6. Accrued Expenses

        The components of accrued expenses at December 31, 2009 and March 31, 2010 are as follows:

7. Income Taxes

        The following table shows the Company's effective income tax rate for the three months ended March 31, 2009 and 2010:

        The Company's effective tax rate decreased from 39.4% to 37.5% for the three months ended March 31, 2009 and 2010, respectively.

8. Earnings Per Share

        Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share is calculated by dividing net income by the weighted average shares outstanding plus share equivalents that would arise from the exercise of share options and the conversion of preferred shares. Conversion of 3,191,996 of Series B and D preferred shares were excluded from the calculation for the three month period ended March 31, 2009 as they were anti-dilutive. The Series B and Series D preferred shares converted to common stock effective September 24, 2009. Employee stock options totaling 287,827 and 86,500 for the three month periods ending March 31, 2009 and 2010, respectively, were excluded from the calculation of diluted earnings per share, as they were anti-dilutive. The

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Echo Global Logistics, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (Continued)

Three Months Ended March 31, 2009 and 2010

8. Earnings Per Share (Continued)

computation of basic and diluted earnings per common share for the three month periods ended March 31, 2009 and 2010 are as follows:

9. Stock-Based Compensation Plans

        Using the Black-Scholes-Merton option valuation model and the assumptions listed below, the Company recorded $191,391 and $207,918 in compensation expense with corresponding tax benefits of $74,642 and $81,088 for the three month periods ended March 31, 2009 and 2010, respectively. During the three month periods ended March 31, 2009 and 2010, the Company granted 40,000 and 440,000 options, respectively, to various employees.

        The following assumptions were utilized in the valuation for options granted during the three months ended March 31, 2009 and 2010:

10. Related Parties

        Certain stockholders and directors of the Company have a direct and/or indirect ownership interest in InnerWorkings, Inc. (InnerWorkings), a publicly traded company that provides print procurement services. InnerWorkings is one of the Company's stockholders. As of March 31, 2010, InnerWorkings owned 577,778 shares of the Company's common stock, or 2.7% of total shares outstanding on a fully-diluted basis.

        For the three months ended March 31, 2009 and 2010 Innerworkings has also provided print procurement services to the Company. As consideration for these services, the Company incurred

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Echo Global Logistics, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (Continued)

Three Months Ended March 31, 2009 and 2010

10. Related Parties (Continued)

expenses of $14,829 and $17,388 for the three month periods ended March 31, 2009 and 2010, respectively.

        The Company provided transportation and logistics services to InnerWorkings and recognized $910,235 and $1,658,787 for such services during the three month periods ended March 31, 2009 and 2010, respectively.

        In June 2006, the Company entered into a supplier rebate program with InnerWorkings, pursuant to which the Company provides InnerWorkings with an annual rebate on all freight expenditures in an amount equal to 5% of revenue received from InnerWorkings. In April 2008, this rebate program was amended to provide InnerWorkings with an annual rebate on all freight expenditures in an amount equal to 3% of revenue received from InnerWorkings, plus an additional 2% of revenue for amounts paid within 15 days. Total supplier rebates to InnerWorkings were $25,619 and $16,112 for the three month periods ended March 31, 2009 and 2010, respectively.

        As of December 31, 2009 and March 31, 2010, the Company had a net receivable due from InnerWorkings of $1,168,538 and $1,293,593, respectively, of which $1,313,014 is included in accounts receivable and $19,421 is included in accounts payable in the balance sheet as of March 31, 2010. The Company had no accounts payables due to InnerWorkings as of December 31, 2009.

        During 2009, one of the Company's stockholders who is a director of the Company became a director of Manpower Inc., a publicly traded company that serves the employment services industry. For the three month period ended March 31, 2010, the Company provided transportation and logistics services to Manpower and recognized $34,001 for such services. As of December 31, 2009 and March 31, 2010, the Company had a net receivable due from Manpower of $7,883 and $13,475, respectively.

        In January 2009, the Company entered into an Independent Contract Referral Services Agreement with Holden Ventures, LLC. Under the terms of the agreement, the Company will pay Holden Ventures 10% of the gross margin, or the actual payments received minus actual expenses that the Company receives from clients referred by Holden Ventures. This agreement may be terminated by either party upon 15 days written notice and prohibits Holden Ventures from competing with the Company's business and soliciting its clients and employees for one year following the termination of the agreement. As of March 31, 2010, no payments have been made to Holden Ventures under the terms of this agreement.

        The Company subleases a portion of its office space to Groupon, LLC (Groupon), a web-based collective buying power organization whose investors include certain stockholders and directors of the Company. The sublease agreement was entered into on May 1, 2009, which was subsequently amended effective November 1, 2009. The agreement requires the Company to provide 30-days notice in advance of cancelling the sublease. For the three months ended March 31, 2010, the Company received sublease rental income of $18,825. The Company did not receive sublease rental income for the three months ended March 31, 2009. The Company had no amounts due to or from Groupon as of December 31, 2009 and March 31, 2010.

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Echo Global Logistics, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements (Continued)

Three Months Ended March 31, 2009 and 2010

11. Legal Matters

        In the normal course of business, the Company is subject to potential claims and disputes related to its business, including claims for freight lost or damaged in transit. Some of these matters may be covered by the Company's insurance and risk management programs or may result in claims or adjustments with our carriers. Management does not believe that the outcome of such matters will have a materially adverse effect on its financial position or results of operations.

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

Overview

        We are a leading provider of technology enabled transportation and supply chain management services, delivered on a proprietary technology platform serving the transportation and logistics needs of our clients. Our proprietary web-based technology platform compiles and analyzes data from our network of over 24,000 transportation providers to serve our clients' shipping and freight management needs. Our technology platform, composed of web-based software applications and a proprietary database, enables us to identify excess transportation capacity, obtain competitive rates and execute thousands of shipments every day while providing high levels of service and reliability. We focus primarily on arranging transportation across the major modes, including truckload (TL), less than truck load (LTL) and small parcel, and we also offer inter-modal (which involves moving a shipment by rail and truck), domestic air, expedited and international transportation services.

        We procure transportation and provide logistics services for more than 15,600 clients across a wide range of industries, such as manufacturing, construction, consumer products and retail. Our clients fall into two categories, enterprise and transactional. We typically enter into multi-year contracts with our enterprise clients, which are often on an exclusive basis for a specific transportation mode or point of origin. As part of our value proposition, we also provide core logistics services to these clients. We provide transportation and logistics services to our transactional clients on a shipment-by-shipment basis, typically with individual, or spot market, pricing.

Revenue

        We generate revenue through the sale of transportation and logistics services to our clients. Revenue is recognized when the client's product is delivered by a third-party carrier. Since our inception, our growth rates have decreased as our revenue has grown. Our revenue was $49.1 million and $89.1 million for the three month periods ended March 31, 2009 and 2010, respectively, an increase of 81.6%.

        Our revenue is generated from two different types of clients: enterprise and transactional. Our enterprise accounts typically generate higher dollar amounts and volume than our transactional relationships. We categorize a client as an enterprise client if we have a contract with the client for the provision of services on a recurring basis. Our contracts with enterprise clients typically have a multi-year term and are often exclusive for a certain transportation mode or point of origin. In several cases, we provide substantially all of a client's transportation and logistics requirements. We categorize all other clients as transactional clients. We provide services to our transactional clients on a shipment-by-shipment basis. As of March 31, 2010, we had 124 enterprise clients and, for the three month period ended March 31, 2010 we served over 9,900 transactional clients. For the three month period ended March 31, 2010, we entered into contracts with eight new enterprise clients. For the three month periods ended March 31, 2009 and 2010, enterprise clients accounted for 43% and 42% of our revenue, respectively, and transactional clients accounted for 57% and 58% of our revenue, respectively. We expect to continue to grow both our enterprise and transactional client base in the future, although the rate of growth for each type of client will vary depending on opportunities in the marketplace.

        Revenue recognized per shipment will vary depending on the transportation mode, fuel prices, shipment weight and density and mileage of the product shipped. The primary modes of shipment that we transact in are TL, LTL and small parcel. Other transportation modes include inter-modal, domestic air, expedited services and international. Typically, our revenue is lower for an LTL shipment than for a TL shipment, and revenue per shipment is higher for shipments in modes other than TL, LTL and small parcel. Material shifts in the percentage of our revenue by transportation mode could have a significant impact on our revenue growth. For the three month period ended March 31, 2010, LTL

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accounted for 44% of our revenue, TL accounted for 38% of our revenue, small parcel accounted for 6% of our revenue and other transportation modes accounted for 12% of our revenue.

        The transportation industry has historically been subject to seasonal sales fluctuations as shipments generally are lower during and after the winter holiday season because many companies ship goods and stock inventories prior to the winter holiday season. While we have experienced some seasonality, differences in our revenue between periods have been driven primarily by growth in our client base.

Transportation costs and net revenue

        We act primarily as a service provider to add value and expertise in the procurement and execution of transportation and logistics services for our clients. Our fee structure is primarily variable, although we have entered into a limited number of fixed fee arrangements that represent an insignificant portion of our revenue. Net revenue consists of transportation revenue minus transportation cost. Our transportation costs consists primarily of the direct cost of transportation paid to the carrier.

        Net revenue is the primary indicator of our ability to procure services provided by carriers and other third-parties and is considered by management to be the primary measurement of our growth. Although our transportation cost is typically lower for an LTL shipment than for a TL shipment, our net revenue margin is typically higher for an LTL shipment than for a TL shipment. Material shifts in the percentage of our revenue by transportation mode, including small parcel, could have a significant impact on our net revenue. The discussion of results of operations below focuses on changes in our net revenues and expenses as a percentage of net revenue margin. For the three month periods ended March 31, 2009 and 2010, our net revenue was $11.0 million and $17.0 million, respectively, reflecting a growth rate of 55%.

Operating expenses

        Our costs and expenses, excluding transportation costs, consist of commissions paid to our sales personnel, general and administrative expenses to run our business and depreciation and amortization.

        Commissions paid to our sales personnel, including employees and agents, are a significant component of our operating expenses. These commissions are based on the net revenue we collect from the clients for which they have primary responsibility. For the three month periods ended March 31, 2009 and 2010, commission expense was 29.0% and 30.7%, respectively, as a percentage of our net revenue. The percentage of net revenue paid as commissions will vary depending on the type of client, composition of the sales team and mode of transportation. Commission expense, stated as a percentage of net revenue, could increase or decrease in the future depending on the composition of our revenue growth and the relative impact of changes in sales teams and service offerings.

        We accrue for commission expense when we recognize the related revenue. Some of our sales personnel receive a monthly advance to provide them with a more consistent income stream. Cash paid to our sales personnel in advance of commissions earned is reflected as a prepaid expense on our balance sheet. As our sales personnel earn commissions, a portion of their commission payment is withheld and offset against their prepaid commission balance, if any.

        Our general and administrative expenses, which exclude commission expense, primarily consist of compensation costs for our operations, information systems, finance and administrative support employees and change to contingent consideration liability. For the three month periods ended March 31, 2009 and 2010, our general and administrative expenses were $6.7 million and $8.1 million, respectively. For the three month periods ended March 31, 2009 and 2010, general and administrative expenses as a percentage of net revenue were 60.5% and 47.6%, respectively.

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        Our depreciation expense is primarily attributable to our depreciation of purchases of computer hardware and software, equipment, furniture and fixtures, and the capitalization of internally developed software. For the three month periods ended March 31, 2009 and 2010, depreciation expense was $0.9 million and $1.3 million, respectively.

        Our amortization expense is attributable to our amortization of intangible assets acquired from business combinations, including client relationships, tradenames and non-compete agreements. For the three month periods ended March 31, 2009 and 2010, amortization expense was $0.2 million and $0.4 million, respectively.

Reverse Stock Split and Recapitalization

        Prior to our initial public offering, on September 25, 2009, we effectuated a one-for-two reverse stock split of all outstanding shares of our Series A common stock, Series B preferred stock and Series D preferred stock. Immediately following the reverse stock split, we exchanged all outstanding shares of our Series A common stock, Series B preferred stock and Series D preferred stock for newly issued shares of common stock on approximately a one-for-one basis.

Income Taxes

        On June 7, 2006, our company completed a conversion pursuant to which Echo Global Logistics, LLC, a limited liability company, converted to Echo Global Logistics, Inc., a corporation. As a limited liability company, we were treated as a partnership for federal income tax purposes. As a result, all items of income, expense, gain and loss of Echo were generally reportable on the tax returns of members of Echo Global Logistics, LLC.

        As a result of our conversion, we account for income taxes in accordance with ASC Topic 740 (previously SFAS No. 109, Accounting for Income Taxes), under which deferred assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying values of assets and liabilities and their respective tax bases. In connection with our conversion, we used $9.4 million of our net proceeds from the issuance of our Series D preferred stock to redeem certain of our Series A common units. Because we redeemed the units as a limited liability company, the cash distribution was taxable to the members and our tax basis increased resulting in the recognition of a deferred tax asset of $3.8 million, for which we recorded a valuation allowance of $2.0 million and a corresponding net increase to additional paid in capital of $2.0 million. The Company evaluated this valuation allowance as of December 31, 2009 and determined it was more likely than not that the existing deferred tax assets would be fully realized, thus the valuation allowance was reduced to zero with the corresponding income tax benefit recorded to income tax expense in 2009.

Comparison of three months ended March 31, 2010 and 2009

Revenue

        Our revenue increased by $40.0 million, or 81.6%, to $89.1 million for the three month period ended March 31, 2010 from $49.1 million for the three month period ended March 31, 2009. The increase was attributable to the increase in the number of our clients, the total number of shipments executed on behalf of, and services provided to these clients. This was partially offset by a decrease in the transportation rates due to pricing declines caused by a weaker economy. In addition, $7.3 million of revenue was generated for the three month period ended March 31, 2010 from the RayTrans Distribution Services acquisition completed in June 2009.

        Our revenue from enterprise clients increased by $16.4 million, or 77.4%, to $37.6 million for the three month period ended March 31, 2010 from $21.2 million for the three month period ended March 31, 2009, resulting from an increase in the number of enterprise clients and shipments executed

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and services provided. As we increased our number of transactional clients, our percentage of revenue from enterprise clients decreased to 42% of our revenue for the three month period ended March 31, 2010 from 43% of our revenue for the three month period ended March 31, 2009. As of March 31, 2010, we had 124 enterprise clients under contract, which was an increase of 26, compared to 98 enterprise clients under contract as of March 31, 2009.

        Our revenue from transactional clients increased by $23.6 million, or 84.8%, to $51.5 million for the three month period ended March 31, 2010 from $27.9 million for the three month period ended March 31, 2009. The growth in revenue from transactional clients during this period was driven by the increase in the number of our transactional clients due to the addition of transactional sales representatives and sales agents, including those acquired in connection with the acquisition of RayTrans Distribution Services. Our percentage of revenue from transactional clients increased to 58% of our revenue for the three month period ended March 31, 2010 from 57% of our revenue for the three month period ended March 31, 2009. We served over 9,900 transactional clients in the three month period ended March 31, 2010, an increase of approximately 2,000 compared to the 7,900 transactional clients served in the three month period ended March 31, 2009.

Transportation costs

        Our transportation costs increased by $34.0 million, or 89.4%, to $72.1 million for the three month period ended March 31, 2010 from $38.1 million for the three month period ended March 31, 2009. The growth in the total number of shipments executed on behalf of our clients accounted for most of the increase in our transportation costs during this period. Our transportation costs as a percentage of revenue increased to 80.9% for the three month period ended March 31, 2010 from 77.6% for the three month period ended March 31, 2009.

Net revenue

        Net revenue increased by $6.0 million, or 54.8%, to $17.0 million for the three month period ended March 31, 2010 from $11.0 million for the three month period ended March 31, 2009. The growth in the total number of shipments executed on behalf of our clients accounted for most of the increase in our net revenue during this period. The remaining increase in net revenue was the result of the $1.3 million generated from the RayTrans Distribution Services acquisition. Net revenue margins decreased to 19.1% for the three month period ended March 31, 2010 from 22.4% for the three month period ended March 31, 2009. The decrease in net revenue margins was the result of tightening in capacity in the truckload market and a higher mix of truckload revenue.

Operating expenses

        Commission expense increased by $2.0 million, or 63.7%, to $5.2 million for the three month period ended March 31, 2010 from $3.2 million for the three month period ended March 31, 2009. This increase is attributable to the increase in net revenue.

        General and administrative expenses increased by $1.4 million, or 21.8%, to $8.1 million for the three month period ended March 31, 2010 from $6.7 million for the three month period ended March 31, 2009. The increase is primarily the result of hiring personnel to support our growth. This increase was offset by a $1.2 million reduction of to the contingent consideration obligations recorded primarily related to the acquisitions of RayTrans Distribution Services and FMI. As a percentage of net revenue, general and administrative expenses decreased to 47.6% for the three month period ended March 31, 2010 from 60.5% for the three month period ended March 31, 2009. The decrease, as a percentage of net revenue, is partially attributable to the reduction of contingent consideration obligations as well as our ability to add clients and sales personnel in order to increase our net revenue without the same corresponding increase in our general and administrative expenses.

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Depreciation and amortization

        Depreciation expense increased by $0.4 million, or 45.8%, to $1.3 million for the three month period ended March 31, 2010 from $0.9 million for the three month period ended March 31, 2009. The increase in depreciation expense is primarily attributable to purchases of computer hardware and software, equipment, furniture and fixtures, and the capitalization of internally developed software. Amortization expense increased by $0.2 million, or 142.4%, to $0.4 million for the three month period ended March 31, 2010 from $0.2 million for the three month period ended March 31, 2009. The increase in amortization expense the result of the intangibles acquired in the RayTrans Distribution Services and FMI acquisitions completed in 2009.

Income from operations

        Income from operations increased by $1.9 million to $2.0 million for the three month period ended March 31, 2010 from $0.1 million for the three month period ended March 31, 2009. The increase in income from operations is attributable to the increase in net revenue in excess of the increase in operating expenses, due to improved leverage gained through the growth of our business.

Other expense and income tax

        Other expense decreased to $50,000 for the three month period ended March 31, 2010 from $77,000 for the three month period ended March 31, 2009. The decrease is due to the pay down of our line of credit during the second half of 2009.

        Provision for income taxes increased to $0.7 million for the three month period ended March 31, 2010 from $18,000 for the three month period ended March 31, 2009. Our effective tax rate decreased from approximately 39% for the three month period ended March 31, 2009 to 38% for the three month period ended March 31, 2010.

Net Income

        Net income increased by $1.2 million to $1.2 million for the three month period ended March 31, 2010 from $28,000 for the three month period ended March 31, 2009 related to the items previously discussed.

Liquidity and Capital Resources

        As of March 31, 2010, we had $41.8 million in cash and cash equivalents, $62.2 million in working capital and $20.0 million available under our credit facility. On April 15, 2010, we amended the line of credit facility from $20.0 million to $10.0 million in availability.

Cash used in operating activities

        For the three month period ended March 31, 2010, $1.5 million of cash was used in operating activities, representing an increase of $0.4 million compared to three month period ended March 31, 2009. For the three month period ended March 31, 2010, we generated $1.2 million of operating cash flow from net income, as compared to $28,000 for the three month period ended March 31, 2009, or an increase of $1.2 million. This cash flow generation was offset by a change in net current assets of $4.1 million, which was primarily attributable to increases in accounts receivable and prepaid expenses, offset in part by an increase in accounts payable. This increase in net current assets was attributable to the growth in our business. For the three month period ended March 31, 2010, the increase in net current assets was $1.7 million. The higher increase in cash utilized due to changes in net current assets was due to the acceleration of the timing of payments made to our vendors in an effort to improve their cash flow in response to the overall slowdown in the economy.

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Cash used in investing activities

        Cash used in investing activities was $4.2 million and $1.3 million during the three month periods ended March 31, 2010 and 2009, respectively. The primary investing activities during these periods were acquisition related payments, the procurement of computer hardware and software and the internal development of computer software. During the three month period ended March 31, 2010, we used $1.2 million for new acquisitions, and paid a $1.4 million earn-out payment to the former owners of Mountain Logistics.

Cash provided by (used in) financing activities

        During the three month period ended March 31, 2010, net cash used in financing activities was $0.3 million compared to cash provided by financing activities of $1.2 million for the three month period ended March 31, 2009. This was primarily attributable to the $2.1 million net borrowings on our credit line for the three month period ended March 31, 2009, offset by a $0.7 million decrease in IPO fees paid for the three month period ended March 31, 2010.

Credit facility

        As of March 31, 2010, we had no amounts outstanding on a $20.0 million line of credit with JPMorgan Chase Bank, N.A., which is due to expire on July 31, 2010. Any outstanding borrowings are collateralized by substantially all of our assets. The maximum amount outstanding under our line of credit cannot exceed 80% of the book value of our eligible accounts receivable. Our line of credit contains limitations on our ability to incur indebtedness, create liens and make certain investments. Interest on the line of credit is payable monthly at an interest rate equal to either: (1) the prime rate or (2) LIBOR plus 2.25%. We have discretion in determining if specific advances against the line of credit are drawn down as a prime rate advance or a LIBOR advance. The terms of the credit line include various covenants, including covenants that require us to maintain a maximum leverage ratio and a minimum interest coverage ratio. As of March 31, 2010, we were not in violation of any of these various covenants. On April 15, 2010, we amended the line of credit facility from $20.0 million to $10.0 million in availability.

Anticipated uses of cash

        Our priority is to continue to grow our revenue and net revenue. We anticipate that our operating expenses and planned expenditures will constitute a material use of cash, and we expect to use available cash to expand our sales force, to enhance our technology, to acquire or make strategic investments in complementary businesses and for working capital and other general corporate purposes. We also expect to use available cash to make approximately $19.3 million of potential earn-out payments due in connection with our acquisitions. We currently expect to use up to $5.0 million for capital expenditures through the end of 2010. We also expect that we will use up to $5.0 million through the end of 2010 to fund working capital requirements. We expect the use of cash for working capital purposes will be offset by the cash flow generated from operating earnings during this period.

        Historically, our average accounts receivable lifecycle has been longer than our average accounts payable lifecycle, meaning that we have used cash to pay carriers in advance of collecting from our clients. We elect to provide this benefit to foster strong relationships with our clients and carriers. As our business grows, we expect this use of cash to continue. The amount of cash we use will depend on the growth of our business.

Off-Balance Sheet Arrangements

        We do not have any off-balance sheet arrangements.

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Contractual Obligations

        As of March 31, 2010, we had the following contractual obligations:

Recent Accounting Pronouncements

        In October 2009, the FASB issued ASC Topic 605 (previously ASU No. 2009-13, Multiple Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force (ASU 2009-13)). The guidance addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. The guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. We are currently evaluating the impact that the adoption of this guidance may have on our consolidated financial statements.

        In January 2010, the FASB issued ASC 820 (previously "Improving Disclosures about Fair Value Measurements" (ASU 2010-06). This guidance improves disclosures originally required under SFAS No. 157. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those years. We are currently evaluating the impact that the adoption of this guidance may have on our consolidated financial statements.

        In February 2010, the FASB issued ASC 855 (previously "Amendments to Certain Recognition and Disclosure Requirements" (ASU 2010-09)). ASU 2010-09 amended SFAS No. 165, "Subsequent Events" to resolve conflicts with SEC reporting requirements. The adoption of this guidance did not have a material impact on the Company's consolidated results of operations and financial condition.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

Commodity Risk

        We pass through increases in fuel prices to our clients. As a result, we believe that there is no material risk exposure to fluctuations in fuel prices.

Interest Rate Risk

        We have exposure to changes in interest rates on our line of credit. The interest rate on our line of credit fluctuates based on the prime rate or LIBOR plus 2.25%. Assuming the $20,000,000 line of credit was fully drawn, a 1.0% increase in the prime rate would increase our annual interest expense by $200,000.

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        Our interest income is sensitive to changes in the general level of U.S. interest rates, in particular because all of our investments are in cash equivalents. Due to the short-term nature of our investments, we believe that there is no material risk exposure.

        We do not use derivative financial instruments for speculative trading purposes.

Impact of Inflation

        We believe that our results of operations are not materially impacted by moderate changes in the inflation rate. Inflation and changing prices did not have a material impact on our operations for the three months ended March 31, 2009 and 2010.

Item 4.    Controls and Procedures

        Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2010. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2010, our chief executive officer and chief financial officer concluded that, as of such date, the Company's disclosure controls and procedures were effective at the reasonable assurance level.

        No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the first quarter ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

        We are not a party to any legal proceedings that we believe would have a material adverse effect on our business, financial condition or operating results.

Item 1A.    Risk Factors

        There have been no material changes from the risk factors described in Item 1A ("Risk Factors") of our Annual Report on Form 10-K for the year ended December 31, 2009.

Item 6.    Exhibits

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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.

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EXHIBIT INDEX

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