**Exhibit 99.1**

**Advanced Technology Systems, Inc., andSubsidiaries**

**Contents**

| **Report of Independent Certified Public Accountants**           |       | 2          |       |
|------------------------------------------------------------------|------------|------------|------------|
| **Consolidated  Financial Statements**                           | ** ** | ** ** | ** ** |
| Consolidated Balance Sheets                                      |       | 3-4        |       |
| Consolidated Statements of Operations                            |       | 5          |       |
| Consolidated Statements of Changes in Stockholders’  Equity |       | 6          |       |
| Consolidated Statements of Cash Flows                            |       | 7          |       |
| Notes to  Consolidated Financial Statements                      |       | 8-22       |       |

 

1

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Board of Directors and ShareholdersAdvanced Technology Systems, Inc., and Subsidiaries

We have audited the accompanying consolidated balancesheets of Advanced Technology Systems, Inc., and Subsidiaries (theCompany) as of October 31, 2006 and 2005, and the related consolidatedstatements of operations, changes in stockholders’ equity, and cash flows foreach of the three years in the period ended October 31, 2006.**These financial statements are the responsibility of theCompany’s management.**Ourresponsibility is to express an opinion on these financial statements based onour audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).**Those standards require that we plan and perform the auditsto obtain reasonable assurance about whether the financial statements are freeof material misstatement.**The Company isnot required to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.**An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.**We believe that our auditsprovide a reasonable basis for our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Advanced TechnologySystems, Inc., and Subsidiaries as of October 31, 2006 and 2005, andthe consolidated results of its operations and its cash flows for each of thethree years in the period ended December 31, 2006 in conformity withaccounting principles generally accepted in the United States of America.

/s/Grant Thornton LLP

McLean, VirginiaMarch 13, 2007

2

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**Advanced Technology Systems, Inc., and Subsidiaries **Consolidated Balance Sheets

| ** **                                | ** ** | **October 31,** | ** ** |
|-------------------------------------------|------------|----------------------|------------|
| ** **                                | ** ** | **2006**             | ** ** | **2005** | ** ** |
| *Assets*                                  |       |                 |       |   |   |
| **Current  Assets**                       |       |                 |       |   |   |
| Cash                                      |       | $                    | 718,571    |   | $ | 1,366,755 |   |
| Accounts receivable, net                  |       | 20,495,315           |       | 23,938,931 |   |
| Prepaid expenses and other current assets |       | 632,948              |       | 648,622 |   |
| Income tax receivable                     |       | 1,483,728            |       | — |   |
| Assets held for sale                      |       | 231,861              |       | 2,988,493 |   |
| **Total Current Assets**                  |       | 23,562,423           |       | 28,942,801 |   |
| **Property and Equipment,** net           |       | 1,352,736            |       | 1,516,641 |   |
| **Goodwill**                              |       | 3,171,886            |       | 3,171,886 |   |
| **Intangible Assets,** net                |       | —               |       | 34,202 |   |
| **Restricted Cash**                       |       | 1,204,710            |       | — |   |
| **Other Assets**                          |       | 328,678              |       | 224,229 |   |
| **Total  Assets**                         |       | $                    | 29,620,433 |   | $ | 33,889,759 |   |

 

The accompanying notes are an integral part of these statements.

3

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**Advanced Technology Systems, Inc., and Subsidiaries**Consolidated Balance Sheets (Continued)

| ** **                                                                                                                             | ** ** | **October 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                             | ** ** | **2006**             | ** ** | **2005** | ** ** |
| *Liabilities and Stockholders’  Equity*                                                                                           |       |                 |       |   |   |
| **Current  Liabilities**                                                                                                               |       |                 |       |   |   |
| Line-of-credit                                                                                                                         |       | $                    | 6,930,000  |   | $ | 5,230,000 |   |
| Capital leases—current portion                                                                                                    |       | 78,999               |       | 22,651 |   |
| Accounts payable and accrued expenses                                                                                                  |       | 7,884,056            |       | 8,157,013 |   |
| Accrued salaries and related taxes                                                                                                     |       | 3,620,113            |       | 4,311,221 |   |
| Accrued vacation                                                                                                                       |       | 2,302,812            |       | 2,615,163 |   |
| Accrued royalty payments—current portion                                                                                          |       | —               |       | 500,000 |   |
| Income taxes payable                                                                                                                   |       | —               |       | 1,312,547 |   |
| Deferred income taxes—current portion                                                                                             |       | 803,258              |       | 681,467 |   |
| Current liabilities of discontinued operations                                                                                         |       | 35,422               |       | 91,447 |   |
| **Total Current Liabilities**                                                                                                          |       | 21,654,660           |       | 22,921,509 |   |
| **Capital Leases—net of current portion**                                                                                         |       | 181,174              |       | 12,550 |   |
| **Accrued Royalty Payments—net of current portion**                                                                               |       | —               |       | 125,000 |   |
| **Deferred Rent**                                                                                                                      |       | 964,658              |       | 1,317,717 |   |
| **Deferred Income Taxes—net of current portion**                                                                                  |       | 1,327,915            |       | 3,240,002 |   |
| **Other Long-term Liabilities**                                                                                                        |       | 48,586               |       | — |   |
| **Total Liabilities**                                                                                                                  |       | 24,176,993           |       | 27,616,778 |   |
| **Commitments and Contingencies**                                                                                                      |       | —               |       | — |   |
| **Stockholders’  Equity**                                                                                                         |       |                 |       |   |   |
| Preferred stock; non-voting, no par value;  50,000,000 shares authorized; no shares issued or outstanding                              |       | —               |       | — |   |
| Common stock; Class A voting, no par value;  75,000,000 shares authorized; 9,219,700 issued; 9,022,500 and 9,023,400  outstanding |       | 34,768               |       | 34,768 |   |
| Common stock; Class B voting, no par value;  75,000,000 shares authorized; 10,000,000 issued and outstanding                      |       | 1,736                |       | 1,736 |   |
| Treasury stock, at cost (197,200 and 196,300 shares,  respectively)                                                                    |       | (37,358              | )          | (32,696 | ) |
| Retained earnings                                                                                                                      |       | 5,444,294            |       | 6,269,173 |   |
| **Total Stockholders’ Equity**                                                                                                    |       | 5,443,440            |       | 6,272,981 |   |
| **Total Liabilities and Stockholders’ Equity**                                                                                    |       | $                    | 29,620,433 |   | $ | 33,889,759 |   |

 

The accompanying notes are an integral part of these statements.

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**Advanced Technology Systems, Inc., and Subsidiaries**Consolidated Statements of Operations

| ** **                                                                                                | ** ** | **Year ended October 31,** | ** **  |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|-------------|
| ** **                                                                                                | ** ** | **2006**                                  | ** **  | **2005** | ** ** | **2004** | ** ** |
| **Contract Revenue**                                                                                      |       | $                                         | 112,254,086 |   | $ | 105,355,040 |   | $ | 106,363,346 |   |
| **Direct Costs**                                                                                          |       | 72,471,117                                |        | 64,235,955 |   | 65,878,829 |   |
| **Gross Margin**                                                                                          |       | 39,782,969                                |        | 41,119,085 |   | 40,484,517 |   |
| **Overhead Expenses**                                                                                     |       | 28,607,435                                |        | 27,779,889 |   | 26,886,467 |   |
| **General and Administrative Expenses**                                                                   |       | 9,071,195                                 |        | 10,610,399 |   | 10,076,986 |   |
| **Operating Income**                                                                                      |       | 2,104,339                                 |        | 2,728,797 |   | 3,521,064 |   |
| **Other  (Expense) Income**                                                                               |       |                                      |        |   |   |   |   |
| Interest expense, net                                                                                     |       | (383,075                                  | )           | (243,611 | ) | (47,880 | ) |
| Other income                                                                                              |       | 61,693                                    |        | 100,773 |   | 58,102 |   |
| **Income Before Income Taxes**                                                                            |       | 1,782,957                                 |        | 2,585,959 |   | 3,531,286 |   |
| **Income Tax Expense**                                                                                    |       | 1,282,762                                 |        | 775,508 |   | 1,523,039 |   |
| **Income from Continuing Operations**                                                                     |       | 500,195                                   |        | 1,810,451 |   | 2,008,247 |   |
| **Loss from Discontinued Operations,** net of income tax benefits of  $849,127, $1,222,149 and $1,415,807 |       | (1,325,074                                | )           | (2,851,682 | ) | (2,310,000 | ) |
| **Net  Loss**                                                                                             |       | $                                         | (824,879    | ) | $ | (1,041,231 | ) | $ | (301,753 | ) |

 

The accompanying notes are an integral part of these statements.

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**Advanced Technology Systems, Inc., and Subsidiaries** Consolidated Statements of Changes in Stockholders’ Equity

| ** **                          | ** ** | **Class A**      | ** ** | **Class B**      | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|-----------------------|------------|-----------------------|------------|-------------------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | **Common Stock** | ** ** | **Common Stock** | ** ** | **Treasury Stock** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Shares**            | ** ** | ** **            | ** ** | **Shares**              | ** ** | ** ** | ** ** | ** ** | ** ** | **Retained** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **Issued**            | ** ** | **Amount**            | ** ** | **Issued**              | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Earnings** | ** ** | **Total** | ** ** |
| **Balance,  October 31, 2003** |       | $                     | 9,207,700  |                  | $          | 32,968                  |       | $          | 10,000,000 |       |       | $ | 1,736 |   |   |   | $ | (31,586 | ) |   | $ | 7,612,157 |   | $ | 7,615,275 |   |
| Purchase of common stock            |       | —                |       | —                |       | —                  |       |       | —     |       |       |   | (1,110 | ) |   | — |   | (1,110 | ) |
| Net loss                            |       | —                |       | —                |       | —                  |       |       | —     |       |       |   | — |   |   | (301,753 | ) | (301,753 | ) |
| **Balance, October 31, 2004**  |       | 9,207,700             |       | 32,968                |       | 10,000,000              |       |       | 1,736      |       |       |   | (32,696 | ) |   | 7,310,404 |   | 7,312,412 |   |
| Stock option exercise               |       | 12,000                |       | 1,800                 |       | —                  |       |       | —     |       |       |   | — |   |   | — |   | 1,800 |   |
| Net loss                            |       | —                |       | —                |       | —                  |       |       | —     |       |       |   | — |   |   | (1,041,231 | ) | (1,041,231 | ) |
| **Balance, October 31, 2005**  |       | 9,219,700             |       | 34,768                |       | 10,000,000              |       |       | 1,736      |       |       |   | (32,696 | ) |   | 6,269,173 |   | 6,272,981 |   |
| Purchase of common stock            |       | —                |       | —                |       | —                  |       |       | —     |       |       |   | (4,662 | ) |   | — |   | (4,662 | ) |
| Net loss                            |       | —                |       | —                |       | —                  |       |       | —     |       |       |   | — |   |   | (824,879 | ) | (824,879 | ) |
| **Balance,  October 31, 2006** |       | 9,219,700             |       | $                     | 34,768     |                    | 10,000,000 |       |       | $          | 1,736      |   |   |   | $ | (37,358 | ) |   | $ | 5,444,294 |   | $ | 5,443,440 |   |
|                                     |            |                       |            |                       |            |                         |            |            |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these statements.

 

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**Advanced Technology Systems, Inc., andSubsidiaries** Consolidated Statements of CashFlows

| ** **                                                                                 | ** ** | **Year ended October 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash Flows from Operating  Activities**                                                  | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                                                                   |       | $                                         | (824,879   | ) | $ | (1,041,231 | ) | $ | (301,753 | ) |
| Adjustments to  reconcile net loss to net cash (used in) provided by operating activities: |       |                                      |       |   |   |   |   |
| Depreciation                                                                               |       | 632,240                                   |       | 1,049,817 |   | 932,236 |   |
| Amortization                                                                               |       | 34,202                                    |       | 151,433 |   | 120,442 |   |
| Deferred income taxes                                                                      |       | (1,790,296                                | )          | (2,129,851 | ) | 90,450 |   |
| Deferred rent                                                                              |       | (353,059                                  | )          | (192,075 | ) | 16,497 |   |
| Loss on disposal of ATSI                                                                   |       | 374,738                                   |       | 663,412 |   | — |   |
| Loss on disposal of equipment                                                              |       | 22,829                                    |       | 12,992 |   | 83,062 |   |
| Bad debt                                                                                   |       | 656,680                                   |       | 195,389 |   | 365,975 |   |
| Changes in assets  and liabilities:                                                        |       |                                      |       |   |   |   |   |
| Accounts receivable                                                                        |       | 3,781,029                                 |       | 363,216 |   | (1,980,608 | ) |
| Prepaid expenses                                                                           |       | (27,043                                   | )          | 446,244 |   | (143,750 | ) |
| Prepaid supplies                                                                           |       | 379,054                                   |       | 339,599 |   | (341,630 | ) |
| Income taxes (receivable) payable                                                          |       | (2,796,276                                | )          | 3,506,595 |   | (1,370,941 | ) |
| Other assets                                                                               |       | (483,882                                  | )          | 31,809 |   | (52,590 | ) |
| Accounts payable and accrued expenses                                                      |       | 5,062                                     |       | 1,712,978 |   | 2,255,314 |   |
| Accrued salaries and related taxes                                                         |       | (677,129                                  | )          | (41,630 | ) | (208,833 | ) |
| Accrued vacation                                                                           |       | (250,604                                  | )          | (757,803 | ) | (2,574 | ) |
| Other long-term liabilities                                                                |       | 48,586                                    |       | — |   | — |   |
| **Net  Cash (Used in) Provided by Operating Activities**                                   |       | (1,268,748                                | )          | 4,310,894 |   | (538,703 | ) |
| **Cash  Flows from Investing Activities**                                                  | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchase of property and equipment                                                         |       | (323,318                                  | )          | (459,926 | ) | (1,297,537 | ) |
| Proceeds from sale of ATSI                                                                 |       | 1,080,350                                 |       | — |   | — |   |
| Acquisition of business                                                                    |       | (599,750                                  | )          | (625,000 | ) | (500,000 | ) |
| Restricted cash                                                                            |       | (1,204,710                                | )          | — |   | — |   |
| **Net  Cash Used in Investing Activities**                                                 |       | (1,047,428                                | )          | (1,084,926 | ) | (1,797,537 | ) |
| **Cash  Flows from Financing Activities**                                                  | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Borrowings (payments) on line-of-credit                                                    |       | 1,700,000                                 |       | (2,640,000 | ) | 1,965,000 |   |
| Payments on notes payable                                                                  |       | —                                    |       | (34,292 | ) | (35,612 | ) |
| Payments on capital leases                                                                 |       | (27,346                                   | )          | (52,686 | ) | (63,209 | ) |
| Exercise of stock options                                                                  |       | —                                    |       | 1,800 |   | — |   |
| Payments to repurchase treasury stock                                                      |       | (4,662                                    | )          | — |   | (1,110 | ) |
| **Net Cash Provided by (Used in) Financing Activities**                                    |       | 1,667,992                                 |       | (2,725,178 | ) | 1,865,069 |   |
| **Net (Decrease) Increase in Cash**                                                        |       | (648,184                                  | )          | 500,790 |   | (471,171 | ) |
| **Cash,**beginning  of year                                                                |       | 1,366,755                                 |       | 865,965 |   | 1,337,136 |   |
| **Cash,**end of year                                                                       |       | $                                         | 718,571    |   | $ | 1,366,755 |   | $ | 865,965 |   |

 

The accompanying notes are an integral part of these statements.

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**Advanced Technology Systems, Inc., and Subsidiaries Notes to Consolidated Financial Statements (Continued) October 31, 2006, 2005, 2004**

**NOTE A**3⁄4SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

The accounting andreporting policies used in the consolidated financial statements conform toaccounting principles generally accepted in the United States of America. Significantaccounting policies are summarized below.

***Nature of Operations***

Advanced Technology Systems, Inc., (the Parent)and Subsidiaries (the Parent and its subsidiaries together are referred toherein as the Company), is headquartered in McLean, Virginia and performs abroad range of high technology services for commercial and government clients. TheCompany focuses on providing enterprise business systems, enabling technologyimplementation and information technology (IT) infrastructure, integration andmanagement. Appix, a wholly owned subsidiary, is a specialized provider oftechnology services and solutions to the mortgage and financial servicesindustries. Advanced Technology Systems International, Inc. (ATSI), awholly owned subsidiary, is an international provider of custom-designedsecurity services and was sold on November 30, 2005. Additionally, theCompany’s Pyramid product solutions unit was discontinued in January 2006(See Note B).

As more fully described inNote N, the Company was acquired by ATS Corporation (formerly Federal ServicesAcquisition Corporation) as of the close of business on January 15, 2007.

***Principles of Consolidation***

The accompanying financialstatements include the accounts of the Parent and its wholly owned subsidiaries.All material intercompany transactions have been eliminated in consolidation.

***Revenue Recognition***

The Company recognizes revenue under its contractswhen a contract has been executed, the contract price is fixed anddeterminable, delivery of services or products has occurred, and collectibilityof the contract price is considered probable and can be reasonably estimated.Revenue is earned under cost reimbursable, time and materials and fixed pricecontracts. Direct contract costs are expensed as incurred.

Under cost reimbursable contracts, the Company isreimbursed for allowable costs, and paid a fee, which may be fixed orperformance-based. Revenue under such contracts is recognized as costs areincurred plus an estimate of applicable fees earned. The Company considersfixed fees under cost reimbursable contracts to be earned in proportion of theallowable costs incurred in performance of the contract. For cost reimbursablecontracts that include performance based fee incentives, the Company recognizesthe relevant portion of the expected fee to be awarded by the customer at thetime such fee can be reasonably estimated, based on factors such as the Company’sprior award experience and communications with the customer regardingperformance.

Revenue on time-and-materials contracts are recognizedbased on direct labor hours expended at contract billing rates plus otherbillable direct costs.

Revenue under fixed price contracts for the deliveryof services is recognized on a straight-line basis over the contract serviceperiod. Revenue for the delivery of product and services under a fixed pricearrangement are recognized under the percentage of completion method based upona ratio of the 

8

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**Advanced Technology Systems, Inc., and Subsidiaries Notes to Consolidated Financial Statements (Continued) October 31, 2006, 2005, 2004**

**NOTE A—SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

estimated costs tocomplete specific milestones or deliverables under the contract to totalestimated contract costs.

The Company’s contracts with agencies of thegovernment are subject to periodic funding by the respective contracting agency.Funding for a contract may be provided in full at inception of the contract orratably throughout the contract as the services are provided. In evaluating theprobability of funding for purposes of assessing collectibility of the contractprice, the Company considers its previous experiences with its customers,communications with its customers regarding funding status, and the Company’sknowledge of available funding for the contract or program. If funding is notassessed as probable, revenue recognition is deferred until realization isdeemed probable.

Contract revenue recognition inherently involvesestimation, including the contemplated level of effort to accomplish the tasksunder contract, the cost of the effort, and an ongoing assessment of progresstoward completing the contract. From time to time, facts develop that requirerevisions to estimated total costs or revenue expected. The cumulative impactof any revisions to estimates and the full impact of anticipated losses on anytype of contract are recognized in the period in which they become known.

The allowability of certain costs under governmentcontracts is subject to audit by the government. Certain indirect costs arecharged to contracts using provisional or estimated indirect rates, which aresubject to later revision based on government audits of those costs. Managementis of the opinion that costs subsequently disallowed, if any, would not besignificant.

Revenue from agencies ofthe United States government accounted for approximately 70 percent, 74 percentand 73 percent of the Company’s revenue for the years ended October 31,2006, 2005 and 2004. Accounts receivable from the United States governmentagencies was 76 percent and 64 percent at October 31, 2006 and 2005,respectively.

***Cash and Cash Equivalents***

For purposes of the statement of cash flows, theCompany considers all highly liquid debt instruments purchased with an originalmaturity of three months or less to be cash equivalents.

Substantially all of theCompany’s cash and cash equivalents are maintained with one major financialinstitution. Deposits held with such financial institution may exceed theamount of insurance provided on such deposits. Generally, these deposits may beredeemed upon demand and, therefore, bear minimal risk.

***Restricted Cash***

The Company is required tomaintain $1,200,000 on deposit with a financial institution to support abonding requirement for one of its state contracts. Such amounts are reflectedin restricted cash in the accompanying consolidated balance sheets.

***Goodwill and Other Intangible Assets***

Goodwill represents the excess of cost over the fairvalue of net tangible and identifiable intangible assets of acquired companies.Customer lists and contract rights obtained through such transactions areamortized on a straight-line basis over periods ranging from 24-27 months.

9

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**Advanced Technology Systems, Inc., and Subsidiaries Notes to Consolidated Financial Statements (Continued) October 31, 2006, 2005, 2004**

**NOTE A—SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

In accordance withStatement of Financial Accounting Standards (SFAS) No. 142, *Goodwill and Other Intangible Assets,*goodwill and certainintangibles are no longer amortized into results of operations, but insteadreviewed for impairment at least annually and written down only in periods inwhich the carrying value of the goodwill and certain intangibles is greaterthan the respective fair values. For the years ended October 31, 2006,2005, and 2004, the Company completed its annual impairment testing andconcluded that goodwill was not impaired.

***Impairment of Long-lived Assets***

The Company complies withSFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets.*Whenever events orchanges in circumstances indicate that the carrying amount of long-livedassets, including intangible assets, may not be fully recoverable, the Companyevaluates the probability that future undiscounted net cash flows, withoutinterest charges, will be less than the carrying amount of the assets. If anyimpairment is indicated as a result of this analysis, the Company wouldrecognize a loss based on the amount by which the carrying amount exceeds theestimated fair value of such assets. As discussed in Note B, the Companyrecorded a loss from the disposal of ATSI, a wholly-owned subsidiary, for theyear ended October 31, 2005. There was no other impairment of long-livedassets for the years ended October 31, 2006, 2005, and 2004.

***Property and Equipment***

Property and equipment arerecorded at cost. Depreciation is calculated using accelerated andstraight-line methods for financial statement purposes and MACRS for income taxpurposes over periods of three to 10 years. Leasehold improvements and leasedassets are amortized using the straight-line method over the shorter of theestimated useful lives of the assets or the terms of the lease.

***Using Estimates in Preparing Financial Statements***

In preparing financialstatements in conformity with accounting principles generally accepted in theUnited States of America, management is required to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the financialstatements and revenue and expenses during the reporting period. Actual resultscould differ from those estimates.

***Income Taxes***

Deferred income taxes areprovided based on the estimated future tax effects of differences betweenfinancial statement carrying amounts and the tax bases of existing assets andliabilities as measured by the enacted tax rates, which will be in effect whenthe differences reverse. A valuation allowance against net deferred tax assetsis provided unless the Company concludes it is more likely than not that thedeferred tax assets will be realized.

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**Advanced Technology Systems, Inc., and Subsidiaries Notes to Consolidated Financial Statements (Continued) October 31, 2006, 2005, 2004**

**NOTE A—SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

***Stock-Based Compensation***

The Company accounts for its stock-based compensationplans in accordance with the provisions of Accounting Principles Board (APB)Opinion No. 25, *Accounting for StockIssued to Employees*, and related interpretations. Historically, nocompensation expense has been recognized upon granting of stock options, as theexercise price of such option grants has been equal to the estimated fair valueof the Company’s common stock. As discussed in Note J, the Company recordedcompensation expense from the settlement of certain option arrangements during2005. The Company has adopted the disclosure-only provisions of SFAS No. 123,*Accounting for Stock-Based Compensation*,as amended by SFAS No. 148, *Accountingfor Stock-Based Compensation—Transition and Disclosure*.

Thefollowing table illustrates the effect on net loss if the Company had appliedthe provisions of SFAS No. 123 to stock based employee compensation:

| ** **                                                                                                                | ** ** | **Year Ended October 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net loss as  reported                                                                                                     |       | $                                         | (824,879   | ) | $ | (1,041,231 | ) | $ | (301,753 | ) |
| Add: total  stock-based employee compensation determined under intrinsic value method,  net of related tax effects        |       | —                                    |       | 85,430 |   | — |   |
| Less: total  stock-based employee compensation expense determined under minimum value  method, net of related tax effects |       | (3,600                                    | )          | (92,434 | ) | (28,782 | ) |
| Pro forma net loss                                                                                                        |       | $                                         | (828,479   | ) | $ | (1,048,235 | ) | $ | (330,535 | ) |

 

***Fair Value of Financial Instruments***

The carrying amounts ofthe Company’s financial instruments, which include cash equivalents, tradereceivables, accounts and notes payables, accrued expenses and the revolvingcredit agreement, approximate their fair values due to the short maturities.

***Reclassifications***

Certain amounts in prioryears have been reclassified to conform to the current year.

***Recent Accounting Pronouncements***

In December, 2004, the FASB issued Statement No. 123(revised 2004), *Share-Based Payment* (SFAS No. 123R),which is a revision of SFAS No. 123. SFAS No. 123R supersedes APB No. 25,and amends FASB Statement No. 95, *Statement of Cash Flows*.Generally, the approach in SFAS No. 123R is similar to the approachdescribed in SFAS No. 123. However, SFAS No. 123R requires allshare-based payments to employees, including grants of employee stock options,to be recognized in the income statement based on their fair values. Pro formadisclosure is no longer an alternative. As permitted by SFAS No. 123, theCompany accounted for share-based payment to employees using APB No. 25’sintrinsic value method and consequently recognized no compensation cost foremployee stock options provided that the exercise price of such option grantswas equal to or greater than the estimated fair value of the Company’s commonstock on the date of grant. This standard became effective for nonpublicentities beginning in fiscal years after 

11

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**Advanced Technology Systems, Inc., and Subsidiaries Notes to Consolidated Financial Statements (Continued) October 31, 2006, 2005, 2004**

**NOTE A—SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (Continued)**

December 15, 2005. Accordingly,the Company has adopted this standard in fiscal year 2007, and used themodified prospective transition method. Under the modified prospectivetransition method, the Company will recognize compensation cost in its consolidatedfinancial statements for all new awards, and awards modified, repurchased orcancelled after November 1, 2006. The adoption of this standard did nothave a material effect on the Company’s results of operations.

In June 2006, the FASB issued Interpretation No. 48,*Accounting for Uncertainty in Income Taxes*,an interpretation of FASB Statement No. 109 (FIN 48) that iseffective for fiscal years beginning after December 15, 2006. FIN 48clarifies the accounting for uncertainty in income taxes recognized infinancial statements in accordance with FASB Statement No. 109, *Accounting for Income Taxes*, by prescribing a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.FIN 48 also provides guidance on derecognition, classification, interestand penalties, accounting in interim periods, disclosure and transition. TheCompany is currently evaluating the impact this pronouncement will have on itsconsolidated financial statements.

In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements.*SFAS No. 157* *defines fair value, establishes a framework formeasuring fair value in generally accepted accounting principles and expandsdisclosures about fair value measurements*.*Specifically,this Statement sets forth a definition of fair value, and establishes ahierarchy prioritizing the inputs to valuation techniques, giving the highestpriority to quoted prices in active markets for identical assets andliabilities and the lowest priority to unobservable inputs. The provisions ofSFAS No. 157 are generally required to be applied on a prospective basis,except to certain financial instruments accounted for under SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities*, for which the provisions of SFAS No. 157 should beapplied retrospectively. SFAS No. 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007, andinterim periods within those fiscal years. The Company will adopt SFASNo. 157 for fiscal year 2009 and is evaluating the effect, if any, on itsfinancial position or results of operations.

**NOTE B**3⁄4DISCONTINUEDOPERATIONS

***Advanced Technology Systems International, Inc.***

In August 2005, the Company adopted a formal planfor the sale of ATSI, which had a history of operating losses. OnNovember 30, 2005, pursuant to the terms of a stock purchase agreemententered into by and between ATS, ATSI, New Technology Management, Inc.(NTMI) and NTMI Acquisition  Corporation, the Company sold all of the outstanding common stock ofATSI for $1,456,267. The sales price consisted of a payment of $1,231,267 atclosing and $225,000 in escrow to be released upon satisfaction of certainconditions as outlined in the stock purchase agreement. The company recorded anestimated loss on disposal of ATSI in accounts payable and accrued expenses of$663,412 for the year ended October 31, 2005.

In September 2006, the Company entered into asettlement agreement with NTMI in which NTMI retained the escrow deposit andreceived additional concessions of approximately $159,000. The total lossrecorded on disposal of ATSI was approximately $ 377,000 for the year endedOctober 31, 2006.

12

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**Advanced Technology Systems, Inc., and Subsidiaries Notes to Consolidated Financial Statements (Continued) October 31, 2006, 2005, 2004**

**NOTEB**3⁄4DISCONTINUEDOPERATIONS (Continued)

Thefollowing represents the results of the operations of ATSI:

| ** **        | ** ** | **Year Ended October 31,** | ** ** |
|-------------------|------------|-------------------------------------------|------------|
| ** **        | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue           |       | $                                         | —     |   | $ | 4,641,425 |   | $ | 4,427,321 |   |
| Loss before taxes |       | (448,746                                  | )          | (1,521,467 | ) | (1,669,181 | ) |
| Net loss          |       | (265,990                                  | )          | (1,065,027 | ) | (1,034,892 | ) |
|                   |            |                                           |            |  |  |  |  |  |  |  |

 

Assets and liabilitiesconsisted of the following at October 31, 2005:

| Accounts  receivable                   |   | $         | 1,376,276 |   |
|----------------------------------------|--------|-----------|-----------|--------|
| Inventory                              |   | 381,311   |      |
| Property, plant  and equipment         |   | 58,233    |      |
| Other assets                           |   | 7,380     |      |
| Total assets                           |   | 1,823,200 |      |
| Accounts payable  and accrued expenses |   | $         | 49,982    |   |
| Notes payable and  capital lease       |   | 41,465    |      |
| Total liabilities                      |   | $         | 91,447    |   |

 

***Pyramid***

The Pyramid ProductSolutions Group had been in operation since fiscal year 2000, and wasestablished for the purpose of providing software applications that enabled lawenforcement agencies to track and manage cases and exchange information withother agencies, regardless of the legacy systems used. The Pyramid product wasnot developed to the point where it could be installed “off the shelf”.Therefore, it required significant customization for each customer. The primarymarket for Pyramid was state governments, and the Company had limited successin penetrating the state government market, in part because other companies hadalready accessed those markets with similar products. In January 2006,management decided to discontinue the operations of Pyramid.

The Company’s managementconsidered the guidance set forth in FASB Statement No. 144 and EmergingIssue Task Force No. 03-13, *Applying the Conditions inParagraph 42 of FASB Statement No. 144 in Determining Whether to ReportDiscontinued Operations*. Although there are continuing cash flowsrelating to support obligations for certain Pyramid customers, they are notconsidered significant to the ongoing operations of ATS, nor are theyconsidered to be significant to the expected cash flows from Pyramid absent thediscontinuance of this business unit (annualized cash inflows and outflows ofapproximately $ 70,000 to $ 80,000 and $ 20,000, respectively).As such, management concluded that such cash flows were not significant, andthat discontinued operations accounting was appropriate.

13

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**Advanced Technology Systems, Inc., and Subsidiaries Notes to Consolidated Financial Statements (Continued) October 31, 2006, 2005, 2004**

**NOTEB**3⁄4DISCONTINUEDOPERATIONS (Continued)

The following represents the results of the operationsof Pyramid:

| ** **        | ** ** | **Year Ended October 31,** | ** ** |
|-------------------|------------|-------------------------------------------|------------|
| ** **        | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenue           |       | $                                         | 733,881    |   | $ | 1,848,989 |   | $ | 1,996,935 |   |
| Loss before taxes |       | (1,725,455                                | )          | (2,552,364 | ) | (2,056,626 | ) |
| Net loss          |       | (1,059,084                                | )          | (1,786,655 | ) | (1,275,108 | ) |
|                   |            |                                           |            |  |  |  |  |  |  |  |

 

Assets held for disposal for Pyramid consisted ofaccounts receivable of $231,861 and $1,165,293 as of October 31, 2006 and2005, respectively.

**NOTE C**3⁄4ACQUISITIONS

***Voyager***

Effective February 12, 2004, the Companypurchased the net assets of Voyager Systems, Inc. (Voyager). Voyager,based in San Diego, California, implements Web-based information systems andreport generators for law enforcement governmental agencies. The acquisitionprovided the Company with technology to complement its existing product andservices offering to customers of its public services division.

The purchase price of $1,750,000 included a cashpayment of $500,000 and minimum royalty payments of $1,250,000, due over threeyears from the purchase date not to exceed $4,000,000. The excess of the$1,750,000 aggregate purchase price over the estimated fair value of the netassets acquired was $1,348,640. The transaction was accounted for as a purchasein accordance with the provisions of SFAS No. 141, *BusinessCombinations*. Voyager’s operating results have been included in theconsolidated statement of operations since the transaction date. The followingtable summarizes the estimated fair values of the assets and liabilitiesassumed at the date of acquisition:

| *February 12, 2004*                        | * * | * *  | * *  |
|-------------------------------------------------|----------|-----------|-----------|
| Accounts receivable, net                        |     | $         | 147,306   |   |
| Prepaid expenses and  other assets              |     | 43,316    |      |
| Property and equipment,  net                    |     | 309,378   |      |
| Goodwill                                        |     | 1,173,640 |      |
| Intangible assets                               |     | 175,000   |      |
| Less: accounts payable  and accrued liabilities |     | (98,640   | )         |
|                                            |     | $         | 1,750,000 |   |

 

The acquired intangibles relate to customer lists thatwere fully amortized as of October 31, 2006.  Goodwill is deductible for income tax purposes.All minimum earn out payments have been paid as of October 31, 2006.

Management of the Company desired to settle anyfurther minimum royalty payments owed to Voyager’s former parent company,TriTech Software Systems, Inc. (TriTech) and collect an outstandingreceivable due from a previous product sale to TriTech totaling $26,250. On June 1,2006, the parties entered into a settlement agreement whereby the Company paidthe remaining royalties of $375,000 in advance of their due date, less theamount of $26,250 owed by TriTech to the Company. The parties agreed that anyroyalties in excess of the minimum payments would be required to be paid toTriTech in the event such amounts were earned.

14

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**Advanced Technology Systems, Inc., and Subsidiaries Notes to Consolidated Financial Statements (Continued) October 31, 2006, 2005, 2004**

**NOTE D**3⁄4ACCOUNTSRECEIVABLE

Accountsreceivable consisted of the following at:

| ** **                       | ** ** | **Year Ended October 31,** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| ** **                       | ** ** | **2006**                                  | ** ** | **2005** | ** ** |
| Billed                           |       | $                                         | 18,264,233 |   | $ | 19,423,146 |   |
| Unbilled                         |       | 3,429,500                                 |       | 5,088,444 |   |
|                             |       | 21,693,733                                |       | 24,511,590 |   |
| Allowance for  doubtful accounts |       | (1,198,418                                | )          | (572,659 | ) |
|                             |       | $                                         | 20,495,315 |   | $ | 23,938,931 |   |

 

Unbilled accounts receivable are comprised primarilyof amounts arising from the Company’s recognition of revenue on apercentage-of-completion basis, billing customers based upon certaincontractual milestones and fee retentions. Management expects to invoice andcollect these receivables during fiscal year 2007 and thereafter. As such,these amounts have been classified as current assets in the consolidatedbalance sheets in accordance with industry practice.

The Company evaluates itsreceivables, especially those past due, periodically and establishes reservesfor amounts not expected to be collected.

**NOTE E**3⁄4PROPERTYAND EQUIPMENT

Propertyand equipment consisted of the following at:

| ** **                                       | ** ** | **Year Ended October 31,** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                  | ** ** | **2005** | ** ** |
| Furniture and  equipment                         |       | $                                         | 2,913,422  |   | $ | 2,728,807 |   |
| Transportation  equipment                        |       | 214,895                                   |       | 237,724 |   |
| Capitalized  software                            |       | 728,731                                   |       | 709,640 |   |
| Leasehold  improvements                          |       | 1,136,774                                 |       | 1,217,716 |   |
| Property held  under capital leases              |       | 390,908                                   |       | 903,957 |   |
|                                             |       | 5,384,730                                 |       | 5,797,844 |   |
| Less: accumulated  depreciation and amortization |       | (4,031,993                                | )          | (4,281,203 | ) |
|                                             |       | $                                         | 1,352,736  |   | $ | 1,516,641 |   |

 

Depreciation expense for the years ended October 31,2006, 2005 and 2004 was approximately $632,000, $1,050,000 and $933,000,respectively. The Company wrote-off fully depreciated property and equipmentduring the year ended October 31, 2006 as the assets were no longer in use.These write-offs consisted of furniture and equipment, capitalized software,leasehold improvements and property under capital leases of $149,847, $40,326,$90,504 and $764,367, respectively.

Accumulated amortizationof property held under capital leases for October 31, 2006 and 2005 was$899,248 and $865,550, respectively.

15

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**Advanced Technology Systems, Inc., and Subsidiaries Notes to Consolidated Financial Statements (Continued) October 31, 2006, 2005, 2004**

**NOTE F**3⁄4INTANGIBLEASSETS

Intangibleassets were comprised as follows at:

| ** **                | ** ** | **Year Ended October 31,** | ** ** |
|---------------------------|------------|-------------------------------------------|------------|
| ** **                | ** ** | **2006**                                  | ** ** | **2005** | ** ** |
| Customer  intangibles     |       | $                                         | 322,462    |   | $ | 322,462 |   |
| Accumulated  amortization |       | (322,462                                  | )          | (288,260 | ) |
|                      |       | —                                    |       | 34,202 |   |
|                           |            |                                           |            |  |  |  |  |

 

Amortization expense forthe years ended October 31, 2006, 2005 and 2004 was $34,202, $151,433 and$120,442, respectively.

**NOTE G**3⁄4LINE-OF-CREDIT

The Company maintains a line-of-credit with UnitedBank (the “Bank”), which provides for maximum borrowing of $15,000,000. Theline-of-credit bears interest at the bank’s prime rate (7.82 percent and 7.00percent at October 31, 2006 and 2005, respectively). Borrowings under theline are limited to 90 percent of eligible government agency accountsreceivable and 80 percent of eligible commercial accounts receivable. The lineis secured by substantially all of the Company’s assets.

The Company is required to comply with certaincovenants, which include a minimum level of net tangible worth, a maximum ratioof liabilities to net tangible worth, and a minimum current ratio of assets toliabilities. The Company was not in compliance with these covenants as of October 31,2006. As further described in Note N, as of the close of business on January 15,2007, the Company was acquired by ATS Corporation. As a condition of thesettlement agreement, the new owners indemnified the shareholders who providedthe personal guarantees, and the outstanding balance of the line of credit waspaid in full. Additionally, ATS Corporation has obtained a new credit facilitywith another lender. As part of the terms of the new agreement, the Company’sassets have been pledged as collateral for any borrowings under the agreement.

Outstanding borrowings onthe line-of-credit as of October 31, 2006 and 2005 were $6,930,000 and$5,230,000, respectively.

16

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**Advanced Technology Systems, Inc., and Subsidiaries Notes to Consolidated Financial Statements (Continued) October 31, 2006, 2005, 2004**

**NOTE H**3⁄4INCOMETAXES

Thecomponents of the deferred tax liability (asset) were as follows at October 31:

| ** **                                                    | ** ** | **2006**    | ** ** | **2005**      | ** ** |
|---------------------------------------------------------------|------------|-------------|------------|---------------|------------|
| ** **                                                    | ** ** | **Current** | ** ** | **Long-term** | ** ** | **Current** | ** ** | **Long-term** | ** ** |
| Change in  accounting method—cash basis to accrual basis |       | $           | 1,608,960  |          | $          | 1,608,960 |   | $ | 1,787,588 |   | $ | 3,575,176 |   |
| Depreciation and  amortization                                |       | —      |       | 121,210       |       | — |   | 173,728 |   |
| Provision for bad  debt                                       |       | (462,829    | )          | —        |       | (269,184 | ) | — |   |
| Prepaid expenses                                              |       | 243,673     |       | —        |       | 217,584 |   | — |   |
| Reserves                                                      |       | —      |       | —        |       | (290,837 | ) | — |   |
| Provision for  loss on sale of subsidiary                     |       | —      |       | —        |       | (256,210 | ) | — |   |
| Accrued expenses                                              |       | (556,645    | )          | —        |       | (507,474 | ) | — |   |
| Deferred rent                                                 |       | —      |       | (372,552      | )          | — |   | (508,902 | ) |
| Net operating  loss carryforward (n-Vision)                   |       | (29,901     | )          | (388,519      | )          | — |   | (448,520 | ) |
| Capital loss on  the sale of ATSI                             |       | —      |       | (135,989      | )          | — |   | — |   |
| Valuation  allowance                                          |       | —      |       | 494,805       |       | — |   | 448,520 |   |
|                                                          |       | $           | 803,258    |          | $          | 1,327,915 |   | $ | 681,467 |   | $ | 3,240,002 |   |

 

The Company assumed $ 5,308,790 in net operating loss(NOL) carryforwards from a prior acquisition of n-Vision. The Companydetermined that the acquired NOL appears to be subject to Internal Revenue CodeSection 382. Based on an analysis performed by Company’s management, theCompany has recorded a tax benefit from the utilization of the acquired NOL of$77,425 and $435,513 for the years ended October 31, 2006 and 2005,respectively. The remaining NOL carryforward of $ 4,795,852 will expire invarious years from 2010 to 2020. As of October 31, 2006 and 2005,approximately $3.7 million of the n-Vision net operating loss was considered tobe permanently impaired. As such, the deferred tax asset disclosed aboverepresents that portion of the NOL which is expected to provide benefit infuture periods. A valuation allowance has been recorded against such NOLcarryforwards, and the capital loss as a result of management’s inability toconclude more likely than not that the benefit will be realized in futureperiods.

Thecomponents of income tax (benefit) expense from continuing operations were asfollows for the years ended October 31:

| ** **      | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**  | ** ** |
|-----------------|------------|------------|------------|------------|------------|-----------|------------|
| Current:        |       |       |       |       |       |      |       |
| Federal         |       | $          | 2,444,274  |       | $          | 2,316,689 |       | $ | 1,205,846 |   |
| State and local |       | 433,725    |       | 588,670    |       | 226,743   |       |
| Deferred:       |       |       |       |       |       |      |       |
| Federal         |       | (1,388,614 | )          | (1,882,076 | )          | 76,108    |       |
| State and local |       | (206,623   | )          | (247,775   | )          | 14,342    |       |
|            |       | $          | 1,282,762  |       | $          | 775,508   |       | $ | 1,523,039 |   |

 

17

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**Advanced Technology Systems, Inc., and Subsidiaries Notes to Consolidated Financial Statements (Continued) October 31, 2006, 2005, 2004**

**NOTEH—INCOME TAXES (Continued)**

A reconciliation of thestatutory federal income tax rate to the Company’s effective income tax ratefrom continuing operations was as follows for the years ended October 31:

| ** **                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory federal  income tax rate |       |     | 34         | %        |       |     | 34         | % |   |   | 35 | % |   |
| State and local  income taxes      |       |     | 2          | %        |       |     | 5          | % |   |   | 5 | % |   |
| Permanent  differences             |       |     | 8          | %        |       |     | (11        | )% |   |   | 3 | % |   |
| Non-deductible  transaction costs  |       |     | 28         | %        |       |     | —     |   |   |   | — |   |   |
| Prior year  adjustments            |       |     | (3         | )%       |       |     | (8         | )% |   |   | — |   |   |
| Change in valuation  allowance     |       |     | 3          | %        |       |     | 10         | % |   |   | — |   |   |
|                               |       |     | 72         | %        |       |     | 30         | % |   |   | 43 | % |   |

 

**NOTE I—COMMITMENTS ANDCONTINGENCIES**

***Operating Leases***

TheCompany leases office space and certain equipment under various operatingleases. Rent expense on certain leases containing fixed escalations or otherlease incentives is recognized on a straight-line basis over the term of eachlease. Future minimum rental payments under non-cancelable operating leases areas follows:

| **Year ended October 31,** | ** ** | ** ** | ** ** | **Gross Operating  Leases** | ** ** | **Sub-leases** | ** ** | **Net  Operating  Leases** | ** ** |
|-------------------------------------------|------------|------------|------------|----------------------------------|------------|----------------|------------|----------------------------|------------|
| 2007                                      |       |       | $          | 3,362,000                        |       |           | $          | (525,000                   | )          | $ | 2,837,000 |   |
| 2008                                      |       |       | 3,214,000  |                             |       | (457,000       | )          | 2,757,000                  |       |
| 2009                                      |       |       | 817,000    |                             |       | (215,000       | )          | 602,000                    |       |
| 2010                                      |       |       | 12,000     |                             |       | —         |       | 12,000                     |       |
|                                      |       |       | $          | 7,405,000                        |       |           | $          | (1,197,000                 | )          | $ | 6,208,000 |   |

 

Rent expense wasapproximately $2,945,000, $2,951,000 and $2,967,000 for the years ended October 31, 2006, 2005 and 2004,respectively.

18

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**Advanced Technology Systems, Inc., and Subsidiaries Notes to Consolidated Financial Statements (Continued) October 31, 2006, 2005, 2004**

**NOTEI—COMMITMENTS AND CONTINGENCIES (Continued)**

***Capital Leases***

TheCompany leases certain equipment under various agreements that are classifiedas capital leases. Future minimum payments consisted of the following at October 31,2006:

| **Year ending October 31,**                    | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|
| 2007                                                          |       | $          | 100,651    |       |
| 2008                                                          |       | 95,559     |       |
| 2009                                                          |       | 94,441     |       |
| 2010                                                          |       | 16,561     |       |
| Total minimum  lease payments                                 |       | 307,212    |       |
| Less: portion  representing interest                          |       | (47,039    | )          |
| Present value of  net minimum lease payments                  |       | 260,173    |       |
| Less: current  maturities of obligations under capital leases |       | (78,999    | )          |
| Long-term capital lease  obligation                           |       | $          | 181,174    |       |

 

***Self-funded Health Insurance Plan***

The Company had a self-funded health insurance plan,which was self-insured up to $50,000 per incident to an aggregate of $1,000,000.Once the limit was exceeded, a supplemental health insurance policy covered anyremaining expenses. The plan covered all employees who choose to participate. TheCompany funded the plan as necessary to cover the claims, and paid the healthinsurance policy premiums on a monthly basis. Employees also funded the planthrough payroll deductions. For the years ended October 31, 2006, 2005 and2004, the Company’s total costs for claims under this plan were approximately$2,908,000, $3,133,000 and $3,251,000, respectively. Amounts recorded inaccounts payable and accrued expenses for claims incurred but not reported were$109,691 and $406,075 at October 31, 2006 and 2005, respectively.

Effective June 30,2006, the Company terminated the self-funded health insurance plan and adopteda standard medical insurance plan. The Company remains obligated for claimsfiled up to three months after the termination date (the “run-off period”).Management believes the remaining accrual for claims incurred by or reported asof the termination date is sufficient to cover any remaining claims processedduring the run-off period.

***Employment and Change in Control Agreements***

The Company has an employment agreement with theExecutive Vice President of Appix, that provided a guarantee of six months ofemployment at his current salary or a termination benefit equal to such amountin the event of a change in control, by actions of a sale or merger or a changewhereby the Chief Executive Officer of the Parent did not hold the position ofChairman of the Board or Chief Executive Officer. As discussed in Note N, theCompany was acquired by ATS Corporation. In the event the Executive VicePresident is terminated prior to the completion of six months of service, hewill be entitled to a pro-rata share of such termination benefits.

19

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**Advanced Technology Systems, Inc., and Subsidiaries Notes to Consolidated Financial Statements (Continued) October 31, 2006, 2005, 2004**

**NOTEI—COMMITMENTS AND CONTINGENCIES (Continued)**

In 2004, the Company entered into two four-yearemployment agreements with several individuals. The employment agreementsspecify annual salary and incentive compensation for the terms of theagreements. The agreements also provided for between six and twelve months’salary if the employees are terminated other than for cause.

The Company’s Board ofDirectors approved Retention Agreements to key employees which authorized thepayment of bonuses if the employee remained employed through the date of theATS Corporation acquisition. As further described in Note N, as of the close ofbusiness on January 15, 2007, the Company was acquired by ATS Corporation.As a condition of the Retention Agreements, certain key employees receivedapproximately $3,705,000 in bonuses upon the closing of the transaction.

***Legal Proceedings and Claims***

Various legal proceedingsand claims generally incidental to the normal course of business are pending orhave been asserted against the Company. The Company believes that the finaloutcome of such proceedings and claims will not have a material adverse effecton its financial position, results of operations, or cash flows.

**NOTE J—EMPLOYEE STOCKOPTION PLAN**

On March 24, 1998,the stockholders of the Company adopted an employee stock option plan (thePlan) and approved the reservation of 1,000,000 shares of Class A commonstock of the Company for issuance under the Plan. The Plan provides for thegranting of incentive and non-qualified stock options to employees, officers,directors or consultants of the Company. Options are granted to participants ofthe Plan at a price that is not less than the estimated fair value on the dateof grant as determined by the Board of Directors. Unless otherwise noted, theoptions vest ratably over a five-year period, beginning on the firstanniversary of the date of grant, and expire 10 years after the date of grant. Therewere no options granted during fiscal years ended October 31, 2006 and2005. The minimum value of the options granted during fiscal year 2004 wasestimated at the date of grant using an option pricing model with the followingassumptions: expected life of five years, discount rate of 4.75 percent, andzero percent volatility. The weighted-average minimum value of options grantedduring 2004 was $0.22. There were 380,400 shares available for issuance underthe Plan at October 31, 2006 and 2005.

20

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**Advanced Technology Systems, Inc., and Subsidiaries Notes to Consolidated Financial Statements (Continued) October 31, 2006, 2005, 2004**

**NOTEJ—EMPLOYEE STOCK OPTION PLAN (Continued)**

A summary of stock optionactivity for the Non-qualified Employee and Incentive Stock Option Plans was asfollows during the years ended October 31:

| ** **                                 | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
|--------------------------------------------|------------|------------|------------|---------------|------------|
| ** **                                 | ** ** | ** ** | ** ** | **average**   | ** ** |
| ** **                                 | ** ** | ** ** | ** ** | **Exercise**  | ** ** |
| ** **                                 | ** ** | **Shares** | ** ** | **Price**     | ** ** |
| Outstanding,  November 1, 2003        |       | 544,600    |       |          | $          | .80 |   |   |
| Grants                                     |       | 75,000     |       |          | 1.05       |   |   |
| Exercise                                   |       | 7,500      |       |          | .48        |   |   |
| Forfeitures                                |       | 34,000     |       |          | .88        |   |   |
| Outstanding,  October 31, 2004        |       | 578,100    |       |          | .83        |   |   |
| Grants                                     |       | —     |       |          | —     |   |   |
| Exercise                                   |       | 12,000     |       |          | .15        |   |   |
| Forfeitures                                |       | 119,000    |       |          | .97        |   |   |
| Outstanding,  October 31, 2005        |       | 447,100    |       |          | .81        |   |   |
| Grants                                     |       | —     |       |          | —     |   |   |
| Exercise                                   |       | —     |       |          | —     |   |   |
| Forfeitures                                |       | —     |       |          | —     |   |   |
| Outstanding,  October 31, 2006        |       | 447,100    |       |          | .81        |   |   |
| Exercisable options  October 31, 2006 |       | 387,100    |       |          | $          | .81 |   |   |

 

During the fiscal year ended October 31, 2005,the Company settled and canceled 45,500 option grants with employees by payingcash for the excess of the fair value of the underlying common stock over the exerciseprice. In connection with these payments, the Company recorded compensationexpense of $85,430. There was no stock option activity during the year ended October 31,2006.

The following tablesummarizes information about stock options outstanding at October 31,2006:

| ** **                                 | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                 | ** ** | ** **                   | ** ** | **Weighted-**                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | ** **                   | ** ** | **average**                  | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                                 | ** ** | ** **                   | ** ** | **Remaining**                | ** ** | **average** | ** ** | ** ** | ** ** | **average** | ** ** |
| ** **                                 | ** ** | **Number**                   | ** ** | **Life in**             | ** ** | **Exercise** | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| **Range of Exercise Price** | ** ** | ** **                   | ** ** | **Outstanding**              | ** ** | **Years** | ** ** | **Price** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
| $.15-$.15                                  |       |                         | 60,100     |                         |       |   | 1.55 |   |   |   | $ | .15 |   |   |   | 60,100 |   |   |   | $ | .15 |   |   |
| $.79-$.79                                  |       |                         | 150,000    |                         |       |   | 6.61 |   |   |   | .79 |   |   |   | 90,000 |   |   |   | .79 |   |   |
| $.98-$.98                                  |       |                         | 178,500    |                         |       |   | 2.70 |   |   |   | .98 |   |   |   | 178,500 |   |   |   | .98 |   |   |
| $1.02 and above                            |       |                         | 58,500     |                         |       |   | 3.71 |   |   |   | 1.02 |   |   |   | 58,500 |   |   |   | 1.02 |   |   |
|                                       |       |                         | 447,100    |                         |       |   | 3.99 |   |   |   | $ | .81 |   |   |   | 387,100 |   |   |   | $ | .81 |   |   |
|                                            |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As further described in Note N, as of the close ofbusiness on January 15, 2007, the Company was acquired by ATS Corporation.As a condition of the stock purchase agreement, all outstanding options werepurchased for $4.38 per share.

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**Advanced Technology Systems, Inc., and Subsidiaries Notes to Consolidated Financial Statements (Continued) October 31, 2006, 2005, 2004**

**NOTE K—PHANTOM STOCK PLAN**

In December 2004, the Company’s subsidiary, Appix, Inc.(Appix), adopted the Appix Phantom Stock Plan (the Phantom Stock Plan). Underthe Phantom Stock Plan, a committee of the Board of Directors of Appix couldaward up to 2,000,000 Phantom stock units to eligible participants. The valueof the units was determined based upon a formula that is defined in theagreement. The units were also subject to a vesting schedule as defined in thePhantom Stock Plan, and become immediately exercisable in the event of a changein control of Appix or the Company. Units issued under the Phantom Stock Planwere subject to certain termination and cancellation provisions. Compensationexpense recognized under the Phantom Stock Plan for the year ended October 31,2006 and 2005 was $36,000 and $88,500, respectively. There was no compensationexpense related to this plan in 2004.

As further described inNote N, as of the close of business on January 15, 2007, the Company wasacquired by ATS Corporation. As a condition of the stock purchase agreement,all outstanding phantom stock units were repurchased for approximately $244,000($ 0.87 per share).

**NOTE L**3⁄4RETIREMENTPLAN

The Company has aqualified 401(k) retirement plan that is funded by contributions from theCompany and substantially all full-time employees who elect to participate inthe plan. The employer contributions are 50 percent of employee contributions,up to 3 percent of an employee’s gross salary. Employer contributions for theyears ended October 31, 2006, 2005, and 2004, were approximately $205,000,$1,296,000, and $1,098,000, respectively.

**NOTE M**3⁄4SUPPLEMENTALCASH FLOW INFORMATION

***Supplemental Disclosures of Cash Flow Information***

Cashpaid for interest and income taxes was as follows for the years ended October 31:

| ** **   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------|------------|----------|------------|----------|------------|----------|------------|
| Interest     |       | $        | 385,979    |     | $          | 255,000  |       | $ | 52,000 |   |
| Income taxes |       | $        | 3,657,200  |     | $          | 111,000  |       | $ | 1,921,000 |   |

 

***Supplemental Schedule of Non-cash Investing andFinancing Activities***

Capital leases enteredinto for the purpose of acquiring equipment and vehicles during the years endedOctober 31, 2006 and 2005, aggregated $252,318 and $22,380, respectively.

**NOTE N**3⁄4SUBSEQUENTEVENTS

As of the close of business on January 15, 2007, ATSCorporation acquired all of the outstanding capital stock of the Companypursuant to a stock purchase agreement dated April 19, 2006, as amended. Theinitial purchase price totaled approximately $85.0 million consisting of $84.0million in cash and 173,913 shares of ATS Corporation common stock with a fairvalue of $860,869 ($4.95 per share). Of the $84 million in cash proceeds, $8.95million was placed in escrow by the buyer subject to working capitaladjustments. The purchase price could be adjusted in the future based upon theCompany attaining certain earnings thresholds and the acquisition of certaincontracts as defined in a stock purchase agreement.

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