**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, 2008.****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)





**(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 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 filero
            
            Accelerated
                filerxNon-accelerated
                filero
            
            Smaller
                reporting companyo(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 7, 2008 was 22,420,151.














**ATS
      CORPORATION**





**TABLE
      OF CONTENTS**


**PART I
                      — FINANCIAL INFORMATION**Item
                      1.
                  
                  Financial
                      Statements
                  3Consolidated
                      Balance Sheets as of September 30, 2008 (unaudited) and as
                      of
                      December 31, 2007 (audited)
                  3Consolidated
                      Statements of Operations (unaudited) for the three and nine
                      months ended
                      September 30, 2008 and September 30, 2007
                  4Consolidated
                      Statements of Cash Flows (unaudited) for the nine months ended
                      September
                      30, 2008 and September 30, 2007
                  5Notes
                      to Consolidated Financial Statements
                  6Item 2.
                  
                  Management’s
                      Discussion and Analysis of Financial Condition and Results
                      of
                      Operations
                  14Item 3.
                  
                  Quantitative
                      and Qualitative Disclosures about Market Risk
                  23Item 4.
                  
                  Controls
                      and Procedures
                  23**PART II
                      — OTHER INFORMATION**Item 1.
                  
                  Legal
                      Proceedings
                  23Item
                      1A.
                  
                  Risk
                      Factors
                  24Item
                      2.
                  
                  Unregistered
                      Sales of Equity Securities and Use of Proceeds
                  24Item 3.
                  
                  Defaults
                      upon Senior Securities
                  24Item
                      4.
                  
                  Submission
                      of Matters to a Vote of Security Holders
                  24Item 5.
                  
                  Other
                      Information
                  24Item 6.
                  
                  Exhibits
                  25**SIGNATURES**
                  26


2





**ATS
      CORPORATION**





**PART I
      — FINANCIAL INFORMATION**





**ITEM
      1. — FINANCIAL STATEMENTS**





**CONSOLIDATED
      BALANCE SHEETS**





**September 30,**
            
            **December 31,****2008**
            
            **2007****(unaudited)**
            
            **(audited)****ASSETS****Current
                assets**Cash
            
            $
            150,069
            
            $
            1,901,977Accounts
                receivable, net
            
            
            31,246,539
            
            
            31,191,784Prepaid
                expenses
            
            
            763,497
            
            
            923,803Income
                taxes receivable
            
            
            558,279
            
            
            1,567,094Other
                current assets
            
            
            128,771
            
            
            16,663Deferred
                income taxes, current
            
            
            1,124,201
            
            
            1,335,965**Total
                current assets**
            
            
            33,971,356
            
            
            36,937,286**Property
                and equipment, net**
            
            
            3,758,115
            
            
            1,501,409**Goodwill**
            
            
            58,608,156
            
            
            107,600,686**Intangible
                assets, net**
            
            
            8,902,011
            
            
            21,446,868**Restricted
                cash**
            
            
            1,308,681
            
            
            1,278,489**Other
                assets**
            
            
            435,783
            
            
            259,353**Deferred
                income taxes**
            
            
            1,844,242
            
            
            —**Total
                assets**
            
            $
            108,828,344
            
            $
            169,024,091


**LIABILITIES
                AND SHAREHOLDERS’ EQUITY****Current
                liabilities:**Current
                portion of long-term debt
            
            $
            2,583,334
            
            $
            2,820,191Capital
                leases – current portion
            
            
            84,761
            
            
            96,558Accounts
                payable and accrued expenses
            
            
            10,066,696
            
            
            8,634,665Accrued
                salaries and related taxes
            
            
            3,829,616
            
            
            4,425,966Accrued
                vacation
            
            
            2,624,063
            
            
            2,479,540Deferred
                revenue
            
            
            1,395,381
            
            
            2,164,574Deferred
                rent – current portion
            
            
            376,534
            
            
            80,984**Total
                current liabilities**
            
            
            20,960,385
            
            
            20,702,478**Long-term
                debt**–**net of current portion**
            
            
            38,407,045
            
            
            45,604,958**Capital
                leases**–**net of current portion**
            
            
            22,927
            
            
            87,078**Deferred
                rent**–**net of current portion**
            
            
            2,890,492
            
            
            94,069**Other
                long-term liabilities (at fair value)**
            
            
            879,952
            
            
            678,678**Deposits**
            
            
            —
            
            
            45,976**Deferred
                income taxes**
            
            
            —
            
            
            6,475,540**Total
                liabilities**
            
            
            63,160,801
            
            
            73,688,777**Commitments
                and contingencies**
            
            
            —
            
            
            —**Shareholders’
                equity:****Preferred
                stock $.001 par value, 1,000,000 shares authorized, and no shares
                issued
                and outstanding**
            
            
            —
            
            
            —**Common
                stock $.001 par value, 100,000,000 shares authorized, 30,724,615
                and
                27,529,010 shares issued, respectively, and 22,381,860 and 19,186,255
                shares outstanding, respectively**
            
            
            3,072
            
            
            2,753**Additional
                paid-in capital**
            
            
            130,449,008
            
            
            129,384,746**Treasury
                stock, at cost, 8,342,755 and 8,342,755 shares held,
                respectively**
            
            
            (30,272,007
            )
            
            (30,272,007
            )**Accumulated
                deficit**
            
            
            (53,975,892
            )
            
            (3,362,407
            )**Accumulated
                other comprehensive loss (net of tax benefit of $338,606 and $260,907,
                respectively)**
            
            
            (536,638
            )
            
            (417,771
            )**Total
                shareholders’ equity**
            
            
            45,667,543
            
            
            95,335,314**Total
                liabilities and shareholders’ equity**
            
            $
            108,828,344
            
            $
            169,024,091




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


3





**ATS
      CORPORATION**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





**Three
                  Months**
                **Ended
                  September 30,**
              
              **Nine
                  Months**
                **Ended
                  September 30,****2008**
                **(unaudited)**
              
              **2007**
                **(unaudited)**
              
              **2008**
                **(unaudited)**
              
              **2007**
                **(unaudited)****Revenue**
              
              $
              32,032,605
              
              $
              25,646,747
              
              $
              100,694,902
              
              $
              75,372,148**Operating
                  costs and expenses**Direct
                  costs
              
              
              22,551,682
              
              
              17,753,224
              
              
              67,785,098
              
              
              52,922,818Selling,
                  general and administrative expenses
              
              
              7,007,507
              
              
              5,850,756
              
              
              24,222,018
              
              
              18,006,631Depreciation
                  and amortization
              
              
              1,505,705
              
              
              1,332,257
              
              
              5,582,615
              
              
              3,336,297Impairment
                  charge
              
              
              56,772,541
              
              
              —
              
              
              56,772,541
              
              
              —**Total
                  operating costs and expenses**
              
              
              87,837,435
              
              
              24,936,237
              
              
              154,362,272
              
              
              74,265,746**Operating
                  (loss) income**
              
              
              (55,804,830
              )
              
              710,510
              
              
              (53,667,370
              )
              
              1,106,402**Other
                  (expense) income**Interest,
                  net
              
              
              (896,913
              )
              
              (124,571
              )
              
              (2,646,049
              )
              
              26,417Loss
                  on warrant liabilities
              
              
              —
              
              
              —
              
              
              —
              
              
              (6,930,000
              )Other
                  (expense) income
              
              
              (13,458
              )
              
              93
              
              
              52,714
              
              
              9,847**Income
                  (loss) before income taxes**
              
              
              (56,715,201
              )
              
              586,032
              
              
              (56,260,705
              )
              
              (5,787,334
              )**Income
                  tax (benefit) expense**
              
              
              (5,759,836
              )
              
              232,827
              
              
              (5,647,221
              )
              
              506,999**Net
                  (loss) income**
              
              $
              (50,955,365
              )
              $
              353,205
              
              $
              (50,613,484
              )
              $
              (6,294,333
              )**Weighted
                  average number of shares outstanding****—basic**
              
              
              22,381,860
              
              
              18,194,081
              
              
              20,825,206
              
              
              18,870,815**—diluted**
              
              
              22,381,860
              
              
              18,499,615
              
              
              20,825,206
              
              
              18,870,815**Net
                  (loss) income per share****—basic**
              
              $
              (2.28
              )
              $
              0.02
              
              $
              (2.43
              )
              $
              (0.33
              )**—diluted**
              
              $
              (2.28
              )
              $
              0.02
              
              $
              (2.43
              )
              $
              (0.33
              )





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,****2008**
            
            **2007****(unaudited)**
            
            **(unaudited)****Cash
                flows from operating activities**Net
                income (loss)
            
            $
            (50,613,484
            )
            $
            (6,294,333
            )Adjustments
                to reconcile net income (loss) to net cash (used in) operating
                activities:Depreciation
                and amortization
            
            
            5,582,615
            
            
            3,336,297Impairment
                charge
            
            
            56,772,541
            
            
            —Stock-based
                compensation
            
            
            618,634
            
            
            821,081Deferred
                income taxes
            
            
            (8,029,350
            )
            
            (1,942,376
            )Deferred
                rent
            
            
            (23,574
            )
            
            —Gain
                on disposal of equipment
            
            
            (2,373
            )
            
            —Loss
                on warrant liabilities
            
            
            —
            
            
            6,930,000Provision
                for bad debt
            
            
            23,781
            
            
            —Accrued
                interest
            
            
            240,391
            
            
            14,141Changes
                in assets and liabilities, net of effects of acquisitions and adjustments
                related to other comprehensive loss:Accounts
                receivable
            
            
            (78,539
            )
            
            (5,813,760
            )Prepaid
                expenses and other current assets
            
            
            160,306
            
            
            (632,007
            )Restricted
                cash
            
            
            (30,192
            )
            
            (44,748
            )Other
                assets
            
            
            (1,014,469
            )
            
            (61,965
            )Accounts
                payable and other accrued expenses
            
            
            639,364
            
            
            46,826Accrued
                salaries and related taxes
            
            
            (596,350
            )
            
            (4,027,516
            )Accrued
                vacation
            
            
            144,523
            
            
            391,839Income
                taxes payable and receivable
            
            
            1,738,485
            
            
            (277,399
            )Other
                current liabilities
            
            
            (200,866
            )
            
            (385,324
            )Other
                long-term liabilities
            
            
            (45,976
            )
            
            (362,767
            )**Net
                cash provided by (used in) operating activities**
            
            
            5,285,467
            
            
            (8,302,011
            )**Cash
                flows from investing activities**Purchase
                of property and equipment
            
            
            (151,280
            )
            
            (359,976
            )Proceeds
                from disposals of equipment
            
            
            21,352
            
            
            —Acquisitions
                of businesses – net of cash acquired
            
            
            155,891
            
            
            (94,078,219
            )Sale
                of U.S. government securities held in trust fund
            
            
            —
            
            
            121,024,475Release
                of cash held in trust fund
            
            
            —
            
            
            1,332**Net
                cash (used in) provided by investing activities**
            
            
            25,963
            
            
            26,587,612**Cash
                flows from financing activities**Borrowings
                on lines of credit
            
            
            47,868,284
            
            
            16,735,087Payments
                on lines of credit
            
            
            (53,128,697
            )
            
            (3,238,834
            )Payments
                on notes payable
            
            
            (2,174,357
            )
            
            —Payments
                on capital leases
            
            
            (74,516
            )
            
            (52,989
            )Proceeds
                from stock issued pursuant to Employee Stock Purchase Plan
            
            
            211,813
            
            
            —Proceeds
                from exercise of warrants, net
            
            
            234,135
            
            
            —Purchase
                of stock purchase warrants
            
            
            —
            
            
            (1,430,345
            )Payments
                to repurchase treasury stock
            
            
            —
            
            
            (30,272,007
            )**Net
                cash used in financing activities**
            
            
            (7,063,338
            )
            
            (18,259,088
            )**Net
                (decrease) increase in cash**
            
            
            (1,751,908
            )
            
            26,513**Cash,
                beginning of period**
            
            
            1,901,977
            
            
            213,395**Cash,
                end of period**
            
            $
            150,069
            
            $
            239,908**Supplemental
                disclosures:**Cash
                paid or received during the period for:Income
                taxes paid
            
            $
            2,340,704
            
            $
            2,852,096Income
                tax refunds
            
            
            1,917,399
            
            
            —Interest
                paid
            
            
            2,463,804
            
            
            114,871Interest
                received
            
            
            28,227
            
            
            188,650Non-cash
                investing and financing activities:Increase
                in fixed assets due to build-out allowance
            
            
            3,115,547
            
            
            —Increase
                in deferred rent due to build-out allowance
            
            
            (3,204,965
            )
            
            —Issuance
                of stock related to acquisition of businesses
            
            
            —
            
            
            1,700,000Notes
                payable issued related to acquisition of businesses
            
            
            —
            
            
            2,336,857


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 2007 statements of operations
      and cash flows reflect the activities of acquired companies from the acquisition
      dates, such dates being January 15, 2007, February 28, 2007, August 31, 2007
      and
      November 9, 2007 for ATSI, Reliable Integration Services, Inc. (“ RISI”),
      Potomac Management Group (“PMG”), and Number Six Software, Inc., (“NSS”),
      respectively.





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. 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 2007 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 (“US
      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**





In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 157, *Fair
      Value Measurements* (“SFAS
      No. 157”). SFAS No. 157 defines fair value, establishes a framework
      for measuring fair value in generally accepted accounting principles and expands
      disclosures about fair value measurements. Specifically, this Statement sets
      forth a definition of fair value, and establishes a hierarchy prioritizing
      the
      inputs to valuation techniques, giving the highest priority to quoted prices
      in
      active markets for identical assets and liabilities and the lowest priority
      to
      unobservable inputs. The provisions of SFAS No. 157 are generally required
      to be applied on a prospective basis, except to certain financial instruments
      accounted for under SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* ,
      for
      which the provisions of SFAS No. 157 should be applied retrospectively. In
      February 2008, the FASB issued Staff Position FAS 157-2, *Effective
      Date of FASB Statement No. 157* ,
      which
      defers the implementation for the non-recurring nonfinancial assets and
      liabilities from fiscal years beginning after November 15, 2007 to fiscal
      years beginning after November 15, 2008. The disclosure requirements of
      SFAS No. 157, which took effect on January 1, 2008, are presented in
      Note 4. On January 1, 2009, the Company will implement the
      previously-deferred provisions of SFAS No. 157 for nonfinancial assets and
      liabilities recorded at fair value as required. The Company does not believe
      that the remaining provisions will have a material effect on the Company’s
      consolidated financial position or results of operations when they become
      effective.





6


In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities—Including an
      amendment of FASB Statement No. 115* (“SFAS
      No. 159”). SFAS No. 159 permits an entity, at specified election
      dates, to choose to measure certain financial instruments and other items at
      fair value. The objective of SFAS No. 159 is to provide entities with the
      opportunity to mitigate volatility in reported earnings caused by measuring
      related assets and liabilities differently, without having to apply complex
      hedge accounting provisions. The adoption of SFAS No. 159, effective
      January 1, 2008, did not have a material impact on our consolidated
      financial statements. The Company did not elect the fair value measurement
      option for any of our existing financial instruments.





**Standards
      Issued But Not Yet Effective**





In
      December 2007, the FASB issued SFAS No. 141(R)— *Business
      Combinations* (“SFAS
      No. 141(R)”). SFAS No. 141(R) replaces FASB Statement
      No. 141— *Business
      Combinations* .
      The new
      statement retains the fundamental requirements that the acquisition (or
      purchase) method of accounting be used for all business combinations and expands
      the definition of a business, thus increasing the number of transactions which
      may qualify as business combinations. Contingent consideration will be measured
      at fair value at the acquisition date, with changes in fair value recognized
      in
      earnings, and transaction-related expenses and restructuring costs will be
      expensed as incurred. Changes in acquired tax contingencies will be recognized
      in earnings if outside the purchase price allocation period (generally one
      year
      or less). Adjustments to finalize purchase price allocations will be shown
      as
      revised in future financial statements to reflect the adjustments as if they
      had
      been recorded on the acquisition date. Also, in the event of a bargain purchase
      (acquisition of a business at below fair market value of net assets acquired),
      a
      gain could be recognized, or in the event of a change in control of an existing
      investment, a gain or loss could be recognized. SFAS No. 141(R) will
      be applied prospectively to business acquisitions with acquisition dates on
      or
      after January 1, 2009. There is no current impact as SFAS
      No. 141(R) is not applicable until January 1, 2009.





In
      December 2007, the FASB issued SFAS No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements—An Amendment of ARB No. 51* (“SFAS No.
      160”). SFAS No. 160 establishes new accounting and reporting standards for
      the non-controlling interest in a subsidiary and for the deconsolidation of
      a
      subsidiary. SFAS No. 160 is effective for fiscal years beginning on or
      after December 15, 2008 and early adoption is prohibited. Adoption of this
      statement is not expected to have a material impact on the Company’s
      consolidated financial position or results of operations when it becomes
      effective in 2009, but may significantly affect the accounting for
      noncontrolling (or minority) interests from that date forward. The Company
      currently does not have any noncontrolling (or minority) interests.





In
      March 2008, the FASB issued Statement SFAS No. 161, *Disclosure
      about Derivative Instruments and Hedging Activities — An Amendment of FASB
      Statement No. 133* (“SFAS
      No. 161”).  SFAS No. 161 requires more disclosures about an
      entity’s derivative and hedging activities in order to improve the transparency
      of financial reporting.  SFAS No. 161 is effective for financial
      statements issued for fiscal years and interim periods beginning after
      November 15, 2008, with early application encouraged.  This
      Statement encourages, but does not require, comparative disclosures for earlier
      periods at initial adoption.  The Company will adopt the provisions of
      SFAS No. 161 on January 1, 2009, which is not expected to have a
      material impact on the Company’s consolidated financial statements.





**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 $108,681 earned thereon
      as
      of September 30, 2008, is reflected in restricted cash in the accompanying
      consolidated balance sheets.





**NOTE
      4** **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 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 is to hedge cash flows and not for trading purposes.
      The
      Company records cash payments and receipts related to its interest rate swap
      as
      adjustments to interest expense and as a component of operating cash
      flow.





7





A
      liability of approximately $880,000 and $679,000 is included in other long-term
      liabilities, as of September 30, 2008 and December 31, 2007, respectively,
      related to this interest rate swap. This valuation method, which is consistent
      with the second highest level of the valuation hierarchy described in SFAS
      No.
      157, *Fair
      Value Measurements* ,
      is fair
      market value based upon an extrapolation of forward rates for the remaining
      term
      of the interest rate swap. A loss of $201,000 related to a change in market
      value for this derivative, net of a tax benefit of $78,000, was recorded in
      other comprehensive loss for the nine months ended September 30,
      2008.





**NOTE
      5** **3⁄4** **STOCK PLANS AND STOCK-BASED COMPENSATION**





In
      December 2004, the FASB issued SFAS No. 123(R), *Share
      Based Payment* ,
      which
      requires that compensation costs related to share-based payment transactions
      be
      recognized in financial statements. Under the fair value recognition provisions
      of SFAS No. 123(R), the Company recognizes stock-based compensation 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, 2008
      and
      2007 is as follows:





**Compensation Related to**
              **Options and Restricted****Stock**
            
            **Three
                Months Ended September 30, 2008**
            
            **Three Months Ended**
              **September 30, 2007**
            
            **Nine Months Ended**
              **September 30, 2008**
            
            **Nine Months Ended**
              **September 30, 2007**Non-qualified stock option expense
            
            $
            33,000
            
            $
            2,000
            
            $
            124,000
            
            $
            633,000Incentive
                stock options
            
            
            —
            
            
            —
            
            
            —
            
            
            —Restricted
                stock
            
            
            133,000
            
            
            67,000
            
            
            628,000
            
            
            145,000Stock
                grants to directors in lieu of cash
            
            
            —
            
            
            —
            
            
            180,000
            
            
            43,000Forfeitures
                in excess of estimate
            
            
            (313,000
            )
            
            —
            
            
            (313,000
            )
            
            —Total
                stock-based compensation expense
            
            $
            (147,000
            )
            $
            69,000
            
            $
            619,000
            
            $
            821,000





Stock-based
      compensation for the three month period ended September 30, 2008 was ($147,000)
      consisting of $166,000 in stock option and restricted stock expense, offset
      by
      ($313,000) in forfeitures due to the departure of three executive employees
      who
      were participants in the stock plans.





*Stock
      Options* - The
      Company estimates the fair value of options as of the date of grant using the
      Black-Scholes option pricing model. No options were granted during the three
      month period ended September 30, 2008. The fair value of options granted during
      the nine month periods ended September 30, 2008 and 2007 have been estimated
      as
      of the date of grant using the Black-Scholes option pricing model with the
      following assumptions:





**Nine Months**
              **Ended September 30,**2008****
            
            **Nine Months**
              **Ended September 30, **2007****Expected
                dividend yield
            
            
            0
            %
            
            0
            %Expected
                volatility
            
            
            38.5
            %
            
            37.0
            %Risk
                free interest rate
            
            
            3.7
            %
            
            4.7
            %Expected
                life of options
            
            
            6.0
                years
            
            
            5.6
                yearsForfeiture
                rate
            
            
            4.125
            %
            
            4
            %





The
      average fair value of options granted during the nine months ended September
      30,
      2008 was $0.93. As of September 30, 2008, there was $513,242 of unrecognized
      compensation expense related to unvested options. This cost is expected to
      be
      recognized over a weighted-average period of 3.3 years. The table below provides
      stock option information for the three months ended September 30,
      2008:




8




**Number of**
              **Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price Per**
              **Share**
            
            **Weighted-**
              **Average**
              **Remaining**
              **Contractual**
              **Life**
            
            **Aggregate**
              **Intrinsic**
              **Value of**
              **In-the-**
              **Money**
              **Options**Options
                outstanding at beginning of period
            
            
            582,500
            
            $
            3.38
            
            
            9.39
            
            $
            —
            (1)Options
                granted
            
            
            —
            
            
            —
            
            
            —
            
            
            —Options
                expired
            
            
            —
            
            
            —
            
            
            —
            
            
            —Options
                forfeited
            
            
            (188,000
            )
            
            3.84
            
            
            8.96
            
            
            —Options
                outstanding at end of period
            
            
            394,500
            
            $
            3.16
            
            
            9.22
            
            $
            —
            (2)Options
                exercisable at end of period
            
            
            21,000
            
            $
            4.66
            
            
            8.44
            
            $
            —
            (2)





(1)
      Intrinsic value represents the excess of the closing stock price on the last
      trading day of the preceding period, which was $2.09 as of June 30, 2008, 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 $1.65 as of September 30, 2008, over the
      exercise price, multiplied by the number of options.





The
      table
      below provides stock option information for the nine months ended September
      30,
      2008:








**Number of**
              **Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price Per**
              **Share**
            
            **Weighted-**
              **Average**
              **Remaining**
              **Contractual**
              **Life**
            
            **Aggregate**
              **Intrinsic**
              **Value of**
              **In-the-**
              **Money**
              **Options**Options
                outstanding at beginning of period
            
            
            404,000
            
            $
            3.92
            
            
            9.65
            
            $
            34,000(1
            )Options
                granted
            
            
            178,500
            
            
            2.15
            
            
            9.75
            
            
            —Options
                expired
            
            
            —
            
            
            
            
            
            
            
            
            —Options
                forfeited
            
            
            (188,000
            )
            
            3.84
            
            
            8.96
            
            
            —Options
                outstanding at end of period
            
            
            394,500
            
            $
            3.16
            
            
            9.22
            
            $
            —(2
            )Options
                exercisable at end of period
            
            
            21,000
            
            $
            4.66
            
            
            8.44
            
            $
            —(2
            )





(1)
      Intrinsic value represents the excess of the closing stock price on the last
      trading day of the preceding period, which was $3.60 as of December 31, 2007,
      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 $1.65 as of September 30, 2008, over the
      exercise price, multiplied by the number of options.




9





The
      following table summarizes information about stock options outstanding at
      September 30, 2008:





**Options Outstanding**
              
              **Options Exercisable****Weighted-****average**
              
              **Weighted-**
              
              
              
              **Weighted-****Remaining**
              
              **average**
              
              
              
              **average****Exercise**
              
              **Number**
              
              **Life in**
              
              **Exercise**
              
              **Number**
              
              **Exercise****Prices**
              
              **Outstanding**
              
              **Years**
              
              **Price**
              
              **Exercisable**
              
              **Price**$
              2.15
              
              
              170,500
              
              
              9.68
              
              $
              2.15
              
              
              —
              
              $
              —3.40
              
              
              80,000
              
              
              9.22
              
              
              3.40
              
              
              —
              
              
              —3.50
              
              
              30,000
              
              
              9.12
              
              
              3.50
              
              
              —
              
              
              —3.67
              
              
              30,000
              
              
              9.01
              
              
              3.67
              
              
              —
              
              
              —3.75
              
              
              4,500
              
              
              8.80
              
              
              3.75
              
              
              1,125
              
              
              —3.85
              
              
              4,500
              
              
              8.59
              
              
              3.85
              
              
              1,125
              
              
              3.854.32
              
              
              15,000
              
              
              8.42
              
              
              4.32
              
              
              3,750
              
              
              4.324.88
              
              
              60,000
              
              
              8.41
              
              
              4.88
              
              
              15,000
              
              
              4.88394,500
              
              
              9.23
              
              $
              3.16
              
              
              21,000
              
              $
              4.66





*Restricted
      Shares* –
      Pursuant to the plan, during the three and nine month periods ended September
      30, 2008, the Company granted 40,000 and 102,604 restricted shares valued at
      $72,000 and $215,989, respectively. Such shares vest ratably over a five-year
      period. The table below provides additional restricted share information for
      the
      nine months ended September 30, 2008:




**Nine Months**
              **Ended September 30, 2008****No. of**
              **Shares**
            
            **Weighted**
              **Average**
              **Grant**
              **Date Fair**
              **Value**Nonvested
                at January 1, 2008
            
            
            625,662
            
            $
            3.99Granted
            
            
            102,604
            
            
            2.11Vested
            
            
            (63,606
            )
            
            3.67Forfeited
            
            
            (152,396
            )
            
            3.57Nonvested
                at September 30, 2008
            
            
            512,263
            
            $
            3.44





**NOTE
      6** **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 shareholders 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 discount. The Company has reserved an aggregate of 100,000 shares of Common
      Stock exclusively for issuance under the Plan.





The
      Plan
      is a qualified plan under Section 423 of the Internal Revenue Code and, for
      financial reporting purposes and is considered non-compensatory under SFAS
      No. 123R Share Based Payment. Accordingly, there is no stock-based
      compensation expense associated with shares acquired under the Plan for the
      three and nine months ended September 30, 2008 and 2007. As of September 30,
      2008, participants have purchased 87,190 shares under the Plan at a weighted
      average price per share of $2.43. During the three months ended September 30,
      2008, no shares were purchased, however a $60,000 liability existed to purchase
      38,291 shares at a price per share of $1.56.


10


**NOTE
      7** **3⁄4** **INCOME
      (LOSS) PER SHARE**





Basic
      and
      diluted earnings per share information is presented in accordance with 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
      for the three months ended September 30, 2008 and 2007 excludes unvested
      restricted shares and excludes warrants and stock options to purchase
      approximately 3,374,675 and 38,429,245 shares, respectively, 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. The
      weighted average shares outstanding for the nine months ended September 30,
      2008
      and 2007 excludes restricted shares and excludes warrants and stock options
      to
      purchase approximately 18,490,013 and 38,823,779 shares, respectively, 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.





**NOTE
      8** **3⁄4** **SEGMENT
      ACCOUNTING**





The
      Company reviewed its services by unit to determine if any unit of the business
      is subject to risks and returns that are different than those of other units
      in
      the Company. Based on this review, the Company has determined that all units
      of
      the Company are providing comparable services to its clients, and the Company
      has only one reportable segment.





**NOTE
      9** **3⁄4** **WARRANT
      EXCHANGE OFFER**





On
      April 8, 2008, we announced an offer to holders of all 36,380,195
      outstanding, publicly-traded warrants, that would permit the exercise of the
      warrants on amended terms, for a limited time. The offer modified the terms
      of
      the warrants to allow holders to receive one share of common stock for every
      12.5 warrants surrendered, without paying a cash exercise price. In addition,
      for each 10 warrants a holder tendered in the cashless exercise, the holder
      could also exercise one additional warrant by paying a reduced cash exercise
      price of $2.25 for one share of common stock.





The
      offer
      commenced on April 8, 2008, and was through May 16, 2008. Under the
      tender offer, a total of 33,400,020 warrants were exercised (approximately
      92%
      of the 36,380,195 publicly traded warrants issued in the initial public offering
      of Federal Services Acquisition Corporation. This consisted of 33,073,703
      warrants tendered for cashless exercise in exchange for 2,645,887 shares of
      common stock (on the basis of 12.5 warrants for one share of common stock),
      and
      326,317 warrants exercised by payment of a reduced cash price of $2.25 per
      share. As a result of the exercise of warrants, 2,972,204 new shares of common
      stock were issued. Proceeds received by the Company were $734,192 and expenses
      were $499,715. The 2,980,175 warrants that were not exercised during the tender
      offer had their original terms reinstituted and will expire on October 19,
      2009,
      unless earlier exercised in accordance with their original terms.





**NOTE
      10** **3⁄4** **CREDIT
      FACILITY**





On
      May 12, 2008, ATSC, with Bank of America, N.A., as lenders’ agent and their
      other lenders and the guarantors listed on the signature page thereto,
      modified their existing credit agreement by entering into an Amendment
      No. 3 to the Credit Agreement (the “Third Amendment”), Capitalized terms
      used in this summary have the same meanings assigned to them in the Third
      Amendment. The following primary changes were made pursuant to such Third
      Amendment: (i) amendment of the financial covenants to revise the required
      Consolidated Leverage Ratios, the required minimum Consolidated EBITDA, the
      required Consolidated Asset Coverage Ratio, and the required Consolidated Fixed
      Charge Coverage Ratios; (ii) inclusion of a requirement of the Lenders’
consent to acquisitions, if the pro forma Consolidated Leverage Ratio exceeds
      2.50 to 1.00; (iii) inclusion of a new requirement that, depending on the
      Consolidated Leverage Ratio, either 50% or 100% of the Net Cash Proceeds from
      ATSC’s sale of Equity Interests shall be applied to prepay the Loans (provided,
      however, that this prepayment requirement does not apply to either proceeds
      from
      the sale of the ATSC Early Warrant Exercise Program effective as of
      April 8, 2008, or sales or issuances of Equity Interests to ATSC);
      (iv)  adjustment of the due date for the accounts receivable aging report
      and accounts payable aging report from ATSC to 30 days after the end of each
      month; and (v) modification of the interest rate applicable to loans
      outstanding under the Third Amendment (with interest continuing to be based
      on
      LIBOR, but with increments ranging from 200 basis points to 350 basis points,
      depending on the Consolidated Leverage Ratio). This description of the Third
      Amendment is qualified in its entirety by the full text of the Third Amendment
      attached as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
      three month period ended June 30, 2008 and is incorporated by
      reference.


11


**NOTE
      11** **3⁄4** **EMPLOYMENT
      AGREEMENTS**





On
      August
      4, 2008, the Company and Dr. Edward H. Bersoff, the Company’s Chairman,
      President and Chief Executive Officer, amended Dr. Bersoff’s employment
      agreement, extending his employment term as Chief Executive Officer through
      December 31, 2009. The Company originally entered into an employment agreement
      with Dr. Bersoff on March 19, 2007, who had been serving in that capacity since
      January 16, 2007.





On
      August
      7, 2008, the Company announced that George Troendle had been appointed the
      Chief
      Operating Officer of the Company effective August 11, 2008. Mr. Troendle
      submitted his resignation as a director of the Company on August 7, 2008 to
      be
      effective with his appointment as the Chief Operating Officer on August 11,
      2008. Mr. Troendle had served as a director since June 11, 2007. Mr. Troendle
      was the founder, Chief Executive Officer and a Director of Resource Consultants
      Inc. (“RCI”), a broadly diversified technology company, specializing in support
      of government agencies, particularly defense and homeland security.  In
      2005, RCI became part of Serco North America, a $500 million division of Serco
      Group, a $3.5 billion international services company specializing in government
      operations.  Mr. Troendle became President of Serco North America and
      served in that capacity until stepping down in 2006.  Prior to founding
      RCI, Mr. Troendle was one of three executives running a major division of
      Advanced Technology, Inc., a 300-employee technology company primarily
      supporting the Department of the Navy. Mr. Troendle graduated from Georgetown
      University with both an M.A. and B.A. in Economics.




On
      August
      7, 2008, Mr. Troendle entered into an employment agreement (the “Agreement”)
      with the Company effective August 11, 2008. The terms of the Agreement provide
      for a base salary of $300,000, with an annual performance bonus of up to 60%
      of
      base salary at target performance and health, life and disability insurance
      consistent with that of other Company executives.  The Agreement provides
      for 12 months’ severance in the case of his involuntary termination (other than
      upon a change in control) throughout the Agreement’s term which extends until
      December 31, 2010.  If Mr. Troendle is involuntarily terminated after his
      initial two-year term during the renewal period, then he would receive nine
      months’ severance pay equal to one month of his base salary. The severance
      payment would be calculated based on his then current annual base salary and
      a
      bonus component, as provided for in the Agreement.  In the event the
      Company is merged or purchased by a third party and the Company’s shareholders
      immediately prior to the transaction retain less than 50% of the surviving
      entity, and Mr. Troendle is terminated involuntarily by the acquiring entity
      or
      terminated voluntarily for “good reason,” then he would receive his then current
      base salary and target bonus for 12 months, whereas if he were to be terminated
      under the same circumstances during a renewal period he would receive nine
      months’ severance.




**NOTE
      12** **3⁄4** **SUBSEQUENT
      EVENTS**




On
      October 15, 2008, pursuant to the Amended and Restated Escrow Agreement dated
      October 19, 2005 and amended June 29, 2007, the Company agreed to release the
      escrowed shares held by the initial stockholders of Federal Services Acquisition
      Corporation (now operating as ATS Corporation) and the former members of FSAC
      Partners, LLC. The escrowed shares released are owned by the following
      individuals in the following share amounts:




**Individual**
            
            **Shares Released**Joel
                R. Jacks
            
            
            939,213Peter
                M. Schulte
            
            
            939,213Sary
                Awad
            
            
            85,021Daniel
                Colon, Jr.
            
            
            33,135Wesley
                Gaus
            
            
            177,138Erik
                Metviner
            
            
            19,743Edward
                H. Bersoff
            
            
            405,287Arthur
                L. Money
            
            
            26,250Total
                Shares Released
            
            
            2,625,000





Mr.
      Jacks, Bersoff, and Schulte are affiliates and as such, their shares are subject
      to Rule 144 trading restrictions.


12





**NOTE
      13** **3⁄4** **GOODWILL
      VALUATION**




Goodwill
      represents the excess of purchase price over the fair value of net assets
      acquired because of various business acquisitions. In accordance with SFAS
      No.
      142, “Goodwill and Other Intangible Assets,” goodwill must be recorded at the
      reporting unit level. Reporting units are defined as an operating segment.
      We
      have identified one reporting unit. SFAS No. 142 prohibits the amortization
      of
      goodwill, but requires that it be tested for impairment at least annually (at
      any time during the year, but at the same time each year), or more frequently
      if
      events or circumstances change, such as adverse changes in the business climate,
      that would more likely than not reduce the reporting unit’s fair value below its
      carrying amount.




The
      Company performed its annual impairment test in September in connection with
      the
      preparation and review of its financial statements to be included in this
      Quarterly Report on Form 10-Q. Based on an updated outlook for businesses
      acquired in 2007, we concluded that a non-cash charge for impairment was
      required. After consideration, we determined that a discounted cash flow
      analysis was the most appropriate valuation methodology to use in our analysis
      as it reflects ATSC’s unique business characteristics and forward earnings
      potential. We applied this analysis to the Company’s outlook and financial
      statements as of August 31, 2008. We concluded that the estimated fair value
      of
      the Company was less than its balance sheet carrying amount as of the valuation
      date by $56.8 million and recognized an impairment charge, of which $48.8
      million was related to goodwill and $8.0 million was related to intangible
      assets.




Intangible
      assets subject to amortization were evaluated as follows:





Assets
            
            Weighted-
              Average
              Amortiza-
              tion Period
            
            Carrying
              Amount as
              of
              August 31,
              2008
            
            Fair value
              as of
              August 31,
              2008
            
            Impairment
            
            Adjusted
              Carrying
              Amount as of
              August 31, 2008Customer-related
                intangible assets
            
            
            56
                mos.
            
            $
            16,186,953
            
            $
            8,235,000
            
            $
            (7,951,953
            )
            $
            8,235,000Marketing-related
                intangible assets
            
            
            41
                mos.
            
            
            477,589
            
            
            3,115,000
            
            
            
            
            
            477,589Technology-related
                intangible assets
            
            
            60
                mos.
            
            
            325,833
            
            
            3,488,000
            
            
            
            
            
            325,833Totals
            
            
            58
                mos.
            
            $
            16,990,375
            
            $
            14,838,000
            
            $
            (7,951,953
            )
            $
            9,038,422





In
      accordance with FAS 142, the marketing- and technology-related intangible asset
      basis were not adjusted because the fair values assigned to those assets were
      greater than the carrying amounts as of August 31, 2008. The customer-related
      intangibles were evaluated at a fair value less than the carrying amount as
      of
      August 31, 2008 and were adjusted to reflect their fair values. The resultant
      impairment is included in the impairment charge reflected on the Company’s
      income statements for the three and nine month periods ended September 30,
      2008.




As
      of
      September 30, 2008 and December 31, 2007, goodwill was $58.6 and $107.6 million,
      respectively. As of September 30, 2008 and December 31, 2007, our net basis
      in
      intangible assets was $8.9 and $21.4 million, respectively.




**NOTE
      14** **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. Other than possibly the
      below disclosure, 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
      are a
      defendant in *Maximus, Inc.
      vs. Advanced Technology Systems, Inc.* ,
      pending
      in the Connecticut Superior Court, Hartford District. The lawsuit asserts 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 seeks damages in excess of
      $3.5 million. The case was filed in August 2007.





We
      have
      filed our answer denying Maximus’ claims and have asserted counterclaims.
      Discovery has commenced and is currently scheduled to be completed in February
      2009. Trial is currently set for July 2010. Based on the claims asserted in
      the
      lawsuit, we have 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.
      Our indemnification demand is subject to the dispute resolution process provided
      for in the stock purchase agreement.


13





We
      have
      also asserted other claims against the principal former owners of ATSI based
      on
      the stock purchase agreement governing the transaction, and the former ATSI
      owners have asserted certain counterclaims against us. These claims are also
      subject to the dispute resolution process provided for in the stock purchase
      agreement.




The
      stock
      purchase agreement required three escrow accounts to be established at closing
      to cover potential working capital adjustments, general indemnification claims
      and the accounting method tax payments. The current balance in the three escrow
      accounts totals approximately $9.1 million. The proceeds of such escrow accounts
      shall be disbursed to the parties in accordance with the dispute resolution
      process provided for in the stock purchase agreement.




**NOTE
      15** **3⁄4** **CHANGE
      OF ADDRESS OF CORPORATE HEADQUARTERS**




On
      February 11, 2008, the Company executed a new lease, with West*Group Properties,
      LLC, at 7925 Jones Branch Drive, McLean, Virginia, with the intent of relocating
      its principal executive offices from 7915 Jones Branch Drive, McLean, Virginia.
      The details of this new lease and a copy thereof were filed as a part of a
      Form
      8-K dated February 11, 2008. On June 1, 2008, the Company officially relocated,
      in effect terminating the prior lease at the 7915 Jones Branch Drive
      location.




The
      new
      lease agreement included provisions for a build-out allowance of approximately
      $3,200,000. Of this amount, approximately $2,175,000 was used to prepare the
      building for occupancy and $1,025,000 was used to purchase additional capital
      assets, including a telephone system, for the Company’s use. In accordance with
      generally accepted accounting principles, these amounts have been capitalized
      and are being depreciated over their useful lives of 10 years.




In
      accordance with Financial Accounting Standards Board Technical Bulletin No.
      85-3, *Accounting
      for Operating Leases with Scheduled Rent Increases* ,
      the
      Company included amortization of the tenant improvement allowance in the rent
      expense. Additionally, in accordance with Financial Accounting Standards Board
      Technical Bulletin No. 88-1, *Issues
      Relating to Accounting for Leases* ,
      the
      Company classifies construction allowances on its Consolidated Balance Sheet
      as
      deferred rent. Construction allowances are presented within operating activities
      on our Consolidated Statements of Cash Flows as part of deferred
      rent.




**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;





·
            risks
                related to our business, including our dependence on contracts with
                U.S.
                Federal Government agencies and departments, 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 Securities
                and
                Exchange Commission.


14




Additional
      factors that may affect our results are discussed in our Annual Report on
      Form 10-K for the year ended December 31, 2007 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**





ATS
      Corporation was organized as a “blank check” company under the laws of the State
      of Delaware on April 12, 2005 and was formed for the purpose of acquiring,
      through a merger, capital stock exchange, asset acquisition, stock purchase
      or
      other similar business combination, an operating business in the federal
      services and defense industries. ATSC acquired four companies in 2007. Their
      results are included in the results of operations for 2007 from the dates of
      acquisition. Calendar year 2008 is the first full year that ATSC is an operating
      company with the acquisitions fully integrated into its operations.





ATSC
      (www.atsva.com) is an information technology services firm serving both the
      government and commercial organizations, specializing in software and systems
      development, systems integration, information technology infrastructure and
      outsourcing, information sharing and consulting services.





Our
      diverse customer base consists primarily of U.S. government agencies. For the
      quarter ended September 30, 2008, we generated approximately 38% of our revenue
      from federal civilian agencies, 39% from defense and homeland security agencies,
      22% from commercial customers, including government-sponsored enterprises,
      and
      1% from state and local customers.
      Our largest clients in the quarter ended September 30, 2008 were the U.S.
      Department of Housing and Urban Development
      (“HUD”), the U.S. Coast Guard, and Fannie Mae, representing approximately 16%,
      11% and 10%, respectively, of total revenue.





We
      derive
      substantially all of our revenues from fees for consulting services. We generate
      these fees from contracts with various payment arrangements, including time
      and
      materials contracts and fixed-price contracts. During the nine months ended
      September 30, 2008, revenue from time and materials and fixed-price
      contracts were approximately 66% and 34% respectively, of total revenue. We
      typically issue monthly invoices to our clients for services rendered. 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, we recognize
      revenue on a straight-line basis over the term of the contract. We recognize
      revenue from cost-type contracts to the extent of costs incurred plus a
      proportionate amount of the fee earned.





On
      occasion, we enter into contracts that include the delivery of a combination
      of
      two or more of our service offerings. Typically, such multiple-element
      arrangements incorporate the design, development, or modification of systems
      and
      an ongoing obligation to manage, staff, maintain, host, or otherwise run
      solutions and systems provided to the client. Such contracts are divided into
      separate units of accounting, and the total arrangement fee is allocated to
      each
      unit based on its relative fair value. In accordance with our revenue
      recognition policy, revenue is recognized separately for each element. If
      evidence of the fair value of each element does not exist, all revenue must
      be
      deferred until such evidence exists, or all elements have been delivered, or
      evidence of fair value exists for the undelivered elements.





The
      fees
      under certain government contracts may be increased or decreased in accordance
      with cost or performance incentive provisions that measure actual performance
      against targets or other criteria. Such incentive fee awards or penalties are
      included in revenue at the time the amounts can be reasonably determined.
      Provisions for anticipated contract losses are recognized at the time they
      become known.





In
      the
      nine months ended September 30, 2008, we derived approximately 22% of our
      revenue through relationships with prime contractors, who contract directly
      with
      the end-client and subcontract with us.


15


Our
      most
      significant expense is direct cost, 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, 2008, we had 636 personnel that 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, depreciation and amortization, travel and all other corporate
      costs.





**Goodwill
      Valuation**




Goodwill
      represents the excess of purchase price over the fair value of net assets
      acquired because of various business acquisitions. In accordance with SFAS
      No.
      142, “Goodwill and Other Intangible Assets,” goodwill must be recorded at the
      reporting unit level. Reporting units are defined as an operating segment.
      We
      have identified one reporting unit. SFAS No. 142 prohibits the amortization
      of
      goodwill, but requires that it be tested for impairment at least annually (at
      any time during the year, but at the same time each year), or more frequently
      if
      events or circumstances change, such as adverse changes in the business climate,
      that would more likely than not reduce the reporting unit’s fair value below its
      carrying amount.




The
      Company performed its annual impairment test in September in connection with
      the
      preparation and review of its financial statements to be included in this
      Quarterly Report on Form 10-Q. Based on an updated outlook for businesses
      acquired in 2007, we concluded that a non-cash charge for impairment was
      required. After consideration, we determined that a discounted cash flow
      analysis was the most appropriate valuation methodology to use in our analysis
      as it reflects ATSC’s unique business characteristics and forward earnings
      potential. We applied this analysis to the Company’s outlook and financial
      statements as of August 31, 2008. We concluded that the estimated fair value
      of
      the Company was less than its balance sheet carrying amount as of the valuation
      date by $56.8 million and recognized an impairment charge, of which $48.8
      million was related to goodwill and $8.0 million was related to intangible
      assets.




Intangible
      assets subject to amortization were evaluated as follows:





Assets
            
            Weighted-
              Average
              Amortiza-
              tion
                Period
            
            Carrying
              Amount
                as of
              August
                31,
              2008
            
            Fair
                value
              as
                of
              August
                31,
              2008
            
            Impairment
            
            Adjusted
              Carrying
              Amount as of
              August 31, 2008Customer-related
                intangible assets
            
            
            56
                mos.
            
            $
            16,186,953
            
            $
            8,235,000
            
            $
            (7,951,953
            )
            $
            8,235,000Marketing-related
                intangible assets
            
            
            41
                mos.
            
            
            477,589
            
            
            3,115,000
            
            
            
            
            
            477,589Technology-related
                intangible assets
            
            
            60
                mos.
            
            
            325,833
            
            
            3,488,000
            
            
            
            
            
            325,833Totals
            
            
            58
                mos.
            
            $
            16,990,375
            
            $
            14,838,000
            
            $
            (7,951,953
            )
            $
            9,038,422





In
      accordance with FAS 142, the marketing- and technology-related intangible asset
      basis were not adjusted because the fair values assigned to those assets were
      greater than the carrying amounts as of August 31, 2008. The customer-related
      intangibles were evaluated at a fair value less than the carrying amount as
      of
      August 31, 2008 and were adjusted to reflect their fair values. The resultant
      impairment is included in the impairment charge reflected on the Company’s
      income statements for the three and nine month periods ended September 30,
      2008.




As
      of
      September 30, 2008 and December 31, 2007, goodwill was $58.6 and $107.6 million,
      respectively. As of September 30, 2008 and December 31, 2007, our net basis
      in
      intangible assets was $8.9 and $21.4 million, respectively.


16


**Contract
      Backlog**





We
      define
      backlog as the future revenue we expect to receive from our existing contracts
      and other current 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. Our backlog as of September 30, 2008, was approximately $208.3 million,
      of which $54.6 million was funded.





**Recent
      Events**





**Warrant
      Exchange Offer**





On
      April 8, 2008, we announced an offer to holders of all 36,380,195
      outstanding, publicly-traded warrants, that would permit the exercise of the
      warrants on amended terms, for a limited time. The offer modified the terms
      of
      the warrants to allow holders to receive one share of common stock for every
      12.5 warrants surrendered, without paying a cash exercise price. In addition,
      for each 10 warrants a holder tendered in the cashless exercise, the holder
      could also exercise one additional warrant by paying a reduced cash exercise
      price of $2.25 for one share of common stock.





The
      offer
      commenced on April 8, 2008, and was extended through May 16, 2008.
      Under the tender offer, a total of 33,400,020 warrants were exercised
      (approximately 92% of the 36,380,195 publicly traded warrants issued in the
      initial public offering of our predecessor, Federal Services Acquisition
      Corporation. This consisted of 33,073,703 warrants tendered for cashless
      exercise in exchange for 2,645,887 shares of common stock (on the basis of
      12.5
      warrants for one share of common stock), and 326,317 warrants exercised by
      payment of a reduced cash price of $2.25 per share. As a result of the exercise
      of warrants, 2,972,204 new shares of common stock were issued. Proceeds received
      by the Company were $734,192 and expenses were $499,715. The warrants that
      were
      not exercised during the tender offer had their original terms reinstituted
      and
      will expire on October 19, 2009, unless earlier exercised in accordance with
      their original terms.





**Change
      Of Address Of Corporate Headquarters**




On
      February 11, 2008, the Company executed a new lease, with West*Group Properties,
      LLC, at 7925 Jones Branch Drive, McLean, Virginia, with the intent of relocating
      its principal executive offices from 7915 Jones Branch Drive, McLean, Virginia.
      The details of this new lease and a copy thereof were filed as a part of a
      Form
      8-K dated February 11, 2008. On June 1, 2008, the Company officially relocated,
      in effect terminating the prior lease at the 7915 Jones Branch Drive
      location.




The
      new
      lease agreement included provisions for a build-out allowance of approximately
      $3,200,000. Of this amount, approximately $2,175,000 was used to prepare the
      building for occupancy and $1,025,000 was used to purchase additional capital
      assets, including a telephone system, for the Company’s use. In accordance with
      generally accepted accounting principles, these amounts have been capitalized
      and are being depreciated over their useful lives of 10 years.




In
      accordance with Financial Accounting Standards Board Technical Bulletin No.
      85-3, *Accounting
      for Operating Leases with Scheduled Rent Increases* ,
      the
      Company included amortization of the tenant improvement allowance in the rent
      expense. Additionally, in accordance with Financial Accounting Standards Board
      Technical Bulletin No. 88-1, *Issues
      Relating to Accounting for Leases* ,
      the
      Company classifies construction allowances on its Consolidated Balance Sheet
      as
      deferred rent. Construction allowances are presented within operating activities
      on our Consolidated Statements of Cash Flows as part of deferred
      rent.




17




**Results
      of Operations (unaudited)**





Results
      of operations for the three and nine months ended September 30, 2008 compared
      with the three and nine months ended September 30, 2007 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 Ended****September 30,**
              
              
              
              **September 30,**
              
              
              
              **September 30,**
              
              
              
              **September 30,****2008**
              
              **%**
              
              **2007**
              
              **%**
              
              **2008**
              
              **%**
              
              **2007**
              
              **%****Revenue**
              
              $
              32,032,605
              
              
              
              
              $
              25,646,747
              
              
              
              
              $
              100,694,902
              
              
              
              
              $
              75,372,148**Operating
                  costs and expenses**Direct
                  costs
              
              
              22,551,682
              
              
              70.4
              %
              
              17,753,224
              
              
              69.2
              %
              
              67,785,098
              
              
              67.3
              %
              
              52,922,818
              
              
              70.2
              %Selling,
                  general and administrative expenses
              
              
              7,007,507
              
              
              21.9
              %
              
              5,850,756
              
              
              22.8
              %
              
              24,222,018
              
              
              24.1
              %
              
              18,006,631
              
              
              23.9
              %Depreciation
                  and amortization
              
              
              1,505,705
              
              
              4.7
              %
              
              1,332,257
              
              
              5.2
              %
              
              5,582,615
              
              
              5.5
              %
              
              3,336,297
              
              
              4.4
              %Impairment
                  Charge
              
              
              56,772,541
              
              
              177.2
              %
              
              —
              
              
              
              
              
              56,772,541
              
              
              56.4
              %
              
              —**Total
                  operating costs and expenses**
              
              
              87,837,435
              
              
              274.2
              %
              
              24,936,237
              
              
              97.2
              %
              
              154,362,272
              
              
              153.3
              %
              
              74,265,746
              
              
              98.5
              %**Operating
                  (loss) income**
              
              
              (55,804,830
              )
              
              (174.2
              )%
              
              710,510
              
              
              2.8
              %
              
              (53,667,370
              )
              
              (53.3
              )%
              
              1,106,402
              
              
              1.5
              %**Other
                  (expense) income**Interest
                  income (expense), net
              
              
              (896,913
              )
              
              (2.8
              )%
              
              (124,571
              )
              
              (0.5
              )%
              
              (2,646,049
              )
              
              (2.6
              )%
              
              26,417
              
              
              0.0
              %Loss
                  on warrant liabilities
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (6,930,000
              )
              
              (9.2
              )%Other
                  (expense) income
              
              
              (13,458
              )
              
              (0.0
              )%
              
              93
              
              
              0.0
              
              
              52,714
              
              
              0.1
              %
              
              9,847
              
              
              0.0
              %**Income
                  (loss) before income taxes**
              
              
              (56,715,201
              )
              
              (177.1
              )%
              
              586,032
              
              
              2.3
              %
              
              (56,260,705
              )
              
              (55.9
              )%
              
              (5,787,334
              )
              
              (7.7
              )%**Income
                  tax (benefit) expense**
              
              
              (5,759,836
              )
              
              (18.0
              )%
              
              232,827
              
              
              0.9
              %
              
              (5,647,221
              )
              
              (5.6
              )%
              
              506,999
              
              
              0.7
              %**Net
                  Income (loss)**
              
              $
              (50,955,365
              )
              
              (159.1
              )%
              $
              353,205
              
              
              1.4
              %
              $
              (50,613,484
              )
              
              (50.3
              )%
              $
              (6,294,333
              )
              
              (8.4
              )%**Weighted
                  average number of shares outstanding****—basic**
              
              
              22,381,860
              
              
              
              
              
              18,194,081
              
              
              
              
              
              20,825,206
              
              
              
              
              
              18,870,815**—diluted**
              
              
              22,381,860
              
              
              
              
              
              18,499,615
              
              
              
              
              
              20,825,206
              
              
              
              
              
              18,870,815**Net
                  income (loss) per share****—basic**
              
              $
              (2.28
              )
              
              
              
              $
              0.02
              
              
              
              
              $
              (2.43
              )
              
              
              
              $
              (0.33
              )**—diluted**
              
              $
              (2.28
              )
              
              
              
              $
              0.02
              
              
              
              
              $
              (2.43
              )
              
              
              
              $
              (0.33
              )





**Comparison
      of the three months ended September 30, 2008 to the three months ended September
      30, 2007.**





***Revenue*** -
      Revenue increased by $6.4 million, or 24.9%, to $32 million for the three months
      ended September 30, 2008. Comparisons to prior periods are strongly affected
      by
      the acquisitions in 2007, which added to our revenue base. Revenue from
      commercial contracts increased slightly by $0.2 million to $6.3 million, or
      3%.
      Revenue from the civilian and defense customers increased $6.2 million to $25.7
      million, or 24.1%. We experienced growth with existing customers such as the
      Department of Housing and Urban Development and the Department of Education,
      as
      well as new sources such as the U.S. Coast Guard ($2.9 million), Headquarters
      Air Force ($1.5 million), the Nuclear Regulatory Commission ($0.6 million)
      and
      the National Cancer Institute ($0.7 million).


18





***Direct
      costs -*** Direct
      costs were 70.4% and 69.2% of revenue for the three month periods ended
      September 30, 2008 and 2007 respectively, an increase of 1.2%. Direct costs
      are
      comprised of direct labor, fringe on this labor, subcontract labor costs and
      material and other direct costs (“ODCs”). Material and ODCs are incurred in
      response to specific client tasks and may vary from period to period. The single
      largest component of direct costs, direct labor, was $10.5 million and $8.1
      million for the three month periods ended September 30, 2008 and 2007,
      respectively. Overall margins for the third quarter 2008 decreased 1.2% from
      2007 to 29.6% from 30.8% primarily due to increased loss provisions during
      the
      three month period ended September 30, 2008 on two fixed price contracts: a
      commercial contract ending during the three month period ending December 31,
      2008 and one contract with a local government scheduled to end during the year
      ending December 31, 2009.





***Selling,
      general and administrative (“SG&A”) expenses -*** Components
      of SG&A are marketing, bid and proposal costs, indirect labor and the
      associated fringe benefits, facilities costs and other discretionary expenses.
      As a percentage of revenue, SG&A expenses were 21.9% and 22.8% for the three
      month periods ended September 30, 2008 and 2007, respectively. Reduced spending
      on legal and accounting fees, as well as a reduction in indirect labor costs,
      have contributed to this improvement. Costs are higher overall due primarily
      to
      the increased volume of business in the three month period ended September
      30,
      2008. Higher costs are also partly attributable to approximately $0.9 million
      in
      severance expenses accrued in connection with the termination of three senior
      executives. Operating costs for 2008 remained consistent with expenses for
      the
      three month period ended September 30, 2007.





***Depreciation
      and amortization -*** Depreciation
      and amortization expense decreased to 4.7% of revenue for the three months
      ended
      September 30, 2008 compared to 5.2% for the three month period ended September
      30, 2007. This was directly related to amortization decreases in September
      2008
      resulting from the intangible asset impairment valuation taken during the three
      month period ended September 30, 2008.





***Impairment
      charge -*** Based
      on
      an analysis of the Company’s discounted cash flow, management concluded that the
      estimated fair value of the Company was less than its balance sheet carrying
      amount as of August 31, 2008 by $56.8 million and recognized an impairment
      charge, of which $48.8 million was related to goodwill and $8.0 million was
      related to intangible assets. (See the detailed discussion at Goodwill
      Valuation).





***Interest,
      net -*** The
      net
      increase in interest expense is $0.8 million for the three month period ended
      September 30, 2008 compared with the three month period ended September 30,
      2007. This is a result of borrowings to finance acquisitions made in 2007 and
      interest on notes with the former owners of the acquired companies.





***Income
      taxes*** - For
      the three months ended September 30, 2008, the Company reported an income
      benefit of $5.8 million and for the three month period ended September 30,
      2007,
      the Company reported income tax expense of $0.2 million. The income tax credit
      for the three month period ended September 30, 2008 is primarily due to the
      income tax benefit associated with the goodwill and intangible asset impairment
      charge. The effective tax rates were 10.2% and 39.7% for the three month periods
      ended September 30, 2008 and 2007, respectively. The impairment charge had
      a
      significant impact on the effective tax rate due to the $41.1 million adjustment
      to goodwill that does not have an associated tax-basis resulting in a permanent
      book-to-tax difference.





**Comparison
      of the nine months ended September 30, 2008 to the nine months ended September
      30, 2007.**





***Revenue*** -
      Revenue increased by $25.3 million, or 33.6%, to $100.7 million for the nine
      months ended September 30, 2008. Comparisons to prior periods are strongly
      affected by the acquisitions in 2007, which added to our revenue base. Revenue
      from commercial contracts increased $3.2 million to $21.9 million, or 17%.
      This
      increase was driven primarily by increased revenue from existing customers,
      as
      well as new sources such as IBM, CareFirst and Blue Cross Blue Shield. Revenue
      from civilian and defense customers increased $22.1 million to $78.8 million,
      or
      39.1%. Growth with existing customers such as the Department of Housing and
      Urban Development and the Department of Education combined with revenue from
      new
      sources such as the U.S. Coast Guard ($10.0 million), Headquarters Air Force
      ($4.2 million), the Nuclear Regulatory Commission ($1.9 million) and the
      National Cancer Institute ($2.1 million).


19





***Direct
      costs -*** Direct
      costs were 67.3% and 70.2% of revenue for the nine month periods ended September
      30, 2008 and 2007, respectively, an improvement of 2.9%. Direct costs are
      comprised of direct labor, fringe on this labor, subcontract labor costs and
      material and other direct costs (“ODCs”). Material and ODCs are incurred in
      response to specific client tasks and may vary from period to period. The single
      largest component of direct costs, direct labor, was $33.0 million and $16.7
      million for the nine month periods ended September 30, 2008 and 2007,
      respectively. Overall margins for the first nine months ended September 30,
      2008
      improved 2.9% over 2007 to 32.7% from 29.8% This is attributable to higher
      margins associated with several HUD contracts having successfully transitioned
      from the lower-margin development phase to the higher-margin on-going
      maintenance and support phase. Higher margins in the defense division, 36.9%
      in
      2008 versus 30.0% in 2007, are also driving this margin improvement. Much of
      this increase is due to a higher percentage of business with the U.S. Coast
      Guard which had higher margins.





***Selling,
      general and administrative (“SG&A”) expenses -*** Components
      of SG&A are marketing, bid and proposal costs, indirect labor and the
      associated fringe benefits, facilities costs and other discretionary expenses.
      As a percentage of revenue, SG&A expenses were 24.1% and 23.9% for the
      periods ended September 30, 2008 and 2007, respectively. This increase was
      primarily driven by an enhanced business development function needed to address
      the expanded markets presented by the acquisitions made in 2007. Higher costs
      are also partly attributable to approximately $0.9 million in severance expenses
      accrued in connection with the termination of three senior executives.
      Non-severance costs remained consistent with expenses for the nine month period
      ended September 30, 2007.





***Depreciation
      and amortization -*** Amortization
      expenses increased to 5.5% of revenue for the nine months ended September 30,
      2008 compared to 4.4% for the nine month period ended September 30, 2007. This
      was directly related to additional intangible amortization expense associated
      with acquisitions in August and November of 2007 of the Potomac Management
      Group
      and Number Six Software. In future periods, this percentage should decline
      in
      relation to revenue due to the impairment entry taken during the current
      period.





***Impairment
      charge -*** Based
      on
      an analysis of the Company’s discounted cash flow, management concluded that the
      estimated fair value of the Company was less than its balance sheet carrying
      amount as of August 31, 2008 by $56.8 million and recognized an impairment
      charge of which $48.8 million was related to goodwill and $8.0 million was
      related to intangible assets. (See the detailed discussion at Goodwill
      Valuation).





***Interest,
      net -*** The
      net
      change in interest (expense) income was $2.6 million for the nine months ended
      September 30, 2008 compared with the nine months ended September 30, 2007.
      This
      is a result of borrowings to finance acquisitions made in 2007, as well as
      interest on notes with the former owners of the acquired companies.





***Income
      taxes*** - For
      the nine months ended September 30, 2008, the Company reported an income tax
      benefit of $5.6 million and for the nine months ended September 30, 2007, the
      Company reported income tax expense of $0.5 million. The variation in income
      tax
      expense was primarily due to the tax effect of the impairment to goodwill and
      intangible assets taken in the current period. The effective tax rates were
      10.0% and (8.8)% for the nine month periods ended September 30, 2008 and 2007,
      respectively. The impairment charge had a significant impact on the effective
      tax rate for the nine month period ended September 30, 2008 due to the $41.1
      million adjustment to goodwill that does not have an associated tax-basis
      resulting in a permanent book-to-tax difference. The loss on warrant liabilities
      had a significant impact on the effective tax rate for the nine month period
      ended September 30, 2007 because the loss was not deductible for tax purposes
      resulting in a permanent book-to-tax difference.





**Financial
      Condition, Liquidity and Capital Resources**





**Financial
      Condition.** Total
      assets decreased to $109 million as of September 30, 2008 compared to $169
      million as of December 31, 2007. This decrease was primarily driven by the
      impairment of goodwill and intangible assets. Additionally, other components
      of
      total assets changed significantly; income taxes receivable decreased by $1.0
      million,
      deferred income tax assets increased by $1.6 million,and property
      and equipment increased by $2.3 million due primarily to assets from the
      build-out of the Company’s new headquarters space.





Our
      total
      liabilities showed a decrease of $10.5 million to $63.2 million as of September
      30, 2008 from $73.7 million as of December 31, 2007. Significant changes
      within total liabilities were: a decrease to the revolving credit facility
      of
      $8.0 million due to favorable cash collections, an increase in deferred rent
      expense of $3.1 million, increases in accounts payable and accrued expenses
      of
      $1.4 million, and decreases in taxes payable and deferred taxes of $6.5
      million.


20





**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
      $50
      million line of credit facility. As of September 30, 2008, we had an outstanding
      balance of $35.8 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 decline, thus reducing the outstanding
      balance on the credit facility. The credit facility is considered adequate
      to
      meet the operations liquidity and capital requirements.





Net
      cash
      generated by operating activities was $5.3 million for the nine months ended
      September 30, 2008. Cash generated by operating activities was primarily driven
      by ongoing operations, which were utilized to pay down the balance on our line
      of credit facility as discussed above.





Net
      cash
      generated by investing activities was less than $0.1 million for the nine months
      ended September 30, 2008.





Net
      cash
      used in financing activities was $7.1 million for the nine months ended
      September 30, 2008. The cash was 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.





On
      May 12, 2008, ATSC and its lenders amended the terms of the Company’s
      credit agreement, effective March 31, 2008. The facility is a three-year,
      secured facility that permits continuously renewable borrowings of up to $50.0
      million, with an expiration date of June 4, 2010. The interest rate is
      based on LIBOR plus the applicable rate ranging from 200 to 350 basis points
      depending on the Company’s consolidated leverage ratio. The Company pays a fee
      in the amount of .20% to .375% on the unused portion of the facility, based
      on
      its consolidated leverage ratio, as defined in the agreement. Any outstanding
      balances under the facility are due on the expiration date. The amended
      agreement places certain restrictions on the Company’s ability to make
      acquisitions. It also requires the Company to reduce the principal amount on
      its
      loan outstanding by between 50% to 100% of the net cash proceeds from the sale
      or issuance of equity interests, other than the warrant exercise program
      completed during the second quarter.





**Off-Balance
      Sheet Arrangements**





For
      the
      nine months ended September 30, 2008, we did not have any off-balance sheet
      arrangements.





**Contractual
      Obligations**





The
      following table summarizes our contractual obligations as of September 30,
      2008
      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
            
            $
            2,583
            
            $
            38,407
            
            $
            —
            
            $
            —
            
            $
            40,990Capital
                Leases
            
            
            85
            
            
            23
            
            
            —
            
            
            —
            
            
            108Operating
                Leases
            
            
            2,500
            
            
            3,994
            
            
            3,512
            
            
            8,897
            
            
            18,903Total
            
            $
            5,168
            
            $
            42,424
            
            $
            3,512
            
            $
            8,897
            
            $
            60,001




21





**Recent
      Accounting Pronouncements**





**Adoption
      of New Accounting Standards** .
      In
      September 2006, the FASB issued “SFAS” No. 157, *Fair
      Value Measurements* (“SFAS
      No. 157”). SFAS No. 157 defines fair value, establishes a framework
      for measuring fair value in generally accepted accounting principles and expands
      disclosures about fair value measurements. Specifically, this Statement sets
      forth a definition of fair value, and establishes a hierarchy prioritizing
      the
      inputs to valuation techniques, giving the highest priority to quoted prices
      in
      active markets for identical assets and liabilities and the lowest priority
      to
      unobservable inputs. The provisions of SFAS No. 157 are generally required
      to be applied on a prospective basis, except to certain financial instruments
      accounted for under SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* ,
      for
      which the provisions of SFAS No. 157 should be applied retrospectively. In
      February 2008, the FASB issued Staff Position FAS 157-2, *Effective
      Date of FASB Statement No. 157* ,
      which
      defers the implementation for the non-recurring nonfinancial assets and
      liabilities from fiscal years beginning after November 15, 2007 to fiscal
      years beginning after November 15, 2008. The disclosure requirements of
      SFAS No. 157 which took effect on January 1, 2008 are presented in
      Note 4 to the September 30, 2008 interim financial statements. On
      January 1, 2009, the Company will implement the previously-deferred
      provisions of SFAS No. 157 for nonfinancial assets and liabilities recorded
      at fair value as required. The Company does not believe that the remaining
      provisions will have a material effect on the Company’s consolidated financial
      position or results of operations when they become effective.





In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities—Including an
      amendment of FASB Statement No. 115* (“SFAS
      No. 159”). SFAS No. 159 permits an entity, at specified election
      dates, to choose to measure certain financial instruments and other items at
      fair value. The objective of SFAS No. 159 is to provide entities with the
      opportunity to mitigate volatility in reported earnings caused by measuring
      related assets and liabilities differently, without having to apply complex
      hedge accounting provisions. The adoption of SFAS No. 159 effective
      January 1, 2008 did not have a material impact on our consolidated
      financial statements. The Company did not elect the fair value measurement
      option for any of our existing financial instruments.





**Standards
      Issued But Not Yet Effective.** In
      December 2007, the FASB issued SFAS No. 141(R)— *Business
      Combinations* (“SFAS
      No. 141(R)”). SFAS No. 141(R) will replace FASB Statement
      No. 141— *Business
      Combinations* .
      The new
      statement retains the fundamental requirements that the acquisition (or
      purchase) method of accounting be used for all business
      combinations and expands the definition of a business, thus increasing the
      number of transactions which may qualify as business combinations. Contingent
      consideration will be measured at fair value at the acquisition date, with
      changes in fair value recognized in earnings, and transaction-related expenses
      and restructuring costs will be expensed as incurred. Changes in acquired tax
      contingencies will be recognized in earnings if outside the purchase price
      allocation period (generally one year or less). Adjustments to finalize purchase
      price allocations will be shown as revised in future financial statements to
      reflect the adjustments as if they had been recorded on the acquisition date.
      Also, in the event of a bargain purchase (acquisition of a business at below
      fair market value of net assets acquired) a gain could be recognized, or in
      the
      event of a change in control of an existing investment a gain or loss could
      be
      recognized. SFAS No. 141(R) will be applied prospectively to business
      acquisitions with acquisition dates on or after January 1, 2009. There is
      no current impact as SFAS No. 141(R) is not applicable until January
      1, 2009.





In
      December 2007, the FASB issued SFAS No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements-An Amendment of ARB No. 51* (“SFAS No.
      160”). SFAS No. 160 establishes new accounting and reporting standards for
      the non-controlling interest in a subsidiary and for the deconsolidation of
      a
      subsidiary. SFAS No. 160 is effective for fiscal years beginning
      on or after December 15, 2008 and early adoption is prohibited. Adoption of
      this statement is not expected to have a material impact on the Company’s
      consolidated financial position or results of operations when it becomes
      effective in 2009, but may significantly affect the accounting for
      noncontrolling (or minority) interests from that date forward. The Company
      does
      not have any noncontrolling (or minority) interests.





In
      March 2008, the Financial Accounting Standards Board (FASB) issued
      Statement of Financial Accounting Standards (SFAS) No. 161, *Disclosure
      about Derivative Instruments and Hedging Activities - An Amendment of FASB
      Statement No. 133* (“SFAS
      No. 161”).  SFAS No. 161 requires more disclosures about an
      entity’s derivative and hedging activities in order to improve the transparency
      of financial reporting.  SFAS No. 161 is effective for financial
      statements issued for fiscal years and interim periods beginning after
      November 15, 2008, with early application encouraged.  This
      Statement encourages, but does not require, comparative disclosures for earlier
      periods at initial adoption.  The Company will adopt the provisions of
      SFAS No. 161 on January 1, 2009, which is not expected to have a
      material impact on the Company’s consolidated financial
      statements.


22





**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 a portion of our borrowings under our credit
      facility. As of September 30, 2008, we had an outstanding balance of $35.8
      million under our variable interest rate line of credit. In November 2007,
      we hedged the interest rate risk on $35 million of this debt by executing an
      interest rate swap as discussed in Note 4 of the financial
      statements.





**Item
      4. Controls and Procedures.**





Our
      management performed an assessment, under the supervision and with the
      participation of our Chief Executive Officer (principal executive officer)
      and
      our Chief Financial Officer (principal financial officer), of the effectiveness
      of the design and operation of our disclosure controls and procedures (as
      defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange
      Act of 1934, as amended) as of September 30, 2008 and have concluded that these
      controls and procedures are effective to ensure that information required to
      be
      disclosed by the Company is recorded, processed, summarized, and reported within
      the time periods specified in the Securities and Exchange Commission’s (the
“SEC”) rules and forms. The forms of certification are required in
      accordance with Section 302 of the Sarbanes - Oxley Act of
      2002.





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
      Securities Exchange Act of 1934, 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 three months ended September 30, 2008, no change 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.





**PART II
      — OTHER INFORMATION**





**Item
      1. Legal Proceedings.**





From
      time
      to time, we are involved in various legal matters and proceedings concerning
      matters arising in the ordinary course of business. Other than possibly the
      below disclosure, 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
      are a
      defendant in *Maximus, Inc.
      vs. Advanced Technology Systems, Inc.* ,
      pending
      in the Connecticut Superior Court, Hartford District. The lawsuit asserts 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 seeks damages in excess of
      $3.5 million. The case was filed in August 2007.





We
      have
      filed our answer denying Maximus’ claims and have asserted counterclaims.
      Discovery has commenced and is currently scheduled to be completed in February
      2009. Trial is currently set for July 2010. Based on the claims asserted in
      the
      lawsuit, we have 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.
      Our indemnification demand is subject to the dispute resolution process provided
      for in the stock purchase agreement.





We
      have
      also asserted other claims against the principal former owners of ATSI based
      on
      the stock purchase agreement governing the transaction, and the former ATSI
      owners have asserted certain counterclaims against us. These claims are also
      subject to the dispute resolution process provided for in the stock purchase
      agreement.





The
      stock
      purchase agreement required three escrow accounts to be established at closing
      to cover potential working capital adjustments, general indemnification claims
      and the accounting method tax payments. The current balance in the three escrow
      accounts totals approximately $9.1 million. The proceeds of such escrow accounts
      shall be disbursed to the parties in accordance with the dispute resolution
      process provided for in the stock purchase agreement.


23





**Item
      1A. Risk Factors.**




See
      Part
      I, Item 1A, “Risk Factors,” of the Company’s 2007 Form 10-K for a detailed
      discussion of the risk factors affecting the Company. The information below
      provides updates to the previously disclosed risk factors and should be read
      in
      conjunction with the risk factors and information disclosed in the 2007 Form
      10-K.




***As
      a result of our acquisitions, we have substantial amounts of goodwill and
      intangible assets, and changes in future business conditions could cause these
      assets to become impaired, requiring substantial write-downs that would
      adversely affect our financial results.***




Our
      acquisitions involved purchase prices well in excess of tangible asset values,
      resulting in the creation of a significant amount of goodwill and other
      intangible assets. As of December 31, 2007, goodwill and other intangible assets
      accounted for approximately $107.6 million and $21.4 million, or approximately
      63.7% and 12.7%, respectively, of our total assets. We plan to continue
      acquiring businesses if and when opportunities arise, further increasing our
      goodwill and intangible asset amounts. To the extent that we determine that
      assets have been impaired, we will write down the carrying value on our balance
      sheet and book an impairment charge in our statement of operations. For example,
      as a part of the Company’s annual impairment test in September of 2008 in
      connection with the preparation and review of its financial statements to be
      included in the Company’s Form 10-Q for the quarter ended September 30, 2008,
      the Company determined that a non-cash charge for impairment was required,
      and
      the Company recognized an impairment charge of $56.8 million.




We
      amortize finite lived intangible assets over their estimated useful lives,
      and
      also review them for impairment. If, as a result of acquisitions or otherwise,
      the amount of intangible assets being amortized increases, so will our
      amortization charges in future periods.





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





The
      Company did not repurchase any equity securities this period.





**Recent
      Sales of Unregistered Securities**





In
      the
      quarter ended September 30, 2008, the Company granted a total of 40,000
      restricted shares valued at approximately $72,000 to Jack Tomarchio, who joined
      the Board of Directors on August 18, 2008. The issuances of these shares are
      exempt under Section 4(2) of the Securities Act of 1933, as
      amended.





**Item
      3.  Defaults upon Senior Securities.**





Not
      applicable.





**Item
      4.  Submission of Matters to a Vote of Security Holders.**





None.




**Item
      5.  Other Information.**





None.


24





**Item
      6.  Exhibits.**





**Exhibit**
              **Number**
            
            **Description**10.1
            
            Employment
                Agreement for Edward H. Bersoff10.2
            
            Employment
                Agreement for George Troendle31.1
            
            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




25





**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 andChief
                Executive OfficerBy:
            /s/
                Pamela A. LittleChief
                Financial OfficerDate:
                November 7, 2008




26