenforceable provision shall be reformed as necessary to make it valid, legal and enforceable to the maximum extent possible under law (or, if such reformation is impossible, such provision shall be severed from this Plan). All payouts under this Plan are subject to applicable withholdings and deductions as required by law. If employed by Sapient Corporation, Sapient Government Services, Inc., or Sapient Private Limited, the Participant continues to be an "at will" employee, and Sapient has the right to terminate a Participant's employment and/or participation in the Plan at any time, with or without cause or prior notice. If employed by Sapient Canada Inc., Sapient GmbH, Sapient Limited or Sapient Netherlands B.V., the Participant continues to be employed in accordance with the terms of his/her employment agreement (the "Employment Agreement"). Sapient has the right to terminate a Participant's employment and/or participation in this Plan at any time, with or without cause or prior notice, subject to the terms of the Participant's Employment Agreement and as permitted by local applicable law. This Plan supersedes all prior understandings, negotiations and agreements, whether written or oral, between each individual Participant and the Company as to the subject matter covered by this Plan. In the event of any conflict between this Plan and any presentations, documents, statements or other communications concerning the subject matter of this Plan, this Plan shall control. This Plan describes the sole and exclusive bonuses or incentives the Company is offering to Participants during the Plan Period; provided, however, that nothing in this Plan will prevent the Company from paying any individual a discretionary bonus or incentive payment at any time or from time to time if authorized in advance by the Compensation Committee. The Company has no obligation to pay anyone a discretionary bonus or incentive at any time. No person who is not a Participant in this Plan shall have any right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term or provision of this Plan. Page 10 APPENDIX 1 EXAMPLES OF ALLOCATION AND PAYOUT SCENARIOS SCHEDULE OF EXAMPLES OF COMPANY FUNDING (STANDARD TARGET IS HIGHLIGHTED IN THE FIRST ROW) * SCENARIO: COMPANY DELIVERS *% ACHIEVEMENT of target operating profit Individual performance percentage range is *%-*% (* points on either side of the company performance percentage; *% is generally indicative of expected performance) >> EXAMPLE 1: Higher performing Sr. Associate A receives *% individual payout based on performance *% is then applied to the bonus track target amount (i.e., *% of base salary in this example), to arrive at the bonus payout amount >> EXAMPLE 2: Lower performing Manager B receives *% individual payout based on performance *% is then applied to the bonus track target amount (i.e., *% of eligible base salary in this example), to arrive at the bonus payout amount >> EXAMPLE 3: Sr. Associate B delivering at good/expected levels receives *% individual payout based on performance *% is then applied to the bonus track target amount (i.e., *% of base salary in this example), to arrive at the bonus payout amount >> There is also a close correlation between BU/GSS team performance against targets and the individual performance payouts in that BU/GSS team, particularly at the more senior career stages NOTE: The examples and performance scenarios in this Appendix 1 are for illustrative purposes only. Actual performance and results may differ. Neither the Plan nor this Appendix 1 contain any obligation or promise on the part of Sapient for compensation of any kind or continued employment to anyone. Page 11 EX-10.3 4 b65658q2exv10w3.txt EX-10.3 FORM OF RESTRICTED STOCK UNITS AGREEMENT (INITIAL GRANTS) EXHIBIT 10.3 SAPIENT CORPORATION RESTRICTED STOCK UNITS AGREEMENT In recognition of the important contributions that ___________ (the "Director") makes to the success of Sapient Corporation (the "Company") and its Affiliates (together with the Company, the "Company Group") as a member of the Company's Board of Directors, the Company hereby grants to the Director, pursuant to the Sapient Corporation 1998 Stock Incentive Plan (the "Plan"), the Restricted Stock Units Award described below. 1. THE RESTRICTED STOCK UNITS AWARD. The Company hereby grants to the Director ________________ (________) Units, subject to the terms and conditions of this Agreement and the Plan. An Award shall be paid hereunder, only to the extent that such Award is Vested, as provided in this Agreement. The Director's rights to the Units are subject to the restrictions described in this Agreement and the Plan in addition to such other restrictions, if any, as may be imposed by law. 2. DEFINITIONS. The following definitions will apply for purposes of this Agreement. Capitalized terms not defined in this Agreement are used as defined in the Plan. (a) "Agreement" means this Restricted Stock Units Agreement granted by the Company and agreed to by the Director. (b) "Award" means the grant of Units in accordance with this Agreement. (c) "Change in Control" means the occurrence of any of the following events: (i) any "person", as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, Jerry A. Greenberg, J. Stuart Moore, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities; (ii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; (iii) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale of disposition by the Company of all or substantially all of the Company's assets; or (iv) individuals who, on the date on which the Plan was adopted by the Board, constituted the Board of Directors of the Company, together with any new director whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least a majority of the directors then still in office who were directors on the date on which the Plan was adopted by the Board or whose election or nomination was previously so approved, cease for any reason to constitute at least a majority of the Board of Directors. (d) "Common Stock" means common stock of the Company, .01 par value. (e) "Grant Date" means ________ __, 200 _. (f) "Fair Market Value" means the average trading price of the Common Stock over the twenty trading days prior to the Valuation Date, based on the closing price on each such day. For this purpose, the "closing price" of the Common Stock on any trading day will be the last sale price with respect to such Common Stock reported on the NASDAQ, or, if on any such date such Common Stock is not quoted by NASDAQ, the average of the closing bid and asked prices with respect to such Common Stock, as furnished by a professional market maker making a market in such Common Stock selected by the Company in good faith; or, if no such market maker is available, the fair market value of such Common Stock as of such day as determined in good faith by the Company. (g) "NASDAQ" means the Nasdaq Stock Market. (h) "Payment Date" means, as to Vested Units, within 30 days of the date on which the Units become Vested, except that in connection with a Change in Control, the Payment Date shall mean immediately prior to or coincident with the occurrence of the Change in Control. (i) "Unit" means a notional unit which is equivalent to a single share of Common Stock on the Grant Date, subject to Section 4. (j) "Valuation Date" means the date on which the Fair Market Value of the Common Stock is to be determined. (k) "Vested" means that portion of the Award to which the Director has a nonforfeitable right. (l) "Vesting Dates" means the dates set forth in Section 3. -2- 3. VESTING. (a) An Award shall become Vested only upon the Vesting Dates described in this Section 3, except as otherwise provided herein or determined by the Company in its sole discretion. No portion of any Award shall become Vested on the Vesting Date unless the Director is then, and since the Grant Date has continuously been, a Director of the Company. (b) Subject to subsections (c), (d) and (e), below, an Award shall become Vested based on the following schedule.

(c) Upon the occurrence of a Change in Control, the length of the Director's service shall be deemed to be twelve months longer than the actual length, and Vested shares shall be distributed immediately prior to or coincident with the Change in Control; provided, however, that in no event shall such deemed time extension serve to increase the number of Vested shares to more than the number of shares of Common Stock as equals that number of Units which have been awarded hereunder. (d) Notwithstanding Section 3(b), if the service of the Director terminates by reason of death or disability (within the meaning of Section 22(e)(3) of the Internal Revenue Code), the length of the Director's service shall be deemed to be six months longer than the actual length; provided, however, that in no event shall such deemed time extension serve to increase the number of Vested shares to more than the number of shares of Common Stock as equals that number of Units which have been awarded hereunder. (e) Notwithstanding Section 3(b), in the event that the Director has completed the full term of service as a Director for which he or she was elected at an Annual Meeting of Stockholders of the Company, but is not standing for re-election to a subsequent term as a Director at the Annual Meeting of Stockholders of the Company at which he or she would otherwise have been re-elected (the "Retirement Meeting"), all -3- Award shares which are scheduled to vest subsequent to the Retirement Meeting but within the same fiscal quarter in which the Retirement Meeting is held shall become Vested shares as of the date immediately preceding such Retirement Meeting; provided, however, that in no event shall such deemed time extension serve to increase the number of Vested Shares to more than the number of shares of Common Stock as equals that number of Units which have been awarded hereunder. (f) In the event that the Director's tenure as a member of the Company's Board of Directors terminates prior to a Vesting Date for any reason other than as set forth in this Section 3, including without limitation termination by the Company or the Company Group, any portion of the Award that has not then become Vested will be forfeited automatically. 4. ADJUSTMENTS BASED ON CERTAIN CHANGES IN THE COMMON STOCK. In the event of any stock split, reverse stock split, stock dividend, recapitalization or similar change affecting the Common Stock, the Award shall be equitably adjusted. 5. NO VOTING RIGHTS/DIVIDENDS. The Award shall not be interpreted to bestow upon the Director any equity interest or ownership in the Company Group prior to the Payment Date. The Director is not entitled to vote any Common Stock by reason of the granting of this Award or to receive or be credited with any dividends declared and payable on any Common Stock underlying any Award prior to any Payment Date. 6. PAYMENT OF AWARD. On the Payment Date, the Company shall issue to the Director that number of shares of Common Stock as equals that number of Units which have become Vested. 7. UNFUNDED STATUS. The obligations of the Company Group hereunder shall be contractual only. The Director shall rely solely on the unsecured promise of the Company and nothing herein shall be construed to give the Director or any other person or persons any right, title, interest or claim in or to any specific asset, fund, reserve, account or property of any kind whatsoever owned by the Company Group. 8. NO ASSIGNMENT. No right or benefit or payment under the Plan shall be subject to assignment or other transfer nor shall it be liable or subject in any manner to attachment, garnishment or execution. 9. WITHHOLDING. The Company's obligation to deliver to the Director shares of Common Stock under an Award shall be subject to the satisfaction of all applicable federal, state and local income tax withholding requirements as determined by the Company Group ("Withholding Taxes"). To satisfy any Withholding Taxes, if any, due upon vesting of the Director's Units, the Director agrees to pay to the Company, or make provision satisfactory to the Company for payment of, any Withholding Taxes, no later than the Payment Date. The Company and any Affiliate may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind due to the Director. Such -4- withheld amounts shall include shares retained from the Award creating the tax obligation, valued at their Fair Market Value on the date of retention. Further, as a condition of receiving any Vested Award, the Director hereby agrees to the terms of the Irrevocable Standing Order to Sell Shares (the "Standing Order"), attached as Exhibit A. Pursuant to the Standing Order, and in lieu of taking the actions described in the immediately preceding paragraph of this Section 9, the Company, in its sole discretion, may require, and, in such event the Director agrees, to the following: (a) The Director authorizes the Company's agent to sell, at the market price and on each Vesting Date (or the first NASDAQ trading day thereafter if a Vesting Date is a day in which NASDAQ is closed), the number of Vested Shares that, per the Company's instructions to its agent, is necessary to obtain proceeds sufficient to satisfy the Withholding Taxes. The Director understands and agrees that the number of shares that such agent will sell will be based on the closing price of the Common Stock on the NASDAQ trading day immediately preceding the Vesting Date. (b) The Director agrees that the proceeds received from the sale of Vested Shares pursuant to this Section 9 will be used to satisfy the Withholding Taxes and, accordingly, the Director hereby authorizes the Company's agent to pay such proceeds to the Company for such purpose. The Director understands that to the extent that the proceeds obtained by such sale exceed the amount necessary to satisfy the Withholding Taxes, such excess proceeds shall be deposited into the Director's stock brokerage account with E*TRADE Financial or such other third party brokerage under which the Director maintains a brokerage account (the "Account"). The Director further understands that any remaining Vested Shares shall be deposited into the Account. (c) The Director acknowledges and agrees that, in the event that a market in the Common Stock does not exist, the Director shall pay to the Company amounts sufficient to pay the Withholding Taxes and, to the extent that such payment is not made, the Company shall have the right to make other arrangements to satisfy the Withholding Taxes due upon the vesting of the Director's Shares. 10. AMENDMENT OR TERMINATION. This Agreement may be amended by mutual written agreement of the parties. 11. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the Commonwealth of Massachusetts. -5- IN WITNESS WHEREOF, Sapient Corporation and ________________________ have executed this Restricted Stock Units Agreement as of the ____ day of ___________, 200___. SAPIENT CORPORATION DIRECTOR ________________________ ______________________ By: Jane E. Owens Title: Sr. Vice President and General Counsel -6- EXHIBIT A IRREVOCABLE STANDING ORDER TO SELL SHARES I have received from the Company on a voluntary basis the right to acquire shares of Company common stock (the "Shares") pursuant to the attached Restricted Stock Units Agreement between the Company and me. I understand that I must maintain a securities brokerage account with E*TRADE Financial or such other third party brokerage (each of E*TRADE Financial or such other third party brokerage is herein defined as the "Broker") to participate in the stock unit plan described in detail in the Restricted Stock Units Agreement, and the Company has informed me about this requirement as well as the requirements for the opening of such a securities brokerage account so that the vested Shares can be deposited into account. Furthermore, I understand that on each vesting date, the vested Shares will be deposited into my stock brokerage account with the broker and that I will incur taxable ordinary income ("Taxable Income") upon my receipt of the vested Shares. Per the terms of the Agreement, and if so directed by the Company, I understand and agree to do the following as a condition of my receipt of vested Shares: Upon each vesting date, I must sell a number of Shares that is sufficient to satisfy all withholding taxes, as determined by Sapient, which are applicable to my Taxable Income (the "Withholding Taxes"). Accordingly, I HEREBY DIRECT THE BROKER TO SELL, ON EACH VESTING DATE LISTED ABOVE (OR THE FIRST NASDAQ TRADING DAY THEREAFTER IF A VESTING DATE IS A DAY ON WHICH NASDAQ IS CLOSED), THAT NUMBER OF SHARES THAT, PER THE COMPANY'S INSTRUCTIONS TO THE AGENT, IS SUFFICIENT TO OBTAIN SALE PROCEEDS SUFFICIENT TO SATISFY THE WITHHOLDING TAXES. THE PER SHARE SALES PRICE SHALL BE CALCULATED BASED ON THE CLOSING PRICE OF A SHARE OF COMPANY COMMON STOCK ON THE NASDAQ TRADING DAY IMMEDIATELY PRECEDING THE APPLICABLE VESTING DATE. I understand that the Broker will remit the proceeds of the foregoing sale promptly to the Company for payment by the Company of the Withholding Taxes, and I authorize and direct the Broker to pay such proceeds to the Company for this purpose. I acknowledge that I have not been induced to participate in any trade in return for or as an expectation of employment or continued employment. I understand and agree that by signing below, I am making an Irrevocable Standing Order to Sell Shares that will remain in effect until such time as I have received all Shares to which I am entitled under this Agreement. I also agree that this Irrevocable Standing Order to Sell Shares is in addition and subject to the terms and conditions of any existing Account Agreement that I have with the Broker. -7- EX-10.4 5 b65658q2exv10w4.txt EX-10.4 FORM OF RESTRICTED STOCK UNITS AGREEMENT (ANNUAL GRANTS) EXHIBIT 10.4 SAPIENT CORPORATION RESTRICTED STOCK UNITS AGREEMENT In recognition of the important contributions that ___________ (the "Director") makes to the success of Sapient Corporation (the "Company") and its Affiliates (together with the Company, the "Company Group") as a member of the Company's Board of Directors, the Company hereby grants to the Director, pursuant to the Sapient Corporation 1998 Stock Incentive Plan (the "Plan"), the Restricted Stock Units Award described below. 1. THE RESTRICTED STOCK UNITS AWARD. The Company hereby grants to the Director ________________ (________) Units, subject to the terms and conditions of this Agreement and the Plan. An Award shall be paid hereunder, only to the extent that such Award is Vested, as provided in this Agreement. The Director's rights to the Units are subject to the restrictions described in this Agreement and the Plan in addition to such other restrictions, if any, as may be imposed by law. 2. DEFINITIONS. The following definitions will apply for purposes of this Agreement. Capitalized terms not defined in this Agreement are used as defined in the Plan. (a) "Agreement" means this Restricted Stock Units Agreement granted by the Company and agreed to by the Director. (b) "Award" means the grant of Units in accordance with this Agreement. (c) "Change in Control" means the occurrence of any of the following events: (i) any "person", as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, Jerry A. Greenberg, J. Stuart Moore, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities; (ii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; (iii) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale of disposition by the Company of all or substantially all of the Company's assets; or (iv) individuals who, on the date on which the Plan was adopted by the Board, constituted the Board of Directors of the Company, together with any new director whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least a majority of the directors then still in office who were directors on the date on which the Plan was adopted by the Board or whose election or nomination was previously so approved, cease for any reason to constitute at least a majority of the Board of Directors. (d) "Common Stock" means common stock of the Company, .01 par value. (e) "Grant Date" means ________ __, 200 _. (f) "Fair Market Value" means the average trading price of the Common Stock over the twenty trading days prior to the Valuation Date, based on the closing price on each such day. For this purpose, the "closing price" of the Common Stock on any trading day will be the last sale price with respect to such Common Stock reported on the NASDAQ, or, if on any such date such Common Stock is not quoted by NASDAQ, the average of the closing bid and asked prices with respect to such Common Stock, as furnished by a professional market maker making a market in such Common Stock selected by the Company in good faith; or, if no such market maker is available, the fair market value of such Common Stock as of such day as determined in good faith by the Company. (g) "NASDAQ" means the Nasdaq Stock Market. (h) "Payment Date" means, as to Vested Units, within 30 days of the date on which the Units become Vested, except that in connection with a Change in Control, the Payment Date shall mean immediately prior to or coincident with the occurrence of the Change in Control. (i) "Unit" means a notional unit which is equivalent to a single share of Common Stock on the Grant Date, subject to Section 4. (j) "Valuation Date" means the date on which the Fair Market Value of the Common Stock is to be determined. (k) "Vested" means that portion of the Award to which the Director has a nonforfeitable right. (l) "Vesting Dates" means the dates set forth in Section 3. -2- 3. VESTING. (a) An Award shall become Vested only upon the Vesting Dates described in this Section 3, except as otherwise provided herein or determined by the Company in its sole discretion. No portion of any Award shall become Vested on the Vesting Date unless the Director is then, and since the Grant Date has continuously been, a Director of the Company. (b) Subject to subsections (c), (d) and (e), below, an Award shall become Vested based on the following schedule.

(c) Upon the occurrence of a Change in Control, an Award shall become 100% Vested, such shares to be distributed immediately prior to or coincident with the Change in Control. (d) Notwithstanding Section 3(b), if the service of the Director terminates by reason of death or disability (within the meaning of Section 22(e)(3) of the Internal Revenue Code), the length of the Director's service shall be deemed to be six months longer than the actual length; provided, however, that in no event shall such deemed time extension serve to increase the number of Vested shares to more than the number of shares of Common Stock as equals that number of Units which have been awarded hereunder. (e) Notwithstanding Section 3(b), in the event that the Director has completed the full term of service as a Director for which he or she was elected at an Annual Meeting of Stockholders of the Company, but is not standing for re-election to a subsequent term as a Director at the Annual Meeting of Stockholders of the Company at which he or she would otherwise have been re-elected (the "Retirement Meeting"), all Award shares which are scheduled to vest subsequent to the Retirement Meeting but within the same fiscal quarter in which the Retirement Meeting is held shall become Vested shares as of the date immediately preceding such Retirement Meeting; provided, however, that in no event shall such deemed time extension serve to increase the number of Vested Shares to more than the number of shares of Common Stock as equals that number of Units which have been awarded hereunder. (f) In the event that the Director's tenure as a member of the Company's Board of Directors terminates prior to a Vesting Date for any reason other than as set forth in this Section 3, including without limitation termination by the Company or the -3- Company Group, any portion of the Award that has not then become Vested will be forfeited automatically. 4. ADJUSTMENTS BASED ON CERTAIN CHANGES IN THE COMMON STOCK. In the event of any stock split, reverse stock split, stock dividend, recapitalization or similar change affecting the Common Stock, the Award shall be equitably adjusted. 5. NO VOTING RIGHTS/DIVIDENDS. The Award shall not be interpreted to bestow upon the Director any equity interest or ownership in the Company Group prior to the Payment Date. The Director is not entitled to vote any Common Stock by reason of the granting of this Award or to receive or be credited with any dividends declared and payable on any Common Stock underlying any Award prior to any Payment Date. 6. PAYMENT OF AWARD. On the Payment Date, the Company shall issue to the Director that number of shares of Common Stock as equals that number of Units which have become Vested. 7. UNFUNDED STATUS. The obligations of the Company Group hereunder shall be contractual only. The Director shall rely solely on the unsecured promise of the Company and nothing herein shall be construed to give the Director or any other person or persons any right, title, interest or claim in or to any specific asset, fund, reserve, account or property of any kind whatsoever owned by the Company Group. 8. NO ASSIGNMENT. No right or benefit or payment under the Plan shall be subject to assignment or other transfer nor shall it be liable or subject in any manner to attachment, garnishment or execution. 9. WITHHOLDING. The Company's obligation to deliver to the Director shares of Common Stock under an Award shall be subject to the satisfaction of all applicable federal, state and local income tax withholding requirements as determined by the Company Group ("Withholding Taxes"). To satisfy any Withholding Taxes, if any, due upon vesting of the Director's Units, the Director agrees to pay to the Company, or make provision satisfactory to the Company for payment of, any Withholding Taxes, no later than the Payment Date. The Company and any Affiliate may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind due to the Director. Such withheld amounts shall include shares retained from the Award creating the tax obligation, valued at their Fair Market Value on the date of retention. Further, as a condition of receiving any Vested Award, the Director hereby agrees to the terms of the Irrevocable Standing Order to Sell Shares (the "Standing Order"), attached as Exhibit A. Pursuant to the Standing Order, and in lieu of taking the actions described in the immediately preceding paragraph of this Section 9, the Company, in its sole discretion, may require, and, in such event the Director agrees, to the following: -4- (a) The Director authorizes the Company's agent to sell, at the market price and on each Vesting Date (or the first NASDAQ trading day thereafter if a Vesting Date is a day in which NASDAQ is closed), the number of Vested Shares that, per the Company's instructions to its agent, is necessary to obtain proceeds sufficient to satisfy the Withholding Taxes. The Director understands and agrees that the number of shares that such agent will sell will be based on the closing price of the Common Stock on the NASDAQ trading day immediately preceding the Vesting Date. (b) The Director agrees that the proceeds received from the sale of Vested Shares pursuant to this Section 9 will be used to satisfy the Withholding Taxes and, accordingly, the Director hereby authorizes the Company's agent to pay such proceeds to the Company for such purpose. The Director understands that to the extent that the proceeds obtained by such sale exceed the amount necessary to satisfy the Withholding Taxes, such excess proceeds shall be deposited into the Director's stock brokerage account with E*TRADE Financial or such other third party brokerage under which the Director maintains a brokerage account (the "Account"). The Director further understands that any remaining Vested Shares shall be deposited into the Account. (c) The Director acknowledges and agrees that, in the event that a market in the Common Stock does not exist, the Director shall pay to the Company amounts sufficient to pay the Withholding Taxes and, to the extent that such payment is not made, the Company shall have the right to make other arrangements to satisfy the Withholding Taxes due upon the vesting of the Director's Shares. 10. AMENDMENT OR TERMINATION. This Agreement may be amended by mutual written agreement of the parties. 11. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the Commonwealth of Massachusetts. -5- IN WITNESS WHEREOF, Sapient Corporation and ______________________ have executed this Restricted Stock Units Agreement as of the ____ day of ___________, 200___. SAPIENT CORPORATION DIRECTOR __________________________________ ________________________ By: Jane E. Owens Title: Sr. Vice President and General Counsel -6- EXHIBIT A IRREVOCABLE STANDING ORDER TO SELL SHARES I have received from the Company on a voluntary basis the right to acquire shares of Company common stock (the "Shares") pursuant to the attached Restricted Stock Units Agreement between the Company and me. I understand that I must maintain a securities brokerage account with E*TRADE Financial or such other third party brokerage (each of E*TRADE Financial or such other third party brokerage is herein defined as the "Broker") to participate in the stock unit plan described in detail in the Restricted Stock Units Agreement, and the Company has informed me about this requirement as well as the requirements for the opening of such a securities brokerage account so that the vested Shares can be deposited into account. Furthermore, I understand that on each vesting date, the vested Shares will be deposited into my stock brokerage account with the broker and that I will incur taxable ordinary income ("Taxable Income") upon my receipt of the vested Shares. Per the terms of the Agreement, and if so directed by the Company, I understand and agree to do the following as a condition of my receipt of vested Shares: Upon each vesting date, I must sell a number of Shares that is sufficient to satisfy all withholding taxes, as determined by Sapient, which are applicable to my Taxable Income (the "Withholding Taxes"). Accordingly, I HEREBY DIRECT THE BROKER TO SELL, ON EACH VESTING DATE LISTED ABOVE (OR THE FIRST NASDAQ TRADING DAY THEREAFTER IF A VESTING DATE IS A DAY ON WHICH NASDAQ IS CLOSED), THAT NUMBER OF SHARES THAT, PER THE COMPANY'S INSTRUCTIONS TO THE AGENT, IS SUFFICIENT TO OBTAIN SALE PROCEEDS SUFFICIENT TO SATISFY THE WITHHOLDING TAXES. THE PER SHARE SALES PRICE SHALL BE CALCULATED BASED ON THE CLOSING PRICE OF A SHARE OF COMPANY COMMON STOCK ON THE NASDAQ TRADING DAY IMMEDIATELY PRECEDING THE APPLICABLE VESTING DATE. I understand that the Broker will remit the proceeds of the foregoing sale promptly to the Company for payment by the Company of the Withholding Taxes, and I authorize and direct the Broker to pay such proceeds to the Company for this purpose. I acknowledge that I have not been induced to participate in any trade in return for or as an expectation of employment or continued employment. I understand and agree that by signing below, I am making an Irrevocable Standing Order to Sell Shares that will remain in effect until such time as I have received all Shares to which I am entitled under this Agreement. I also agree that this Irrevocable Standing Order to Sell Shares is in addition and subject to the terms and conditions of any existing Account Agreement that I have with the Broker. -7- EX-31.1 6 b65658q2exv31w1.htm EX-31.1 CERTIFICATION OF CEO exv31w1

EXHIBIT 31.1

I, Alan J. Herrick, certify that:

1.		I have reviewed this Quarterly Report on Form 10-Q of Sapient Corporation;

2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a.		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b.		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c.		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

	d.		Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	a.		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b.		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Signature	Title	Date

/s/ Alan J. Herrick	Chief Executive Officer	June 12, 2007

Alan J. Herrick

EX-31.2 7 b65658q2exv31w2.htm EX-31.2 CERTIFICATION OF CFO exv31w2

EXHIBIT 31.2

I, Joseph S. Tibbetts, Jr., certify that:

1.		I have reviewed this Quarterly Report on Form 10-Q of Sapient Corporation;

2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a.		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b.		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c.		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

	d.		Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	a.		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b.		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Signature	Title	Date

/s/ Joseph S. Tibbetts, Jr.	Chief Financial Officer	June 12, 2007

Joseph S. Tibbetts, Jr.

EX-32.1 8 b65658q2exv32w1.htm EX-32.1 CERTIFICATION OF CEO exv32w1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sapient Corporation (the “Corporation”) on Form 10-Q for the fiscal quarter ended June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Alan J. Herrick, the Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

	(1)		The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

	(2)		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

Dated: June 12, 2007

A signed original of this written statement required by Section 906 has been provided to Sapient Corporation and will be retained by Sapient Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2 9 b65658q2exv32w2.htm EX-32.2 CERTIFICATION OF CFO exv32w2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Sapient Corporation (the “Corporation”) on Form 10-Q for the fiscal quarter ended June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joseph S. Tibbetts, Jr., the Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

	(1)		The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

	(2)		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

Dated: June 12, 2007

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