UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549






FORM 10-Q


_________________




(Mark
one)


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





FOR
      THE QUARTERLY PERIOD ENDED SEPTEMBER 30,
2010.





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





FOR
      THE TRANSITION PERIOD FROM           TO  
               
..





COMMISSION
FILE NUMBER: 0-51552







ATS
CORPORATION


(Exact
name of registrant as specified in its charter)





Delaware
            
            11-3747850(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (I.R.S.
      Employer Identification No.)





7925
Jones Branch Drive


McLean,
      Virginia
                
                22102(Address
      of principal executive
                  offices)
                
                (ZIP
      code)





(571)
766-2400


(Registrant’s
telephone number, including area code)


________


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







Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.    Yes  x    No 
o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes  o   No  o





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





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





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


Yes 
o  
 No  x





The
number of shares of the issuer’s common stock, $0.0001 par value, outstanding as
of November 2, 2010 was 22,583,593.











ATS
CORPORATION





TABLE
OF CONTENTS





PART I
      — FINANCIAL INFORMATIONItem
      1.
              
              Financial
      Statements
              3Consolidated
      Balance Sheets as of September 30, 2010 (unaudited) and December 31,
      2009 (audited)
              3Consolidated
      Statements of Income (unaudited) for the three- and nine-month periods
      ended September 30, 2010 and September 30, 2009
              4Consolidated
      Statements of Cash Flows (unaudited) for the three- and nine-month periods
      ended September 30, 2010 and September 30, 2009
              5Notes
      to Consolidated Financial Statements
              6Item 2.
              
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              15Item 3.
              
              Quantitative
      and Qualitative Disclosures about Market Risk
              24Item 4.
              
              Controls
      and Procedures
              25PART II — OTHER INFORMATIONItem 1.
              
              Legal
      Proceedings
              26Item 1A.
              
              Risk
      Factors
              26Item 2.
              
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              26Item 3.
              
              Defaults
      upon Senior Securities
              26Item
      4.
              
              Reserved
              26Item 5.
              
              Other
      Information
              26Item 6.
              
              Exhibits
              27SIGNATURES
              28




2





ATS
CORPORATION





PART I
— FINANCIAL INFORMATION





ITEM
1. — FINANCIAL STATEMENTS





CONSOLIDATED
BALANCE SHEETS





September 30,
                                
                                
                                December 31,2010
                                
                                
                                2009(unaudited)
                                
                                
                                (audited)ASSETSCurrent
      assetsCash
                                
                                $
                                202,367
                                
                                
                                $
                                178,225Restricted
      cash
                                
                                
                                1,326,792
                                
                                
                                
                                1,324,510Accounts
      receivable, net
                                
                                
                                20,783,006
                                
                                
                                
                                22,497,444Prepaid
      expenses
                                
                                
                                627,736
                                
                                
                                
                                625,231Income
      taxes receivable
                                
                                
                                304,925
                                
                                
                                
                                205,339Other
      current assets
                                
                                
                                25,949
                                
                                
                                
                                46,057Deferred
      income taxes, current
                                
                                
                                994,735
                                
                                
                                
                                2,361,611Total
      current assets
                                
                                
                                24,265,510
                                
                                
                                
                                27,238,417Property
      and equipment, net
                                
                                
                                2,609,778
                                
                                
                                
                                3,011,621Goodwill
                                
                                
                                55,370,011
                                
                                
                                
                                55,370,011Intangible
      assets, net
                                
                                
                                4,608,552
                                
                                
                                
                                6,102,798Other
      assets
                                
                                
                                146,567
                                
                                
                                
                                146,567Deferred
      income taxes
                                
                                
                                1,492,948
                                
                                
                                
                                1,400,260Total
      assets
                                
                                $
                                88,493,366
                                
                                
                                $
                                93,269,674LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Current
      portion of long-term debt
                                
                                $
                                —
                                
                                
                                $
                                21,191,135Accounts
      payable
                                
                                
                                5,890,236
                                
                                
                                
                                4,753,800Other
      accrued expenses and current liabilities
                                
                                
                                1,780,893
                                
                                
                                
                                6,356,896Accrued
      salaries and related taxes
                                
                                
                                3,595,483
                                
                                
                                
                                4,541,509Accrued
      vacation
                                
                                
                                2,396,430
                                
                                
                                
                                2,259,538Deferred
      revenue
                                
                                
                                305,212
                                
                                
                                
                                1,392,457Deferred
      rent – current portion
                                
                                
                                320,498
                                
                                
                                
                                320,498Total
      current liabilities
                                
                                
                                14,288,752
                                
                                
                                
                                40,815,833Long-term debt
       – net of current
      portion
                                
                                
                                15,954,960
                                
                                
                                
                                —Deferred rent – net of current
      portion
                                
                                
                                2,518,249
                                
                                
                                
                                2,658,055Other
      long-term liabilities
                                
                                
                                5,795
                                
                                
                                
                                5,795Total
      liabilities
                                
                                
                                32,767,756
                                
                                
                                
                                43,479,683Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock $0.0001 par value, 1,000,000 shares authorized, and no shares issued
      and outstanding
                                
                                
                                —
                                
                                
                                
                                —Common stock $0.0001 par value,
      100,000,000 shares authorized, 31,451,275 and 31,235,696 shares
      issued, and
      22,553,382 and 22,489,803 shares outstanding
                                
                                
                                3,145
                                
                                
                                
                                3,124Additional
      paid-in capital
                                
                                
                                132,542,594
                                
                                
                                
                                131,702,488Treasury
      stock, at cost, 8,897,893 and 8,745,893 shares held
                                
                                
                                (31,663,758
                                )
                                
                                
                                (31,209,118
                                )Accumulated
      deficit
                                
                                
                                (45,156,371
                                )
                                
                                
                                (50,062,979
                                )Accumulated
      other comprehensive loss (net of tax benefit of $0 and
      $400,571)
                                
                                
                                —
                                
                                
                                
                                (643,524
                                )Total
      stockholders’ equity
                                
                                
                                55,725,610
                                
                                
                                
                                49,789,991Total
      liabilities and stockholders’ equity
                                
                                $
                                88,493,366
                                
                                
                                $
                                93,269,674




The
accompanying notes are an integral part of these consolidated financial
statements.




3





ATS
CORPORATION


CONSOLIDATED
STATEMENTS OF INCOME





Three Months
                            Ended September 30,
                          
                          
                          Nine Months
                            Ended September 30,2010
                            (unaudited)
                          
                          
                          2009
                            (unaudited)
                          
                          
                          2010
                            (unaudited)
                          
                          
                          2009
                            (unaudited)Revenue
                          
                          $
                          29,246,619
                          
                          
                          $
                          32,074,434
                          
                          
                          $
                          89,004,930
                          
                          
                          $
                          89,497,757Operating
      costs and expensesDirect
      costs
                          
                          
                          20,406,798
                          
                          
                          
                          21,342,643
                          
                          
                          
                          62,325,800
                          
                          
                          
                          59,990,312Selling,
      general and administrative expenses
                          
                          
                          5,486,690
                          
                          
                          
                          6,089,196
                          
                          
                          
                          17,798,821
                          
                          
                          
                          18,908,327Depreciation
      and amortization
                          
                          
                          626,511
                          
                          
                          
                          772,275
                          
                          
                          
                          1,903,680
                          
                          
                          
                          2,324,018Total
      operating costs and expenses
                          
                          
                          26,519,999
                          
                          
                          
                          28,204,114
                          
                          
                          
                          82,028,301
                          
                          
                          
                          81,222,657Operating
      income
                          
                          
                          2,726,620
                          
                          
                          
                          3,870,320
                          
                          
                          
                          6,976,629
                          
                          
                          
                          8,275,100Other
      (expense) incomeInterest,
      net
                          
                          
                          108,491
                          
                          
                          
                          (597,742
                          )
                          
                          
                          (1,069,551
                          )
                          
                          
                          (2,164,426
                          )Other
      income
                          
                          
                          959,440
                          
                          
                          
                          60,037
                          
                          
                          
                          1,463,332
                          
                          
                          
                          60,037Income
      before income taxes
                          
                          
                          3,794,551
                          
                          
                          
                          3,332,615
                          
                          
                          
                          7,370,410
                          
                          
                          
                          6,170,711Income
      tax expense
                          
                          
                          1,131,537
                          
                          
                          
                          1,340,816
                          
                          
                          
                          2,463,802
                          
                          
                          
                          2,581,535Net
      income
                          
                          $
                          2,663,014
                          
                          
                          $
                          1,991,799
                          
                          
                          $
                          4,906,608
                          
                          
                          $
                          3,589,176Weighted
      average number of shares outstanding—basic
                          
                          
                          22,540,904
                          
                          
                          
                          22,741,726
                          
                          
                          
                          22,516,813
                          
                          
                          
                          22,648,962—diluted
                          
                          
                          22,627,723
                          
                          
                          
                          22,846,549
                          
                          
                          
                          22,605,726
                          
                          
                          
                          22,697,864Net
      income per share—basic
                          
                          $
                          0.12
                          
                          
                          $
                          0.09
                          
                          
                          $
                          0.22
                          
                          
                          $
                          0.16—diluted
                          
                          $
                          0.12
                          
                          
                          $
                          0.09
                          
                          
                          $
                          0.22
                          
                          
                          $
                          0.16





The
accompanying notes are an integral part of these consolidated financial
statements.





4




ATS
CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS




Nine Months Ended
                                September 30,2010
                              
                              
                              2009(unaudited)
                              
                              
                              (unaudited)Cash flows from operating activitiesNet
      income
                              
                              $
                              4,906,608
                              
                              
                              $
                              3,589,176Adjustments
      to reconcile net income to net cash from operating
    activities:Depreciation
      and amortization
                              
                              
                              1,903,680
                              
                              
                              
                              2,324,018Non-cash
      interest (income) expense SWAP agreement
                              
                              
                              (354,020
                              )
                              
                              
                              198,458Stock-based
      compensation
                              
                              
                              560,863
                              
                              
                              
                              405,727Directors’
      fees paid in equity
                              
                              
                              103,094
                              
                              
                              
                              113,735Deferred
      income taxes
                              
                              
                              856,016
                              
                              
                              
                              87,772Deferred
      rent
                              
                              
                              (139,806
                              )
                              
                              
                              (201,085
                              )Gain
      on disposal of equipment
                              
                              
                              (8,722
                              )
                              
                              
                              —Provision
      for bad debt
                              
                              
                              951,245
                              
                              
                              
                              432,703Changes
      in assets and liabilities, net of adjustments related to other
      comprehensive loss:Accounts
      receivable
                              
                              
                              763,188
                              
                              
                              
                              5,773,816Prepaid
      expenses
                              
                              
                              (2,505
                              )
                              
                              
                              (179,273
                              )Restricted
      cash
                              
                              
                              (2,282
                              )
                              
                              
                              (7,400
                              )Other
      assets
                              
                              
                              20,315
                              
                              
                              
                              215,537Accounts
      payable
                              
                              
                              1,289,921
                              
                              
                              
                              (429,160
                              )Other
      accrued expenses and accrued liabilities
                              
                              
                              (3,177,887
                              )
                              
                              
                              (2,121,241
                              )Accrued
      salaries and related taxes
                              
                              
                              (946,026
                              )
                              
                              
                              1,150,973Accrued
      vacation
                              
                              
                              136,893
                              
                              
                              
                              425,195Accrued
      interest
                              
                              
                              (153,486
                              )
                              
                              
                              159,975Income
      taxes payable and receivable, net
                              
                              
                              (62,838
                              )
                              
                              
                              62,549Other
      current liabilities
                              
                              
                              (1,087,245
                              )
                              
                              
                              (236,333
                              )Net
      cash provided by operating activities
                              
                              
                              5,557,006
                              
                              
                              
                              11,765,142Cash
      flows from investing activitiesPurchase
      of property and equipment
                              
                              
                              (9,074
                              )
                              
                              
                              (135,414
                              )Proceeds
      from release of escrows
                              
                              
                              —
                              
                              
                              
                              3,758,637Proceeds
      from disposals of equipment
                              
                              
                              10,000
                              
                              
                              
                              —Net
      cash provided by investing activities
                              
                              
                              926
                              
                              
                              
                              3,623,223Cash
      flows from financing activitiesBorrowings
      on line of credit
                              
                              
                              51,366,004
                              
                              
                              
                              45,760,848Payments
      on line of credit
                              
                              
                              (54,594,279
                              )
                              
                              
                              (59,947,409
                              )Issuance
      of notes payable
                              
                              
                              —
                              
                              
                              
                              139,176Payments
      on notes payable
                              
                              
                              (2,007,900
                              )
                              
                              
                              (1,364,996
                              )Payments
      on capital leases
                              
                              
                              —
                              
                              
                              
                              (64,152
                              )Proceeds
      from exercise of stock options
                              
                              
                              5,587
                              
                              
                              
                              —Proceeds
      from stock issued pursuant to Employee Stock Purchase Plan
                              
                              
                              151,438
                              
                              
                              
                              126,428Payments
      to repurchase treasury stock
                              
                              
                              (454,640
                              )
                              
                              
                              (4,216
                              )Net
      cash used in financing activities
                              
                              
                              (5,533,790
                              )
                              
                              
                              (15,354,321
                              )Net
      increase in cash
                              
                              
                              24,142
                              
                              
                              
                              34,044Cash,
      beginning of period
                              
                              
                              178,225
                              
                              
                              
                              364,822Cash,
      end of period
                              
                              $
                              202,367
                              
                              
                              $
                              398,866Supplemental
      disclosures:Cash
      paid or received during the period for:Income
      taxes paid
                              
                              $
                              1,669,146
                              
                              
                              $
                              2,436,380Income
      tax refunds
                              
                              
                              2,258
                              
                              
                              
                              12,148Interest
      paid
                              
                              
                              1,789,871
                              
                              
                              
                              1,861,649Interest
      received
                              
                              
                              301,264
                              
                              
                              
                              48,256





The
accompanying notes are an integral part of these consolidated financial
statements.




5




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 1 3⁄4
BASIS OF
PRESENTATION





Principles of Consolidation –
The consolidated financial statements include the accounts of ATS Corporation
(“ATSC”) and its subsidiary Advanced Technology Systems, Inc. (“ATSI”)
(collectively, the “Company”). All material intercompany accounts, transactions,
and profits are eliminated in consolidation.





The
accompanying consolidated financial statements of the Company have been prepared
by management in accordance with the instructions to Form 10-Q of the
Securities and Exchange Commission (“SEC”). These statements include all
adjustments considered necessary by management to present a fair statement of
the consolidated balance sheets, results of operations, and cash flows. Certain
information and note disclosures normally included in the annual financial
statements have been condensed or omitted pursuant to those instructions,
although the Company believes that the disclosures made are adequate to make the
information presented not misleading. Therefore, these financial statements
should be read in conjunction with the audited consolidated financial
statements, including the notes thereto, contained in the Company’s 2009 Annual
Report on Form 10-K. The results reported in these financial statements
should not be regarded as necessarily indicative of results that may be expected
for the entire year.





Accounting Estimates – The
Company’s financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America (“U.S. GAAP”). The
preparation of the financial statements requires management to make estimates
and judgments that affect the reported amounts of assets and liabilities and the
disclosure of contingencies at the date of the financial statements, as well as
the reported amounts of revenues and expenses during the reporting period.
Estimates have been prepared on the basis of the most current and best available
information and actual results could differ materially from those
estimates.





Financial Statements
Reclassifications – Certain amounts on the prior period financial
statements and related notes have been reclassified to conform to the current
presentation.





NOTE 2 3⁄4
RECENT ACCOUNTING
PRONOUNCEMENTS





Adoption
of New Accounting Standards





New
pronouncements issued by the Financial Accounting Standards Board (“FASB”) with
effective dates prior to September 30, 2010 are not applicable and have had no
effect on the Company’s consolidated financial position or results of
operations.





Standards
Issued But Not Yet Effective





ASU
2009-13 & ASU 2009-14: In September 2009, the FASB issued Accounting
Standards Update (“ASU”) 2009-13, Multiple-Deliverable Revenue Arrangements, and
ASU 2009-14, Certain Revenue Arrangements That Include Software Elements – a
consensus of the FASB Emerging Issues Task Force, to amend the existing revenue
recognition guidance. ASU 2009-13 amends Accounting Standards Codification
(“ASC”) 605, Revenue Recognition, 25, “Multiple-Element Arrangements” (formerly
EITF Issue 00-21, “Revenue Arrangements with Multiple Deliverables”), as
follows: modifies criteria used to separate elements in a multiple-element
arrangement, introduces the concept of “best estimate of selling price” for
determining the selling price of a deliverable, establishes a hierarchy of
evidence for determining the selling price of a deliverable, requires use of the
relative selling price method and prohibits use of the residual method to
allocate arrangement consideration among units of accounting, and expands the
disclosure requirements for all multiple-element arrangements within the scope
of ASC 605-25. The Company does not expect this ASU to have a material impact on
its revenue recognition when adopted for our fiscal year beginning January 1,
2011.




6




ASU
2009-14 amends the scope of ASC 985, Software, 605, “Revenue Recognition”
(formerly AICPA Statement of Position 97-2, Software Revenue Recognition), to
exclude certain tangible products and related deliverables that contain embedded
software from the scope of this guidance. Instead, the excluded products and
related deliverables must be evaluated for separation, measurement, and
allocation under the guidance of ASC 605-25, as amended by ASU 2009-13. The
amended guidance is effective prospectively for revenue arrangements entered
into or materially modified in fiscal years beginning on or after June 15, 2010.
Early adoption is permitted. An entity may elect retrospective application to
all revenue arrangements for all periods presented using the guidance in ASC
250, Accounting Changes and Error Corrections. Entities must adopt the
amendments resulting from both of these ASUs in the same period using the same
transition method, where applicable. The Company does not expect this ASU to
have a material impact on its revenue recognition when adopted for our fiscal
year beginning January 1, 2011.





In April
2010, the FASB issued ASU 2010-17, Revenue Recognition – Milestone Method (Topic
605). ASU 2010-17 provides guidance on applying the milestone method of revenue
recognition in arrangements with research and development activities. The
Company does not expect this ASU to have a material impact on its revenue
recognition when adopted for our fiscal year beginning January 1,
2011.





NOTE 3 3⁄4
RESTRICTED
CASH





The
Company is required to maintain $1.2 million on deposit with a financial
institution to support a bonding requirement for one of the ATSI state
contracts. This amount, and accumulated interest of $126,792 and $124,510 earned
thereon as of September 30, 2010 and December 31, 2009, respectively, is
reflected in restricted cash in the accompanying consolidated balance sheets. We
expect the performance under this contract to be completed in 2010, whereby the
bond will be released and the deposit refunded.





NOTE 4 3⁄4
ACCOUNTS
RECEIVABLE




Total
accounts receivable, net of allowance for doubtful accounts of $0.1 million at
September 30, 2010 and $0.7 million at December 31, 2009, consisted of the
following:




September 30,
                          2010
                        
                        
                        December 31,
                          2009Billed
      receivables
                        
                        $
                        17,407,549
                        
                        
                        $
                        19,559,013Unbilled
      receivables:Amounts
      billable
                        
                        
                        551,902
                        
                        
                        
                        112,300Revenues
      recorded in excess of milestone billings on fixed-price
      contracts
                        
                        
                        2,887,398
                        
                        
                        
                        3,474,459Retainage
                        
                        
                        65,291
                        
                        
                        
                        95,522Total
      accounts receivable
                        
                        $
                        20,912,140
                        
                        
                        $
                        23,241,294Allowance
      for doubtful accounts
                        
                        
                        (129,134
                        )
                        
                        
                        (743,850
                        )Total
      accounts receivable, net
                        
                        $
                        20,783,006
                        
                        
                        $
                        22,497,444




NOTE 5 3⁄4
FAIR VALUE OF FINANCIAL
INSTRUMENTS




In order
to manage interest rate fluctuation exposure on bank debt, the Company entered
into an interest rate swap agreement with Bank of America, NA (“Bank of
America”) on November 9, 2007 providing the Company an ability to eliminate
the variability of interest expense based on $35 million of floating rate debt.
The purpose of the derivative instrument was to hedge cash flows and was not
entered into for trading purposes. The Company recorded cash payments and
receipts related to its interest rate swap as adjustments to interest expense
and as a component of operating cash flow.





7




Historically
the Company accounted for its interest rate swap agreement as a cash flow hedge.
The fair value of the interest rate swap was based on the net present value of
its net projected cash flows, which are a level 3 input under ASC 820-25. On
September 30, 2010, the Company terminated the swap arrangement resulting in an
early payment in the amount of $375,000, the remaining balance of the swap
liability, in accordance with the terms of the agreement. Accordingly, the fair
value of the interest rate swap was reduced to zero at September 30, 2010. 
Since the Company had previously recognized interest expense in 2009 and 2010
relating to the swap ineffectiveness, the effect of terminating the swap
resulted in $335,301 in interest income for the three months and $217,156 for
the nine months ended September 30, 2010, respectively, net of tax expense. The
related deferred tax asset and other comprehensive income were reduced to zero
as well. The fair value of the interest rate swap was $0 and $1,398,115 and
reflected in other accrued expenses and current liabilities, as of September 30,
2010 and December 31, 2009, respectively.




NOTE 6 3⁄4
STOCK PLANS AND STOCK-BASED
COMPENSATION




Under the
fair value recognition provisions of ASC 718, Stock Compensation (formerly SFAS
No. 123(R), Share Based
Payment (“FAS 123(R)”)), the Company recognizes stock-based compensation
expense based upon the fair value of the stock-based awards taking into account
the effects of the employees’ expected exercise and post-vesting employment
termination behavior. A summary of the components of the stock-based
compensation expense recognized during the three- and nine-month periods ended
September 30, 2010 and 2009 is as follows:





Compensation Related to
                        Options and Restricted Stock
                      
                      Three Months
                        Ended
                        September
                        30, 2010
                      
                      
                      Three Months
                        Ended
                        September
                        30, 2009
                      
                      
                      Nine months
                        Ended
                        September
                        30, 2010
                      
                      
                      Nine months
                        Ended
                        September
                        30, 2009Incentive
      stock options
                      
                      $
                      47,000
                      
                      
                      $
                      37,000
                      
                      
                      $
                      191,000
                      
                      
                      $
                      119,000Restricted
      stock
                      
                      
                      216,000
                      
                      
                      
                      119,000
                      
                      
                      
                      504,000
                      
                      
                      
                      317,000Stock
      grants to Directors in lieu of cash
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      103,000
                      
                      
                      
                      114,000Forfeitures
      in excess of estimate
                      
                      
                      (115,000
                      )
                      
                      
                      (17,000
                      )
                      
                      
                      (134,000
                      )
                      
                      
                      (30,000
                      )Total
      stock-based compensation expense
                      
                      $
                      148,000
                      
                      
                      $
                      139,000
                      
                      
                      $
                      664,000
                      
                      
                      $
                      520,000Income
      tax benefit recognized for stock-based compensation
expense
                      
                      $
                      22,000
                      
                      
                      $
                      94,000
                      
                      
                      $
                      185,000
                      
                      
                      $
                      103,000





Stock
Options –The Company estimates the fair value of options as of the date
of grant using the Black-Scholes option pricing model. A total of 50,000 and
158,000 options were granted during the three- and nine-month periods ended
September 30, 2010, respectively. A total of 5,000 and 317,000 options were
granted during the three and nine-month periods ended September 30, 2009,
respectively.  The fair value of options granted during the nine-month
period ended September 30, 2010 has been estimated as of the date of grant using
the Black-Scholes option pricing model with the following
assumptions:





Options Granted
                    January 4, 2010
                  
                  
                  Options Granted
                    April 4, 2010
                  
                  
                  Options Granted
                    May 18, 2010
                  
                  
                  Options Granted
                    September 1, 2010Expected
      dividend yield
                  
                  
                  —
                  %
                  
                  
                  —
                  %
                  
                  
                  —
                  %
                  
                  
                  —
                  %Expected
      volatility
                  
                  
                  70.6
                  %
                  
                  
                  70.0
                  %
                  
                  
                  67.6
                  %
                  
                  
                  66.8
                  %Risk
      free interest rate
                  
                  
                  2.5
                  %
                  
                  
                  2.5
                  %
                  
                  
                  2.5
                  %
                  
                  
                  1.6
                  %Expected
      life of options
                  
                  6.3
      years
                  
                  
                  6.3
      years
                  
                  
                  6.3
      years
                  
                  
                  6.3
      yearsForfeiture
      rate
                  
                  
                  4.25
                  %
                  
                  
                  4.25
                  %
                  
                  
                  4.25
                  %
                  
                  
                  4.25
                  %Options
      granted
                  
                  
                  15,000
                  
                  
                  
                  40,000
                  
                  
                  
                  53,000
                  
                  
                  
                  50,000




8




The
average fair value per option granted during the nine months ended September 30,
2010 was $1.82. As of September 30, 2010, there was $584,499 of unrecognized
compensation expense related to unvested options. This cost is expected to be
recognized over a weighted-average period of 2.8 years. The table below provides
stock option information for the nine months ended September 30,
2010:





Number of
                        Shares
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price Per
                        Share
                      
                      
                      Weighted-
                        Average
                        Remaining
                        Contractual
                        Life in
                        Years
                      
                      
                      Aggregate
                        Intrinsic
                        Value of
                        In-the-
                        Money
                        OptionsOptions
      outstanding at January 1, 2010
                      
                      
                      638,000
                      
                      
                      $
                      2.40
                      
                      
                      
                      9.5
                      
                      
                      $
                      310,655
                      (1)Options
      granted
                      
                      
                      158,000
                      
                      
                      
                      2.86
                      
                      
                      
                      9.7
                      
                      
                      
                      7,850
                      (2)Options
      expired
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Options
      exercised
                      
                      
                      (2,750
                      )
                      
                      
                      2.03
                      
                      
                      
                      —
                      
                      
                      
                      —Options
      forfeited
                      
                      
                      (160,250
                      )
                      
                      
                      2.49
                      
                      
                      
                      —
                      
                      
                      
                      —Options
      outstanding at September 30, 2010
                      
                      
                      633,000
                      
                      
                      $
                      2.51
                      
                      
                      
                      8.3
                      
                      
                      $
                      390,883
                      (2)Options
      exercisable at September 30, 2010
                      
                      
                      203,500
                      
                      
                      $
                      2.81
                      
                      
                      
                      7.5
                      
                      
                      $
                      123,055
                      (2)


(1)
              Intrinsic
      value represents the excess of the closing stock price on the last trading
      day of the preceding period, which was $2.48 as of December 31, 2009, over
      the exercise price, multiplied by the number of
  options.


(2)
              Intrinsic
      value represents the excess of the closing stock price on the last trading
      day of the period, which was $2.84 as of September 30, 2010, over the
      exercise price, multiplied by the number of
  options.




The
following table summarizes information about the stock options outstanding at
September 30, 2010:




Options Outstanding
                            
                            
                            Options ExercisableWeighted-average
                            
                            
                            Weighted-
                            
                            
                            
                            
                            
                            Weighted-Remaining
                            
                            
                            average
                            
                            
                            
                            
                            
                            averageExercise
                            
                            
                            Number
                            
                            
                            Life in
                            
                            
                            Exercise
                            
                            
                            Number
                            
                            
                            ExercisePrices
                            
                            
                            Outstanding
                            
                            
                            Years
                            
                            
                            Price
                            
                            
                            Exercisable
                            
                            
                            Price$
                            1.40
                            
                            
                            
                            42,500
                            
                            
                            
                            8.3
                            
                            
                            $
                            1.40
                            
                            
                            
                            12,500
                            
                            
                            $
                            1.401.50
                            
                            
                            
                            175,250
                            
                            
                            
                            8.6
                            
                            
                            
                            1.50
                            
                            
                            
                            44,875
                            
                            
                            
                            1.502.15
                            
                            
                            
                            122,750
                            
                            
                            
                            7.7
                            
                            
                            
                            2.15
                            
                            
                            
                            64,000
                            
                            
                            
                            2.152.23
                            
                            
                            
                            5,000
                            
                            
                            
                            9.0
                            
                            
                            
                            2.23
                            
                            
                            
                            1,250
                            
                            
                            
                            2.232.50
                            
                            
                            
                            15,000
                            
                            
                            
                            9.2
                            
                            
                            
                            2.50
                            
                            
                            
                            —
                            
                            
                            
                            —2.80
                            
                            
                            
                            50,000
                            
                            
                            
                            9.9
                            
                            
                            
                            2.80
                            
                            
                            
                            —
                            
                            
                            
                            —2.90
                            
                            
                            
                            93,000
                            
                            
                            
                            9.6
                            
                            
                            
                            2.90
                            
                            
                            
                            —
                            
                            
                            
                            —3.40
                            
                            
                            
                            20,000
                            
                            
                            
                            7.2
                            
                            
                            
                            3.40
                            
                            
                            
                            10,000
                            
                            
                            
                            3.403.50
                            
                            
                            
                            30,000
                            
                            
                            
                            7.1
                            
                            
                            
                            3.50
                            
                            
                            
                            15,000
                            
                            
                            
                            3.503.67
                            
                            
                            
                            15,000
                            
                            
                            
                            7.0
                            
                            
                            
                            3.67
                            
                            
                            
                            7,500
                            
                            
                            
                            3.673.75
                            
                            
                            
                            4,500
                            
                            
                            
                            6.8
                            
                            
                            
                            3.75
                            
                            
                            
                            3,375
                            
                            
                            
                            3.754.88
                            
                            
                            
                            60,000
                            
                            
                            
                            6.4
                            
                            
                            
                            4.88
                            
                            
                            
                            45,000
                            
                            
                            
                            4.88633,000
                            
                            
                            
                            8.3
                            
                            
                            $
                            2.51
                            
                            
                            
                            203,500
                            
                            
                            $
                            2.81





9





Restricted
Shares – Pursuant to the 2006 Omnibus Incentive Compensation Plan, during
the nine-month period ended September 30, 2010, the Company granted 226,200
restricted shares valued at an aggregate of $619,380. Such shares vest over a
one- to five-year period. The table below provides additional restricted share
information for the nine months ended September 30, 2010:




No. of
                        Shares
                      
                      
                      Weighted
                        Average Grant
                        Date Fair
                        ValueUnvested at
      January 1, 2010
                      
                      
                      462,986
                      
                      
                      $
                      2.42Granted
                      
                      
                      226,200
                      
                      
                      
                      2.74Vested
                      
                      
                      (110,362
                      )
                      
                      
                      2.32Forfeited
                      
                      
                      (81,428
                      )
                      
                      
                      1.97Unvested
      at September 30, 2010
                      
                      
                      497,396
                      
                      
                      
                      2.66





NOTE 7 3⁄4
EMPLOYEE STOCK PURCHASE
PLAN





The
Company adopted the 2007 Employee Stock Purchase Plan (the “Plan”) in July 2007.
The Plan was subsequently approved by the stockholders in May 2008. The Plan
provides employees and management with an opportunity to acquire or increase
ownership interest in the Company through the purchase of shares of the
Company’s common stock at periodic intervals, namely four month offering periods
during which payroll deductions are made and shares are subsequently purchased
at a five percent discount. The Company initially reserved an aggregate of
150,000 shares of common stock exclusively for issuance under the Plan.
Additionally, the Company may automatically increase the shares registered under
this Plan on an annual basis pursuant to the Plan’s “evergreen” provision. This
provision allows the Company to annually increase its registered Plan shares by
the lesser of the following: (i) 100,000 shares, (ii) 1% of the Company’s
outstanding shares on January 1 of such year, or (iii) a lesser amount as
determined by the Board. Accordingly, the Board increased the number of shares
authorized under the Plan by 100,000 shares for each of fiscal years 2009 and
2010.





The Plan
is a qualified plan under Section 423 of the Internal Revenue Code and, for
financial reporting purposes, is considered non-compensatory under ASC 718,
Stock Compensation (formerly SFAS No. 123R, Share Based Payment ).
Accordingly, there is no stock-based compensation expense associated with shares
acquired under the Plan for the nine-month period ended September 30, 2010. As
of September 30, 2010, participants had purchased 316,893 shares since the
inception of the Plan at a weighted average price per share of $1.86. During the
nine months ended September 30, 2010, 66,920 shares were purchased at an average
price per share of $2.26.




10




NOTE 8 3⁄4
EARNINGS (LOSS) PER
SHARE




Basic and
diluted earnings per share information is presented in accordance with ASC 260,
Earnings Per Share (formerly SFAS No. 128, Earnings Per Share). Basic
earnings per share is calculated by dividing the net income/(loss) attributable
to common stockholders by the weighted-average common shares outstanding during
the period. Diluted earnings per share is calculated by dividing net income
attributable to common stockholders by the weighted average common shares
outstanding which includes common stock equivalents. The Company’s common stock
equivalents include stock options, restricted stock and warrants. The weighted
average shares outstanding excludes unvested restricted shares.  The
weighted average shares outstanding for the three months ended September 30,
2010 excludes stock options to purchase approximately 561,000 shares because
such common stock equivalents have an exercise price in excess of the average
market price of the Company’s common stock during the period, or would be
anti-dilutive. Weighted average shares outstanding for the three months ended
September 30, 2009 excludes warrants and stock options to purchase approximately
3,501,000 shares because such common stock equivalents had an exercise price in
excess of the average market price of the Company’s common stock during the
period, and as such were anti-dilutive.  The weighted average shares
outstanding for the nine months ended September 30, 2010 excludes stock options
to purchase approximately 559,000 shares


because
such common stock equivalents had an exercise price in excess of the average
market price of the Company’s common stock during the period, or would be
anti-dilutive. Weighted average shares outstanding for the nine months ended
September 30, 2009 excludes warrants and stock options to purchase approximately
3,557,000 shares because such common stock equivalents had an exercise price in
excess of the average market price of the Company’s common stock during the
period, and as such were anti-dilutive.  All warrants expired in October
2009.





The chart
below shows the calculation of basic and diluted earnings per
share:





Three Months
                            Ended September 30,
                          
                          
                          Nine Months
                            Ended September 30,2010
                          
                          
                          2009
                          
                          
                          2010
                          
                          
                          2009Net
      income
                          
                          $
                          2,663,014
                          
                          
                          $
                          1,991,799
                          
                          
                          $
                          4,906,608
                          
                          
                          $
                          3,589,176Weighted
      average number of basic shares outstanding during the
    period
                          
                          
                          22,540,904
                          
                          
                          
                          22,741,726
                          
                          
                          
                          22,516,813
                          
                          
                          
                          22,648,962Dilutive
      effect of stock options and restricted shares after application of the
      treasury stock method
                          
                          
                          86,819
                          
                          
                          
                          104,823
                          
                          
                          
                          88,913
                          
                          
                          
                          48,902Weighted
      average number of diluted shares outstanding during the
    period
                          
                          
                          22,627,723
                          
                          
                          
                          22,846,549
                          
                          
                          
                          22,605,726
                          
                          
                          
                          22,697,864Basic
      earnings per share
                          
                          $
                          0.12
                          
                          
                          $
                          0.09
                          
                          
                          $
                          0.22
                          
                          
                          $
                          0.16Diluted
      earnings per share
                          
                          $
                          0.12
                          
                          
                          $
                          0.09
                          
                          
                          $
                          0.22
                          
                          
                          $
                          0.16




Shares
outstanding during the nine months ended September 30, 2010 reflect the
repurchase of 152,000 shares of ATSC common stock for approximately $455,000
pursuant to the share repurchase program which was approved by the Company’s
Board of Directors on February 17, 2009. No stock was repurchased during the
three months ended September 30, 2010.





NOTE 9 3⁄4
SEGMENT
ACCOUNTING





The
Company reviewed its services by business lines to determine if any of the
business lines are subject to risks and returns that are different from those of
other units in the Company. The Company has determined that it has one line of
business, primarily providing IT services to government and commercial
companies. As such, the Company has only one reportable segment.





11




NOTE 10 3⁄4
GOODWILL
VALUATION




Goodwill
represents the excess of purchase price over fair value of net assets of
businesses acquired. Other purchased intangible assets include the fair value of
items such as customer contracts, backlog and customer relationships. ASC Topic
350, Intangibles, Goodwill and Other (ASC 350) (formerly Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS
142”)), establishes financial accounting and reporting for acquired goodwill and
other intangible assets. Goodwill and intangible assets acquired in a purchase
business combination and determined to have an indefinite useful life are not
amortized, but rather tested for impairment on an annual basis or at an interim
date in the event of a triggering event. Purchased intangible assets with a
definite useful life are amortized on a straight-line basis over their estimated
useful lives.





The
Company evaluates goodwill for impairment annually in the third fiscal quarter
or more frequently depending on specific events or when evidence of potential
impairment exists.  For purposes of this testing, management concluded that
there is only one reporting unit. The Company’s testing approach utilizes a
discounted cash flow analysis and market based approaches to determine the fair
value of the reporting unit for comparison to the corresponding carrying value.
If the carrying value exceeds the estimated fair value of the business, an
impairment would be required to be reported. The annual impairment test is based
on several factors requiring judgment. Principally, a significant decrease in
expected cash flows or changes in general market conditions may indicate
potential impairment of recorded goodwill.





The
Company performed its 2010 annual impairment test during the third quarter in
connection with the preparation of its September 30, 2010 interim financial
statements. Management determined that a discounted cash flow analysis combined
with a market based approach utilizing level 2 data pursuant to ASC Topic 820-25
Fair Value Measurements and Disclosures (“ASC 820-25”) was the most appropriate
valuation methodology to use in our analysis as it reflects ATSC’s business
characteristics and forward earnings potential. Based on management’s forecast
for the Company, we concluded that the estimated fair value of the Company
significantly exceeded its book value as of the valuation date. As a result of
this analysis, management concluded that goodwill was not impaired.





NOTE 11 3⁄4 INTANGIBLE
ASSETS




Intangible
assets consisted of the following:




September 30,
                                        2010
                                      
                                      Weighted-
                                        Average
                                        Amortization
                                        Period
                                      
                                      December 31,
                                        2009
                                      
                                      Weighted-
                                        Average
                                        Amortization
                                        PeriodCustomer
      contracts and related customer relationships
                                      
                                      $
                                      8,235,000
                                      
                                      53
      mos.
                                      
                                      $
                                      8,235,000
                                      
                                      53
      mos.Acquired
      technology and in-process research and development
                                      
                                      
                                      400,487
                                      
                                      38
      mos.
                                      
                                      
                                      400,487
                                      
                                      38
      mos.Other
                                      
                                      
                                      711,799
                                      
                                      60
      mos.
                                      
                                      
                                      711,799
                                      
                                      60
      mos.Intangible
      assets
                                      
                                      $
                                      9,347,286
                                      
                                      52
      mos.
                                      
                                      $
                                      9,347,286
                                      
                                      52
      mos.Less
      accumulated amortization
                                      
                                      
                                      (4,738,734
                                      )
                                      
                                      
                                      
                                      (3,244,488
                                      )Total
      intangible assets, net
                                      
                                      $
                                      4,608,552
                                      
                                      
                                      
                                      $
                                      6,102,798




Expected
amortization expense for the remainder of the year ending December 31, 2010, and
for each of the fiscal years thereafter, is as follows:




Year ending December 31,
                      
                      Amount2010
                      
                      $
                      498,0822011
                      
                      
                      1,992,3282012
                      
                      
                      1,962,7622013
                      
                      
                      155,380Total
      intangible assets, net
                      
                      $
                      4,608,552




12




NOTE 12 3⁄4
LEGAL
PROCEEDINGS





From time
to time, we are involved in various legal matters and proceedings concerning
matters arising in the ordinary course of business. We currently believe that
any ultimate liability arising out of these matters and proceedings will not
have a material adverse effect on our financial position, results of operations
or cash flows.





We were a
defendant in Maximus, Inc. vs. Advanced Technology Systems, Inc., in the
Connecticut Superior Court, Complex Litigation Docket. The lawsuit regarded
breach of contract and other claims related to a subcontract between Maximus and
ATSI associated with a prime contract between Maximus and the State of
Connecticut. Based on the complaint filed in the suit, Maximus sought damages in
excess of $3.5 million. The case was filed in August 2007. In January of 2009,
the case was consolidated for discovery purposes with an action brought by the
State of Connecticut against Maximus relating to the prime contract.  On
February 23, 2010, the State of Connecticut advised Maximus that it was
accepting Maximus' settlement offer. On April 6, 2010, a settlement agreement
was signed between Maximus and the Company. In accordance with the terms of the
settlement, ATSC paid Maximus $1.5 million in return for a full release. The
Company had fully accrued the $1.5 million settlement liability as of December
31, 2009.





Based on
the claims asserted in the Maximus lawsuit, we made an indemnification demand
against the former principal owners of ATSI under the stock purchase agreement
governing the transaction in which the Company (then Federal Services
Acquisition Corporation) acquired ATSI. This indemnification demand was paid in
August 2010, in the amount of $1.25 million.




NOTE 13 3⁄4
DEBT




Debt
consisted of the following:





September 30,
                            2010
                          
                          
                          December 31,
                            2009Bank
      Financing
                          
                          $
                          15,954,960
                          
                          
                          $
                          18,688,235Notes
      payable
                          
                          
                          —
                          
                          
                          
                          2,502,900Total
      debt
                          
                          $
                          15,954,960
                          
                          
                          $
                          21,191,135Less
      current portion
                          
                          
                          —
                          
                          
                          
                          (21,191,135
                          )Debt,
      net of current portion
                          
                          $
                          15,954,960
                          
                          
                          $
                          —





Notes
Payable





The notes
payable related to the acquisitions in 2007 were amortized over three years have
been paid in full as of September 30, 2010.




At
September 30, 2010, the aggregate maturities of our debt were as
follows:





Twelve-months Ending September 30,2010
                      
                      $
                      —2011
                      
                      
                      —2012
                      
                      
                      —2013
                      
                      
                      15,954,960Total
      long-term debt
                      
                      $
                      15,954,960




13




Bank
Financing





On June
1, 2010, ATSC, as Borrower, entered into an amended and restated credit
agreement related to its previous credit facility with Bank of America, N.A., as
Administrative Agent, and other various lender parties (the “Amended Credit
Agreement”).  The Amended Credit Agreement provides for an increase in the
credit facility from $50 million to $55 million and an extension to the term for
an additional three years with a maturity in June 2013.  Borrowings under
the facility are subject to compliance with covenants including an asset
coverage ratio, leverage ratio, and a fixed charge ratio. Borrowings bear
interest at rates based on 30-day LIBOR plus applicable margins based on a
leverage ratio as determined quarterly.  The Amended Credit Agreement
adjusted the applicable margins charged on the outstanding borrowings from a
range of 2.0% to 3.5% to a range of 2.0% to 3.0% based on the leverage ratio.
The fee for the unused portion of the facility ranges from .25% to .35% based on
the leverage ratio compared to the previous facility’s terms of .20% to .375%.
The covenants for the minimum fixed charge coverage ratio were adjusted slightly
from 1.3:1 to 1.5:1 while the other financial covenants remained the same. The
Amended Credit Agreement provides a basket for stock repurchase not to exceed
$3.0 million in any period of twelve consecutive months, and total consideration
for acquisitions in any twelve-month period greater than $20 million will
require lender approval. As of September 30, 2010, the facility’s outstanding
debt balance was $16.0 million. For the nine months ended September 30, 2010,
the effective interest rate on the outstanding borrowings under the facility was
6.25%. The maximum availability under the facility at September 30, 2010 was
$20.9 million, of which the Company has $16.0 million outstanding.





The
Company was in compliance with its loan covenant agreements as of September 30,
2010.




14





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





FORWARD-LOOKING
STATEMENTS





Some of
the statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties, and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements. In some cases, you can identify these
statements by forward-looking words such as “anticipate,” “believe,” “could,”
“estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will,”
and “would” or similar words. You should read statements that contain these
words carefully because they discuss our future expectations, contain
projections of our future results of operations or of our financial position, or
state other forward-looking information. The factors described in our filings
with the SEC, as well as any cautionary language in this Quarterly Report on
Form 10-Q, provide examples of risks, uncertainties and events that may
cause our actual results to differ materially from the expectations we describe
in our forward-looking statements, including but not limited to:





·
            risks
      related to the government contracting industry, including possible changes
      in government spending priorities, especially during periods when the
      government faces significant budget
challenges;





·
            risks
      related to our business, including our dependence on contracts with U.S.
      Federal Government agencies and departments, and continued good relations,
      and being successful in competitive bidding, with those
      customers;





·
            uncertainties
      as to whether revenues corresponding to our contract backlog will actually
      be received;





·
            risks
      related to the implementation of our strategic plan, including the ability
      to identify, finance and complete acquisitions and the integration and
      performance of acquired businesses;
and





·
            other
      risks and uncertainties disclosed in our filings with the
    SEC.





Additional
factors that may affect our results are discussed in our Annual Report on
Form 10-K for the year ended December 31, 2009 under “Item 1A. Risk
Factors.” Although we believe the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. You should not place undue reliance on
these forward-looking statements, which apply only as of the date of this
Quarterly Report on Form 10-Q. We undertake no obligation to update these
forward-looking statements, even if our situation changes in the
future.





The terms
“we” and “our” as used throughout this Quarterly Report on Form 10-Q refer
to ATS Corporation and Advanced Technology Systems, Inc., the wholly-owned
subsidiary of ATSC, unless otherwise indicated.





Overview





ATSI
provides software and systems development, systems integration, information
technology infrastructure and outsourcing, information sharing, and consulting
services primarily to U.S. government agencies. As part of its complete systems
life-cycle approach, ATSI offers its clients an integrated full-service
information technology infrastructure outsourcing solution that allows an agency
to focus on its core mission while reducing costs and maintaining system
uptime.




15




For the
nine-month periods ended September 30, 2010 and 2009, we generated revenue from
the following mix of customers:


Nine Months
                          Ended
                          September 30, 2010
                        
                        
                        Nine Months
                          Ended
                          September 30, 2009Federal
      civilian agencies
                        
                        $
                        42,839,000
                        
                        
                        
                        48.1
                        %
                        
                        $
                        42,344,000
                        
                        
                        
                        47.3
                        %Defense
      and homeland security
                        
                        
                        24,150,000
                        
                        
                        
                        27.2
                        %
                        
                        
                        29,998,000
                        
                        
                        
                        33.5
                        %Commercial
                        
                        
                        22,016,000
                        
                        
                        
                        24.7
                        %
                        
                        
                        17,156,000
                        
                        
                        
                        19.2
                        %Totals
                        
                        $
                        89,005,000
                        
                        
                        
                        100.0
                        %
                        
                        $
                        89,498,000
                        
                        
                        
                        100.0
                        %





Our
largest clients during the nine months ended September 30, 2010 were the U.S.
Department of Housing and Urban Development (“HUD”), Fannie Mae, the
Pension Benefit Guaranty Corporation, the Defense Logistics Agency and the
Defense Technology Security Administration, representing approximately $17.8
million, $11.7 million, $9.0 million, $6.7 million, and $5.9 million in
revenues, respectively, accounting for 20.0%, 13.1%, 10.1%, 7.5%, and 6.6%,
respectively, of total revenue.





Nine Months
                                    Ended
                                    September 30, 2010
                                  
                                  
                                  Nine Months
                                    Ended
                                    September 30, 2009(in
      thousands)
                                  
                                  
                                  
                                  
                                  
                                  (in
      thousands)U.S.
      Department of Housing & Urban Development
                                  
                                  $
                                  17,778
                                  
                                  
                                  
                                  20.0
                                  %
                                  
                                  $
                                  17,934
                                  
                                  
                                  
                                  20.0
                                  %Fannie
      Mae
                                  
                                  
                                  11,704
                                  
                                  
                                  
                                  13.1
                                  %
                                  
                                  
                                  8,301
                                  
                                  
                                  
                                  9.3
                                  %Pension
      Benefit Guaranty Corporation
                                  
                                  
                                  9,029
                                  
                                  
                                  
                                  10.1
                                  %
                                  
                                  
                                  6,555
                                  
                                  
                                  
                                  7.3
                                  %Defense
      Logistics Agency
                                  
                                  
                                  6,688
                                  
                                  
                                  
                                  7.5
                                  %
                                  
                                  
                                  6,071
                                  
                                  
                                  
                                  6.8
                                  %Defense
      Technology Security Administration
                                  
                                  
                                  5,907
                                  
                                  
                                  
                                  6.6
                                  %
                                  
                                  
                                  6,943
                                  
                                  
                                  
                                  7.8
                                  %





We derive
substantially all of our revenue from providing professional and technical
services. We generate this revenue from contracts with various payment
arrangements, including time-and-materials contracts and fixed-price contracts.
We recognize revenue on time-and-materials contracts based on actual hours
delivered at the contracted billable hourly rate plus the cost of materials
incurred. We recognize revenue on fixed-price contracts using the
percentage-of-completion method based on costs we incurred in relation to total
estimated cost. However, if the contract is primarily for services being
provided over a specified period of time, for example, maintenance service
arrangements, we recognize revenue on a straight-line basis over the term of the
contract. The following table summarizes our historical contract mix, measured
as a percentage of total revenue, for the periods indicated:





Nine Months
                        Ended
                        September 30, 2010
                      
                      
                      Nine Months
                        Ended
                        September 30, 2009Time-and-materials
                      
                      $
                      58,980,000
                      
                      
                      
                      66.3
                      %
                      
                      $
                      61,594,000
                      
                      
                      
                      68.8
                      %Fixed-price
                      
                      
                      29,944,000
                      
                      
                      
                      33.6
                      %
                      
                      
                      27,904,000
                      
                      
                      
                      31.2
                      %Cost-plus-fixed-fee
                      
                      
                      81,000
                      
                      
                      
                      0.1
                      %
                      
                      
                      —
                      
                      
                      
                      —Totals
                      
                      $
                      89,005,000
                      
                      
                      
                      100.0
                      %
                      
                      $
                      89,498,000
                      
                      
                      
                      100.0
                      %


16


The
Company recognizes revenue when persuasive evidence of an arrangement exists,
services have been rendered or goods delivered, the contract price is fixed or
determinable, and collectability is reasonably assured. The Company’s revenue
historically is derived from primarily three different types of contractual
arrangements: time-and-materials contracts, fixed-price contracts and, to a
lesser extent, cost-plus-fee contracts. Revenue on time-and-material contracts
is recognized based on the actual hours performed at the contracted billable
rates for services provided, plus materials’ cost for products delivered to the
customer, and costs incurred on behalf of the customer. Revenue on fixed-price
contracts is recognized ratably over the period of performance or on
percentage-of-completion depending on the nature of services to be provided
under the contract which are either maintenance and support services based or
require some level of customization. For contracts that involve software design,
customization, or integration, revenue is recognized on the
percentage-of-completion method using costs incurred in relation to total
estimated project costs. Provisions for anticipated contract losses are
recognized at the time they become known.Revenue on cost-plus-fee
contracts is recognized to the extent of costs incurred, plus an estimate of the
applicable fees earned. Fixed fees under cost-plus-fee contracts are recorded as
earned in proportion to the allowable costs incurred in performance of the
contract. For cost-plus-fee contracts that include performance based fee
incentives, the Company recognizes the relevant portion of the expected fee to
be awarded by the customer at the time such fee can be reasonably estimated,
based on factors such as the Company’s prior award experience and communications
with the customer regarding performance.





We
derived some of our revenue from contracts for which we were the prime
contractor and some of our revenue as subcontractors to other prime contractors
as follows:





Nine Months
                      Ended
                      September 30, 2010
                    
                    
                    Nine Months
                      Ended
                      September 30, 2009Prime
      contracts
                    
                    $
                    75,135,000
                    
                    
                    
                    84.4
                    %
                    
                    $
                    71,169,000
                    
                    
                    
                    79.5
                    %Subcontracts
                    
                    
                    13,870,000
                    
                    
                    
                    15.6
                    %
                    
                    
                    18,329,000
                    
                    
                    
                    20.5
                    %Totals
                    
                    $
                    89,005,000
                    
                    
                    
                    100.0
                    %
                    
                    $
                    89,498,000
                    
                    
                    
                    100.0
                    %





Our most significant expense is direct costs, which consists
primarily of project personnel salaries and benefits, and direct expenses
incurred to complete projects. The number of consulting personnel assigned to a
project will vary according to the size, complexity, duration, and demands of
the project. As of September 30, 2010, we had 502 personnel who worked on our
contracts.





General
and administrative expenses consist primarily of costs associated with our
executive management, finance and administrative groups, human resources, sales
and marketing personnel, and costs associated with marketing and bidding on
future projects, unassigned consulting personnel, personnel training, occupancy
costs, travel and all other corporate costs.





Goodwill
Valuation





See Note
10.


17


Contract
Backlog





We define
backlog as the future revenue we expect to receive from our existing contracts
and other engagements. We generally include in backlog the estimated revenue
represented by contract options that have been priced, though not exercised. We
do not include any estimate of revenue relating to potential future delivery
orders that may be awarded under our General Services Administration Multiple
Award Schedule contracts, other Indefinite Delivery/Indefinite Quantity (“IDIQ”)
contracts, or other contract vehicles that are also held by a large number of
firms, an order under which potential further delivery orders or task orders may
be issued by any of a large number of different agencies and are likely to be
subject to a competitive bidding process.





The
following table summarizes our contract backlog at September 30, 2010 and
December 31, 2009, respectively:





September 30,
                    2010
                  
                  
                  December 31,
                    2009Backlog:Funded
                  
                  $
                  48,645,500
                  
                  
                  $
                  60,980,400Unfunded
                  
                  
                  169,928,400
                  
                  
                  
                  105,821,100Total
      backlog
                  
                  $
                  218,573,900
                  
                  
                  $
                  166,801,500





Our
backlog includes orders under contracts that in some cases extend for several
years, with the latest expiring in 2017. The most significant awards during the
nine-month period ended September 30, 2010 were successful re-competitions with
a Department of Defense agency valued at $27.5 million, the Nuclear Regulatory
Commission (“NRC”) valued at $21.4 million, HUD awards valued at $14.6 million,
Defense Logistics Agency valued at $13.7 million and the National Cancer
Institute valued at $13.3 million.





We cannot
guarantee that we will recognize any revenue from our backlog. The federal
government has the prerogative to cancel any contract or delivery order at any
time. Most of our contracts and delivery orders have cancellation terms that
would permit us to recover all or a portion of our incurred costs and potential
fees in such cases. Backlog varies considerably from time to time as current
contracts or delivery orders are executed and new contracts or delivery orders
under existing contacts are won. Our estimate of the portion of the backlog as
of September 30, 2010 from which we expect to recognize revenue during fiscal
year 2010 is likely to change because the receipt and timing of any revenue is
subject to various contingencies, many of which are beyond our
control.


18


Non-GAAP
Financial Measures – EBITDA





In
evaluating our operating performance, management uses certain non-GAAP financial
measures to supplement the consolidated financial statements prepared under U.S.
GAAP. More specifically, we use the following non-U.S. GAAP financial measure:
Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”).
EBITDA is a non-U.S. GAAP measure which we define as U.S. GAAP net income plus
interest expense, income taxes, and depreciation and amortization.  We have
provided EBITDA because we believe it is comparable to similar measures of
financial performance in comparable companies and may be of assistance to
investors in evaluating companies on a consistent basis, as well as enhancing an
understanding of our operating results.  EBITDA is not a recognized term
under U.S. GAAP and does not purport to be an alternative to net income as a
measure of operating performance or the cash flows from operating activities as
a measure of liquidity.





For the Three
                    
                    
                    For the Three
                    
                    
                    For the Nine
                    
                    
                    For the NineMonths Ended
                    
                    
                    Months Ended
                    
                    
                    Months Ended
                    
                    
                    Months EndedSeptember
                      30, 2010
                    
                    
                    September
                      30, 2009
                    
                    
                    September
                      30, 2010
                    
                    
                    September
                      30, 2009Net
      income
                    
                    $
                    2,663,014
                    
                    
                    $
                    1,991,799
                    
                    
                    $
                    4,906,608
                    
                    
                    $
                    3,589,176Adjustments:Depreciation
                    
                    
                    128,428
                    
                    
                    
                    221,972
                    
                    
                    
                    409,434
                    
                    
                    
                    673,110Amortization
      of intangibles
                    
                    
                    498,083
                    
                    
                    
                    550,303
                    
                    
                    
                    1,494,246
                    
                    
                    
                    1,650,908Interest,
      net
                    
                    
                    (108,491
                    )
                    
                    
                    597,742
                    
                    
                    
                    1,069,551
                    
                    
                    
                    2,164,426Taxes
                    
                    
                    1,131,537
                    
                    
                    
                    1,340,816
                    
                    
                    
                    2,463,802
                    
                    
                    
                    2,581,535EBITDA
                    
                    $
                    4,312,571
                    
                    
                    $
                    4,702,632
                    
                    
                    $
                    10,343,641
                    
                    
                    $
                    10,659,155





During
the nine months ended September 30, 2010, we recorded other income of
approximately $0.5 million associated with the adjustment of seller notes in
addition to $1.25 million for the release of escrow from a previous acquisition.
Adjusting EBITDA for these items would result in an adjusted EBITDA of
$3,062,571 for the three months ended September 30, 2010 and $8,598,641 for the
nine months ended September 30, 2010.





Recent
Events





The Board
of Directors has elected Sidney E. Fuchs, the Company’s Chief Operating Officer
and Executive Vice President to serve as the Company’s President and Chief
Executive Officer, beginning January 1, 2011.  Mr. Fuchs has also been
appointed to the Company's board of directors, effective October 19, 2010. 
Dr. Edward H. Bersoff will transition from his current management role as
President and Chief Executive Officer of the Company beginning January 1, 2011
but will continue his service as Chairman of the Board after Mr. Fuchs takes
office.


19


Results
of Operations (unaudited)





Results
of operations for the three- and nine-month periods ended September 30, 2010
compared with the three- and nine-month periods ended September 30, 2009 are
presented below.





The
following table sets forth certain financial data as dollars and as a percentage
of revenue:




For the Three
                    
                    
                    %
                    
                    
                    For the Three
                    
                    
                    %
                    
                    
                    For the Nine
                    
                    
                    %
                    
                    
                    For the Nine
                    
                    
                    %Months Ended
                    
                    
                    
                    
                    
                    Months Ended
                    
                    
                    
                    
                    
                    Months Ended
                    
                    
                    
                    
                    
                    Months EndedSeptember 30,
                    
                    
                    
                    
                    
                    September 30,
                    
                    
                    
                    
                    
                    September 30,
                    
                    
                    
                    
                    
                    September 30,2010
                    
                    
                    
                    
                    
                    2009
                    
                    
                    
                    
                    
                    2010
                    
                    
                    
                    
                    
                    2009Revenue
                    
                    $
                    29,246,619
                    
                    
                    
                    
                    
                    $
                    32,074,434
                    
                    
                    
                    
                    
                    $
                    89,004,930
                    
                    
                    
                    
                    
                    $
                    89,497,757Operating
      costs and expensesDirect
      costs
                    
                    
                    20,406,798
                    
                    
                    
                    69.8
                    %
                    
                    
                    21,342,643
                    
                    
                    
                    66.5
                    %
                    
                    
                    62,325,800
                    
                    
                    
                    70.0
                    %
                    
                    
                    59,990,312
                    
                    
                    
                    67.0
                    %Selling,
      general and administrative expenses
                    
                    
                    5,486,690
                    
                    
                    
                    18.8
                    %
                    
                    
                    6,089,196
                    
                    
                    
                    19.0
                    %
                    
                    
                    17,798,821
                    
                    
                    
                    20.0
                    %
                    
                    
                    18,908,327
                    
                    
                    
                    21.1
                    %Depreciation
      and amortization
                    
                    
                    626,511
                    
                    
                    
                    2.1
                    %
                    
                    
                    772,275
                    
                    
                    
                    2.4
                    %
                    
                    
                    1,903,680
                    
                    
                    
                    2.1
                    %
                    
                    
                    2,324,018
                    
                    
                    
                    2.6
                    %Total
      operating costs and expenses
                    
                    
                    26,519,999
                    
                    
                    
                    90.7
                    %
                    
                    
                    28,204,114
                    
                    
                    
                    87.9
                    %
                    
                    
                    82,028,301
                    
                    
                    
                    92.2
                    %
                    
                    
                    81,222,657
                    
                    
                    
                    90.8
                    %Operating
      income
                    
                    
                    2,726,620
                    
                    
                    
                    9.3
                    %
                    
                    
                    3,870,320
                    
                    
                    
                    12.1
                    %
                    
                    
                    6,976,629
                    
                    
                    
                    7.8
                    %
                    
                    
                    8,275,100
                    
                    
                    
                    9.2
                    %Other
      income (expense)Interest,
      net
                    
                    
                    108,491
                    
                    
                    
                    0.4
                    %
                    
                    
                    (597,742
                    )
                    
                    
                    (1.9
                    )%
                    
                    
                    (1,069,551
                    )
                    
                    
                    (1.2
                    )%
                    
                    
                    (2,164,426
                    )
                    
                    
                    (2.4
                    )%Other
      income
                    
                    
                    959,440
                    
                    
                    
                    3.3
                    %
                    
                    
                    60,037
                    
                    
                    
                    0.2
                    %
                    
                    
                    1,463,332
                    
                    
                    
                    1.6
                    %
                    
                    
                    60,037
                    
                    
                    
                    0.1
                    %Income
      before income taxes
                    
                    
                    3,794,551
                    
                    
                    
                    13.0
                    %
                    
                    
                    3,332,615
                    
                    
                    
                    10.4
                    %
                    
                    
                    7,370,410
                    
                    
                    
                    8.3
                    %
                    
                    
                    6,170,711
                    
                    
                    
                    6.9
                    %Income
      tax expense
                    
                    
                    1,131,537
                    
                    
                    
                    3.9
                    %
                    
                    
                    1,340,816
                    
                    
                    
                    4.2
                    %
                    
                    
                    2,463,802
                    
                    
                    
                    2.8
                    %
                    
                    
                    2,581,535
                    
                    
                    
                    2.9
                    %Net
      Income
                    
                    $
                    2,663,014
                    
                    
                    
                    9.1
                    %
                    
                    $
                    1,991,799
                    
                    
                    
                    6.2
                    %
                    
                    $
                    4,906,608
                    
                    
                    
                    5.5
                    %
                    
                    $
                    3,589,176
                    
                    
                    
                    4.0
                    %Weighted
      average number of shares outstanding—basic
                    
                    
                    22,540,904
                    
                    
                    
                    
                    
                    
                    
                    22,741,726
                    
                    
                    
                    
                    
                    
                    
                    22,516,813
                    
                    
                    
                    
                    
                    
                    
                    22,648,962—diluted
                    
                    
                    22,627,723
                    
                    
                    
                    
                    
                    
                    
                    22,846,549
                    
                    
                    
                    
                    
                    
                    
                    22,605,726
                    
                    
                    
                    
                    
                    
                    
                    22,697,864Net
      income per share—basic
                    
                    $
                    0.12
                    
                    
                    
                    
                    
                    
                    $
                    0.09
                    
                    
                    
                    
                    
                    
                    $
                    0.22
                    
                    
                    
                    
                    
                    
                    $
                    0.16—diluted
                    
                    $
                    0.12
                    
                    
                    
                    
                    
                    
                    $
                    0.09
                    
                    
                    
                    
                    
                    
                    $
                    0.22
                    
                    
                    
                    
                    
                    
                    $
                    0.16


20


Comparison
of the three months ended September 30, 2010 to the three months ended September
30, 2009.





Revenue –
Revenue decreased by $2.8 million, or 8.8%, to $29.2 million for the three
months ended September 30, 2010. This was primarily due to reductions in other
direct costs related to a lower demand for computer equipment purchases and the
effect of awards on re-competed contracts that transitioned from
time-and-materials to fixed-price contracts.





Direct costs
–Direct costs are comprised of direct labor, fringe on this labor,
subcontract labor costs and other direct costs. Other direct costs are incurred
in response to specific client tasks and may vary from period to period. The
following chart shows the cost categories with significant cost variances for
the three-month periods:





Three Months Ended
                                September 30, 2010
                              
                              
                              Three Months Ended
                                September 30, 2009
                              
                              
                              Increase
                                (Decrease)(in thousands)
                              
                              
                              %
                              
                              
                              (in thousands)
                              
                              
                              %
                              
                              
                              (in thousands)
                              
                              
                              %Revenue
                              
                              $
                              29,247
                              
                              
                              
                              100
                              %
                              
                              $
                              32,074
                              
                              
                              
                              100
                              %
                              
                              $
                              (2,827
                              )
                              
                              
                              8.8
                              %Direct
      labor and fringe benefits
                              
                              
                              13,070
                              
                              
                              
                              44.7
                              %
                              
                              
                              13,331
                              
                              
                              
                              41.6
                              %
                              
                              
                              (261
                              )
                              
                              
                              (2.0
                              )%Subcontractors
                              
                              
                              6,208
                              
                              
                              
                              21.2
                              %
                              
                              
                              6,526
                              
                              
                              
                              20.3
                              %
                              
                              
                              (318
                              )
                              
                              
                              (4.9
                              )%Other
      direct costs
                              
                              
                              1,129
                              
                              
                              
                              3.9
                              %
                              
                              
                              1,486
                              
                              
                              
                              4.6
                              %
                              
                              
                              (357
                              )
                              
                              
                              (24.0
                              )%Total
      direct costs
                              
                              $
                              20,407
                              
                              
                              
                              69.8
                              %
                              
                              $
                              21,343
                              
                              
                              
                              66.5
                              %
                              
                              $
                              (936
                              )
                              
                              
                              (4.4
                              )%





Direct
costs were 69.8% and 66.5% of revenue for the three months ended September 30,
2010 and 2009, respectively, an increase of 3.3%. Direct labor is the largest
component of direct costs representing 64.0% and 62.5% of total direct cost for
the the three months ending September 30, 2010 and  2009, respectively.
Although direct labor dollars decreased slightly over the comparable period in
2009, as a percentage of revenue the direct labor dollars increased from 41.6%
to 44.7% as a result of lower margins on time-and-materials and fixed price
contracts. These margins improved in the third quarter by approximately 0.9%
from the previous two quarters and are expected to continue to improve. 
Subcontractor costs and other direct costs represented 25.1% and 24.9% of
revenue and 36.0% and 37.5% of total direct costs for the three months ended
September 30, 2010 and 2009, respectively.





Selling, general
and administrative (“SG&A”) expenses – The components of SG&A are
marketing, bid and proposal costs, indirect labor and the associated fringe
benefits, facilities costs and other discretionary expenses.  SG&A
expenses decreased $0.6 million to $5.5 million, or 18.8% of revenue, for the
quarter ended September 30, 2010 compared to $6.1 million, or 19.0% of revenue,
for the quarter ended September 30, 2009. The improvement in SG&A expense is
attributable to controlling various indirect costs, partially offset by an
increase in bad debt expense as a result of the recognition of receivables from
one contract determined to be uncollectible.





Depreciation and
amortization – Depreciation and amortization expense decreased $0.2
million to $0.6 million for the quarter ended September 30, 2010 from $0.8
million for the quarter ended September 30, 2009 primarily due to a reduction of
amortization as acquired intangible assets reach the end of their amortization
periods.





Interest, net
– The net interest (income)/expense was $(0.1) million and $0.6 million
for the three-months ended September 30, 2010 and September 30, 2009,
respectively. This decrease of $0.7 million in net interest expense was
attributable to several factors.   As part of the indemnification
settlement ATSC recognized $291,000 of interest income effectively reducing net
interest expense for the quarter.  A reduction in the applicable margin
from 3.5 to 2.0 on the outstanding balance of our credit line resulted in a
decrease of $33,000 in interest expense. In addition, interest expense decreased
$21,000 due to the declining outstanding loan balance on the credit facility and
an additional $51,000 reduction due to the declining balance on the notes
payable from the acquisitions in 2007.  Finally, the retirement of the
interest rate swap at September 30, 2010 resulted in the recognition of
approximately $307,000 in interest income as the interest expense had been
recorded in the previous periods due to the ineffectiveness of the
swap.





Our
average outstanding debt balance for the quarter ended September 30, 2010 was
$17.6 million compared to $20.4 million for the quarter ended September 30,
2009.


21


Income
taxes – The
Company reported an income tax expense of $1.0 million and $1.3 million for the
three-month periods ended September 30, 2010 and 2009, respectively. The
effective tax rates were 29.8% and 40.2% for the three-month periods ended
September 30, 2010 and 2009, respectively. The significantly lower effective tax
rate for the three-month period ended September 30, 2010 compared to the
three-month period ended September 30, 2009 was due to $1.0 million of the $1.25
million indemnification payment as a result of the settlement of the
indemnification demand against the former principal owners of ATSI under the
stock purchase agreement governing the transaction which adjusted the tax basis
of the acquisition and is considered a non-taxable permanent
difference.





Comparison
of the nine months ended September 30, 2010 to the nine months ended September
30, 2009.





Revenue –
Revenue decreased by $0.5 million, or 0.6%, to $89.0 million for the nine months
ended September 30, 2010, compared to the nine months ended September 30, 2009.
This was the result of lower staffing requirements on Department of Defense
contracts, partially offset by increased requirements on commercial and civilian
contracts.





Direct costs
–Direct costs are comprised of direct labor, fringe on this labor,
subcontract labor costs and material and other direct costs. Material and other
direct costs are incurred in response to specific client tasks and may vary from
period to period. The following chart shows the cost categories with significant
cost variances for the nine-month periods:





Revenue
                                            
                                            Nine Months Ended
                                              September 30, 2010
                                            
                                            
                                            Nine Months Ended
                                              September 30, 2009
                                            
                                            
                                            Increase
                                              (Decrease)(in thousands)
                                            
                                            
                                            %
                                            
                                            
                                            (in thousands)
                                            
                                            
                                            %
                                            
                                            
                                            (in thousands)
                                            
                                            
                                            %Revenue
                                            
                                            $
                                            89,005
                                            
                                            
                                            
                                            100
                                            %
                                            
                                            $
                                            89,498
                                            
                                            
                                            
                                            100
                                            %
                                            
                                            $
                                            (493
                                            )
                                            
                                            
                                            5.5
                                            %Direct
      labor
                                            
                                            $
                                            40,546
                                            
                                            
                                            
                                            45.6
                                            %
                                            
                                            $
                                            38,239
                                            
                                            
                                            
                                            42.7
                                            %
                                            
                                            $
                                            2,307
                                            
                                            
                                            
                                            6.0
                                            %Subcontractors
                                            
                                            
                                            18,137
                                            
                                            
                                            
                                            20.4
                                            %
                                            
                                            
                                            17,927
                                            
                                            
                                            
                                            20.0
                                            %
                                            
                                            
                                            210
                                            
                                            
                                            
                                            1.2
                                            %Other
      direct costs
                                            
                                            
                                            3,643
                                            
                                            
                                            
                                            4.1
                                            %
                                            
                                            
                                            3,824
                                            
                                            
                                            
                                            4.3
                                            %
                                            
                                            
                                            (181
                                            )
                                            
                                            
                                            (4.7
                                            )%Total
      direct costs
                                            
                                            $
                                            62,326
                                            
                                            
                                            
                                            70.0
                                            %
                                            
                                            $
                                            59,990
                                            
                                            
                                            
                                            67.0
                                            %
                                            
                                            $
                                            2,336
                                            
                                            
                                            
                                            3.9
                                            %





Direct
costs were 70.0% and 67.0% of revenue for the nine-month periods ended September
30, 2010 and 2009 respectively, an increase of 3.0%. Direct labor is the largest
component of direct costs representing 65.0% and 63.7% of total direct costs.
for the nine months ended September 30, 2010 and September 30, 2009,
respectively. The increase in direct labor dollars is primarily attributable to
increased staffing requirements and salary escalation.  Direct labor
increased as a percent of revenue from 42.7% to 45.6% as a result of lower
margins on time-and-materials and fixed price contracts  Subcontractor
costs and other direct costs represented 24.5% and 24.3% of revenue and 35.0%
and 36.3% of total direct costs for the nine-month periods ended September 30,
2010 and 2009, respectively.





Selling, general
and administrative (“SG&A”) expenses – The components of SG&A are
marketing, bid and proposal costs, indirect labor and the associated fringe
benefits, facilities costs and other discretionary expenses.  SG&A
expenses decreased $1.1 million to $17.8 million, or 20.0% of revenues, for the
nine months ended September 30, 2010 compared to $18.9 million, or 21.1% of
revenues, for the nine months ended September 30, 2009.  The improvement in
the SG&A expense is attributable to controlling various indirect costs, as
well as significant savings on legal fees due to the resolution of the
arbitration with the previous owners of ATSI, partially offset by an increase in
bad debt expense as a result of the recognition of receivables from one contract
determined to be uncollectible.





Depreciation and
amortization – Depreciation and amortization expense decreased $0.4
million to $1.9 million from $2.3 million, primarily due to a reduction of
amortization as acquired intangible assets reach the end of their amortization
periods.


22


Interest, net
– The net interest expense was $1.1 million and $2.2 million for the
nine-months ended September 30, 2010 and September 30, 2009, respectively. This
decrease of $ 1.1 million in net interest expense was attributable to several
factors.   As part of the indemnification settlement ATSC recognized
$291,000 of interest income effectively reducing interest expense for the
year.  A reduction in the applicable margin from 3.5 to 2.0 on the
outstanding balance of our credit line resulted in a decrease of $218,000 in
interest expense. In addition, interest expense decreased $183,000 due to the
declining outstanding loan balance on the credit facility and an additional
$145,000 reduction due to the declining balance on the notes payable from the
acquisitions in 2007.  Finally, the retirement of the interest rate swap at
September 30, 2010 resulted in the recognition of approximately $444,000 in
interest income as the interest expense had been recorded in previous periods
due to the ineffectiveness of the swap.





Our
average outstanding debt balance for the nine months ended September 30, 2010
was $17.9 million compared to $26.0 million for the nine months ended September
30, 2009.





Other income
– Other income was $1.5 million for the nine-month period ended September
30, 2010, up from $60,000 for the nine-month period ended September 30, 200 due
primarily to the resolution of acquisition-related indemnification
claims.





Income
taxes – The
Company reported income tax expense of $2.5 million and $2.6 million for the
nine-month periods ended September 30, 2010 and 2009, respectively. The
effective tax rates were 33.4% and 41.8% for the nine-month periods ended
September 30, 2010 and 2009, respectively. The significantly lower effective tax
rate for the nine-month period ended September 30, 2010 compared to the
nine-month period ended September 30, 2009 was primarily due to $1.0 million of
the $1.25 million indemnification payment as a result of the settlement of the
indemnification demand against the former principal owners of ATSI under the
stock purchase agreement governing the transaction which adjusted the tax basis
of the acquisition and is considered a non-taxable permanent
difference.





Financial
Condition, Liquidity and Capital Resources





Financial
Condition – Total
assets decreased by $4.8 million to $88.5 million as of September 30, 2010 from
$93.3 million as of December 31, 2009. This decrease was primarily driven
by a $1.7 million decrease in our accounts receivable related to reduced revenue
in the third quarter, $1.5 million related to the amortization of intangible
assets and $1.3 million related to recognized deferred tax assets.





Our total
liabilities decreased $10.7 million to $32.8 million as of September 30, 2010
from $43.5 million as of December 31, 2009. Significant changes within
total liabilities included a decrease in long-term debt by $5.2 million to $16.0
million from $21.2 million due to income from operations. In addition, accrued
expenses decreased by $4.6 million to $1.8 million at September 30, 2010
compared to $6.4 million at December 31, 2009 due to the payment of $1.5 million
to settle the Maximus litigation (See Note 12 - Legal Proceedings) and the
amortization and retirement of the interest rate swap agreement totaling $1.4
million.  Also, deferred revenue decreased by $1.1 million to $0.3
million.





Liquidity and
Capital Resources – Our
primary liquidity needs are to finance the costs of operations, acquire capital
assets and to make selective strategic acquisitions. We expect to meet our
short-term requirements through funds generated from operations and from our $55
million credit facility with Bank of America. As of September 30, 2010, we had
an outstanding balance of $16.0 million on our credit facility. As noted above,
there has been a significant decrease in this debt due to positive cash flow
from operations. The balance is expected to continue to decrease for the
remainder of 2010. The facility is considered adequate to meet our operations
liquidity and capital requirements. The maximum availability under the facility
at September 30, 2010 was $20.9 million.





Net cash
generated by operating activities was $5.6 million for the nine months ended
September 30, 2010, compared to $11.8 million for the same period in 2009. Cash
generated by operating activities was primarily driven by income from
operations, , which was utilized to pay down the balance on our line of credit
facility as discussed above. Results in 2009 reflect the collection of
approximately $7.6 million in aged receivables, reducing days-sales-outstanding
from 86 days to 60 days offset by the payment of the Maximus settlement of $1.5
million. Depreciation and amortization were also lower due to the effect of
assets reaching the end of their depreciable and amortizable
lives.


23


Net cash
provided by investing activities was $0.0 million for the nine months ended
September 30, 2010, compared to $3.6 million provided in the same period in
2009, primarily as a result of the settlement of a working capital escrow
claim.





Net cash
used in financing activities was $5.5 million for the nine months ended
September 30, 2010, compared to cash used in financing activities of $15.4
million in the same period in 2009. The cash was primarily used to pay down the
credit facility and the notes payable from acquisitions in 2007.





We expect
to retain future earnings, if any, for use in the operation and expansion of our
business and do not anticipate paying any cash dividends in the foreseeable
future.





ATSC has
a credit facility which is a three-year, secured facility that permits
continuously renewable borrowings of up to $55.0 million, subject to the
borrowing base. The term of the credit agreement expires June 1, 2013. The
interest rate is based on LIBOR plus the applicable rate ranging from 200 to 300
basis points depending on the Company’s consolidated leverage ratio. The Company
pays a fee in the amount of .25% to .35% on the unused portion of the facility,
based on its consolidated leverage ratio, as defined in the credit agreement.
Any outstanding balances under the facility are due on the expiration date. The
amended credit agreement also allows the Company to repurchase its common stock
in an amount not to exceed $3 million in any twelve-month period. Total
consideration for acquisitions in any twelve-month period greater than $20
million requires lender approval. At September 30, 2010, the Company was in
compliance with its loan covenants.





Off-Balance
Sheet Arrangements





For the
nine months ended September 30, 2010, we did not have any off-balance sheet
arrangements.





Contractual
Obligations





The
following table summarizes our contractual obligations as of September 30, 2010
that require us to make future cash payments.





Less than
                  One Year
                
                One to Three
                  Years
                
                Three to Five
                  Years
                
                More than
                  Five Years
                
                Total(in thousands)Long-Term
      Debt Obligations
                
                $
                —
                
                
                $
                15,955
                
                
                $
                —
                
                
                $
                —
                
                
                $
                15,955Operating
      Leases
                
                
                1,865
                
                
                
                3,688
                
                
                
                3,697
                
                
                
                5,207
                
                
                
                14,457Total
                
                $
                1,865
                
                
                $
                19,643
                
                
                $
                3,697
                
                
                $
                5,207
                
                
                $
                30,412





Standards
Issued But Not Yet Effective





See Note
2.





Item
3. Quantitative and Qualitative Disclosures about Market Risk.





We are
exposed to certain financial market risks, the most predominant being
fluctuations in interest rates for our borrowings under our credit facility. As
of September 30, 2010, we had an outstanding balance of $16.0 million under our
variable interest rate line of credit.


24


Item
4. Controls and Procedures.





As of
September 30, 2010, under the supervision and with the participation of our
management, including our Chief Executive Officer and our Chief Financial
Officer, we have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation,
our Chief Executive Officer and our Chief Financial Officer have concluded that
our disclosure controls and procedures as defined by Rule 13a-15(e) of the
Exchange Act were effective as of September 30, 2010. However, in evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.





Disclosure
controls and procedures are designed with the objective of ensuring that
information required to be disclosed in our reports filed or submitted under the
Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms. Disclosure controls and procedures are also designed with
the objective of ensuring that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.





Changes
in Internal Control Over Financial Reporting





During
the nine months ended September 30, 2010, no changes occurred in the Company’s
internal control over financial reporting that materially affected, or is likely
to materially affect, the Company’s internal control over financial
reporting.


25


PART II
— OTHER INFORMATION





Item
1. Legal Proceedings.





See Note
12 of the notes to the consolidated financial statements.





Item
1A. Risk Factors.





See Part
I, Item 1A, “Risk Factors,” of the Company’s 2009 Form 10-K for a detailed
discussion of the risk factors affecting the Company.





Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.





On August
10, 2009, the Company announced the approval of a plan under Rule 10b5-1 under
the Exchange Act, to facilitate purchases of the Company’s common shares and
assist with compliance with Rule 10b-18 under such Act.  A plan under Rule
10b5-1 allows a company to repurchase its common shares at times when it
otherwise might be prevented from doing so under insider trading laws.  A
broker selected by the Company has authority under the plan to repurchase up to
$1.5 million of the Company’s common stock over the next two years on the
Company’s behalf.  The $1.5 million amount is a portion of the total
repurchase program amount previously approved by the Board on February 11, 2009
of the lesser of $3.0 million or 2.0 million shares.  Purchases of
common shares under the 10b5-1 plan will be subject to specified parameters and
certain price, volume and timing constraints.  Accordingly, there can
be no assurance as to how many common shares will be purchased.  In
addition, the program and related plan may be suspended or discontinued at any
time without prior notice.





Purchases
of Equity Securities by Issuer





Period
                  
                  Total Number
                    of Shares
                    Purchased
                  
                  
                  Average Price
                    Paid per Share
                  
                  
                  Total Number of Shares
                    Purchased as Part of
                    Publicly Announced
                    Plans or Programs
                  
                  
                  Maximum Dollar
                    Value of Shares that
                    May Yet Be Purchased
                    Under the PlanJanuary
      1-31, 2010
                  
                  
                  2,000
                  
                  
                  $
                  2.32
                  
                  
                  
                  405,138
                  
                  
                  $
                  2,058,249March
      1-31, 2010
                  
                  
                  150,000
                  
                  
                  
                  3.00
                  
                  
                  
                  555,138
                  
                  
                  
                  1,608,249Total
                  
                  
                  152,000
                  
                  
                  $
                  2.99
                  
                  
                  
                  555,138
                  
                  
                  $
                  1,608,249





No stock
was repurchased during the three months ended September 30, 2010.  The
Company repurchased approximately 152,000 shares of common stock for
approximately $455,000 during the nine months ended September 30, 2010 as part
of the repurchase program. The Company currently has approximately 22.6 million
shares outstanding.





Recent
Sales of Unregistered Securities





None.





Item
3.  Defaults upon Senior Securities.





Not
applicable.





Item
4.  Reserved.





Item
5.  Other Information.





None.


26


Item
6.  Exhibits.





Exhibit
              Number
            
            Description31.1
            
            Certification
      of Principal Executive Officer pursuant to
      Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934,
      as amended31.2
            
            Certification
      of Principal Financial Officer pursuant to
      Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934,
      as amended32.1
            
            Certification
      of Principal Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2
            
            Certification
      of Principal Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002


27


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.





ATS CorporationBy:
            /s/ Edward H. BersoffChairman
      of the Board, President andChief
      Executive OfficerBy:
            /s/ Pamela A. LittleExecutive
      Vice President and Chief Financial OfficerDate:
      November 3, 2010


28