**FORM 10-Q**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C. 20549**
| **x** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------|

 

**For thequarterly period ended June 30, 2007**

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

 

**For thetransition period from            to            **

**Commissionfile number 0-23585.**

**SM&A**

(Exact name of registrant as specified in its charter)

| **Delaware**                                                             |   | **33-0080929**                        |
|--------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization)          |   | (I.R.S. Employer  Identification No.) |
|                                                                     |   |                                  |
| **4695  MacArthur Court, 8****th Floor, Newport Beach, California** |   | **92660**                             |
| (Address of  principal executive offices)                                |   | (Zip Code)                            |

 

**(949) 975-1550**

(Registrant’s telephone number, including area code)

**Not applicable**

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

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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 registrantis a large accelerated filer, an accelerated filer, or a non-acceleratedfiler.  See definition of acceleratedfiler and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o     Acceleratedfiler x     Non-acceleratedfiler o

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

Yes o     No x

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date:

**Common Stock, $0.0001 par value—18,833,904 shares outstanding as ofJune 30, 2007**

 

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**SM&A**

**INDEX**
|                                    | ** **                                                                                                         | **Page**   |
|------------------------------------|--------------------------------------------------------------------------------------------------------------------|------------|
| ** **                         | ** **                                                                                                         | ** ** |
| **PART I.  FINANCIAL INFORMATION** | ** **                                                                                                         |
|                               |                                                                                                               |       |
|                               | Cautionary Statement Related to Forward Looking Statements                                                         | 3          |
|                               |                                                                                                               |       |
|                               | How to Obtain SM&A SEC Filings                                                                                 | 3          |
|                               |                                                                                                               |       |
| Item 1.                            | Financial Statements:                                                                                              |       |
|                               | Condensed Consolidated Balance Sheets as of June 30,  2007 (unaudited) and December 31, 2006                       | 4          |
|                               | Condensed Consolidated Statements of Income for the  three and six months ended June 30, 2007 and 2006 (unaudited) | 5          |
|                               | Condensed Consolidated Statements of Cash Flows for  the six months ended June 30, 2007 and 2006 (unaudited)       | 6          |
|                               | Notes to Condensed Consolidated Financial Statements  (unaudited)                                                  | 7          |
| Item 2.                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        | 14         |
| Item 3.                            | Quantitative  and Qualitative Disclosures About Market Risk                                                        | 19         |
| Item 4.                            | Controls and Procedures                                                                                            | 19         |
|                               |                                                                                                               |       |
| **PART  II. OTHER INFORMATION**    |                                                                                                               |
|                               |                                                                                                               |       |
| Item 1.                            | Legal Proceedings                                                                                                  | 20         |
| Item  1A.                          | Risk  Factors                                                                                                      | 20         |
| Item 2.                            | Changes in  Securities, Use of Proceeds and Issuer Purchase of Equity Securities                                   | 22         |
| Item 3.                            | Defaults  Upon Senior Securities                                                                                   | 22         |
| Item 4.                            | Submission  of Matters to a Vote of Security Holders                                                               | 22         |
| Item 5.                            | Other Information                                                                                                  | 22         |
| Item  6.                           | Exhibits                                                                                                           | 23         |
|                               |                                                                                                               |       |
| **Signatures**                     | 26                                                                                                                 |

 

2

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**CAUTIONARY STATEMENT RELATED TO FORWARD LOOKING STATEMENTS**

*This Quarterly Report on Form 10-Q includes certainforward-looking statements as defined within Section 27A of the Securities Actof 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, asamended, relating to revenue, revenue composition, earnings, projected plans,performance, contract procurement, demand trends, future expense levels, trendsin average headcount and gross margins, and the level of expected capitalexpenditures. Such forward-looking statements are based on the beliefs of,estimates made by, and information currently available to SM&A managementand are subject to certain risks, uncertainties and assumptions. Any statementscontained herein (including without limitation statements to the effect thatthe Company or management “estimates,” “expects,” “anticipates,” “plans,” “believes,”“projects,” “continues,” “may,” “will,” “could,” or “would” or statementsconcerning “potential” or “opportunity” or variations thereof or comparableterminology or the negative thereof) that are not statements of historical factshould be construed as forward-looking statements. The actual results ofSM&A may vary materially from those expected or anticipated in theseforward-looking statements.  Therealization of such forward-looking statements may be impacted by certainimportant unanticipated factors including those discussed in “Risk Factors”under Item 1A, and “Management’s Discussion and Analysis of Financial Conditionand Results of Operations,” at pages 14-18. Because of these and other factorsthat may affect SM&A’s operating results, past performance should not beconsidered as an indicator of future performance, and investors should not usehistorical results to anticipate results or trends in future periods.  The Company undertakes no obligation topublicly release the results of any revisions to these forward-lookingstatements that may be made to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events.  Readers should carefully review the riskfactors described in this and other documents that SM&A files from time totime with the Securities and Exchange Commission (“SEC”), including subsequentCurrent Reports on Form 8-K, Quarterly Reports on Form 10-Q and Annual Reportson Form 10-K.*

**HOW TO OBTAIN SM&A SEC FILINGS**

*All reports filed by SM&A with the SEC are availablefree of charge via EDGAR through the SEC website at www.sec.gov. In addition,the public may read and copy materials filed by the Company with the SEC at theSEC’s public reference room located at 450 Fifth St., N.W., Washington, D.C.20549. SM&A also provides copies of its Forms 8-K, 10-K, 10-Q, Proxy andAnnual Report at no charge to investors upon request and makes electroniccopies of its most recently filed reports available through its website atwww.smawins.com as soon as reasonably practicable after filing such materialwith the SEC.*

3

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**SM&A**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(in thousands)
| ** **                                        | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                        | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| **ASSETS**                                        | ** ** | ** **              | ** ** |                        |       |
| Current assets:                                   |       |                    |       |                        |       |
| Cash and cash equivalents                         |       | $                       | 1,737      |                        | $          | 15,143 |   |
| Investments                                       |       | 6,500                   |       | —                      |       |
| Accounts receivable, net                          |       | 24,641                  |       | 15,759                      |       |
| Prepaid expenses and other current assets         |       | 710                     |       | 341                         |       |
| Prepaid income taxes                              |       | —                  |       | 286                         |       |
| Deferred tax asset – current                 |       | 260                     |       | 244                         |       |
| Total current assets                              |       | 33,848                  |       | 31,773                      |       |
| Fixed assets,  net                                |       | 3,704                   |       | 3,446                       |       |
| Goodwill                                          |       | 4,288                   |       | —                      |       |
| Intangibles, net                                  |       | 1,083                   |       | —                      |       |
| Deferred tax  asset                               |       | 601                     |       | 354                         |       |
| Other assets                                      |       | 197                     |       | 53                          |       |
|                                              |       | $                       | 43,721     |                        | $          | 35,626 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**     | ** ** | ** **              | ** ** | ** **                  | ** ** |
|                                              |       |                    |       |                        |       |
| Current  liabilities:                             |       |                    |       |                        |       |
| Accounts payable                                  |       | $                       | 1,470      |                        | $          | 1,232 |   |
| Accrued compensation and related benefits         |       | 3,607                   |       | 2,112                       |       |
| Income taxes payable                              |       | 159                     |       | —                      |       |
| Net liabilities of discontinued operations        |       | —                  |       | 42                          |       |
| Total current liabilities                         |       | 5,236                   |       | 3,386                       |       |
| Deferred income  taxes                            |       | 37                      |       | 91                          |       |
| Other  liabilities                                |       | 551                     |       | 553                         |       |
| Total liabilities                                 |       | 5,824                   |       | 4,030                       |       |
|                                              |       |                    |       |                        |       |
| Commitments,  contingencies and subsequent events |       |                    |       |                        |       |
|                                              |       |                    |       |                        |       |
| Stockholders’  equity:                       |       |                    |       |                        |       |
| Preferred stock                                   |       | —                  |       | —                      |       |
| Common stock                                      |       | 2                       |       | 2                           |       |
| Additional paid-in capital                        |       | 43,582                  |       | 39,893                      |       |
| Treasury stock                                    |       | (1,506                  | )          | (664                        | )          |
| Accumulated deficit                               |       | (4,181                  | )          | (7,635                      | )          |
| Total stockholders’ equity                   |       | 37,897                  |       | 31,596                      |       |
|                                              |       | $                       | 43,721     |                        | $          | 35,626 |   |

 

*Seeaccompanying notes to condensed consolidated financial statements*

4

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**SM&A**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

**(in thousands, except per sharedata)**

**(UNAUDITED)**
| ** **                                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                        | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                        | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                           |       | $                                               | 25,568     |                                          | $          | 18,277 |   | $ | 49,192 |   | $ | 35,992 |   |
| Cost of revenue                                   |       | 15,663                                          |       | 10,268                                        |       | 30,080 |   | 20,842 |   |
| Gross margin                                      |       | 9,905                                           |       | 8,009                                         |       | 19,112 |   | 15,150 |   |
|                                              |       |                                            |       |                                          |       |   |   |   |   |
| Selling, general  and administrative expenses     |       | 6,631                                           |       | 6,086                                         |       | 13,525 |   | 11,414 |   |
| Operating income                                  |       | 3,274                                           |       | 1,923                                         |       | 5,587 |   | 3,736 |   |
|                                              |       |                                            |       |                                          |       |   |   |   |   |
| Interest income,  net                             |       | 78                                              |       | 252                                           |       | 221 |   | 444 |   |
| Income before  income taxes                       |       | 3,352                                           |       | 2,175                                         |       | 5,808 |   | 4,180 |   |
|                                              |       |                                            |       |                                          |       |   |   |   |   |
| Income tax  expense                               |       | 1,349                                           |       | 895                                           |       | 2,354 |   | 1,721 |   |
|                                              |       |                                            |       |                                          |       |   |   |   |   |
| Net income                                        |       | $                                               | 2,003      |                                          | $          | 1,280 |   | $ | 3,454 |   | $ | 2,459 |   |
|                                              |       |                                            |       |                                          |       |   |   |   |   |
| Net income per  share:                            |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                             |       | $                                               | 0.11       |                                          | $          | 0.07 |   | $ | 0.18 |   | $ | 0.13 |   |
| Diluted                                           |       | $                                               | 0.11       |                                          | $          | 0.07 |   | $ | 0.18 |   | $ | 0.12 |   |
|                                              |       |                                            |       |                                          |       |   |   |   |   |
| Shares used in  calculating net income per share: |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                             |       | 18,787                                          |       | 19,170                                        |       | 18,698 |   | 19,492 |   |
| Diluted                                           |       | 18,964                                          |       | 19,372                                        |       | 18,882 |   | 19,706 |   |

 

*See accompanyingnotes to condensed consolidated financial statements.*

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**SM&A**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(inthousands)

**(UNAUDITED)**
| ** **                                                                                   | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                                                                                   | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                   | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net income                                                                                   |       | $                                             | 3,454      |   | $ | 2,459 |   |
| Adjustments to reconcile net income to net cash  (used in) provided by operating activities: |       |                                          |       |   |   |
| Depreciation and amortization                                                                |       | 589                                           |       | 377 |   |
| Stock-based compensation expense                                                             |       | 898                                           |       | 629 |   |
| Excess tax benefits from stock-based compensation                                            |       | (118                                          | )          | — |   |
| Deferred income taxes                                                                        |       | (199                                          | )          | (148 | ) |
| Changes in operating assets and liabilities, net of  business acquisition:                   |       |                                          |       |   |   |
| Accounts receivable                                                                          |       | (7,096                                        | )          | (4,505 | ) |
| Prepaid expense and other assets                                                             |       | (399                                          | )          | (311 | ) |
| Prepaid income taxes                                                                         |       | 286                                           |       | 924 |   |
| Accounts payable                                                                             |       | 238                                           |       | (60 | ) |
| Accrued compensation and related benefits                                                    |       | 784                                           |       | 284 |   |
| Income taxes payable                                                                         |       | 159                                           |       | 368 |   |
| Other liabilities                                                                            |       | (2                                            | )          | 13 |   |
| Net cash (used in) provided by operating activities                                          |       | (1,406                                        | )          | 30 |   |
|                                                                                         |       |                                          |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                   | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Purchases of fixed assets                                                                    |       | (747                                          | )          | (1,115 | ) |
| Proceeds from the sale of fixed assets                                                       |       | 18                                            |       | — |   |
| Purchases of marketable securities                                                           |       | (12,500                                       | )          | (100 | ) |
| Proceeds from disposal of marketable securities                                              |       | 6,000                                         |       | — |   |
| Cost of acquisition, net of cash acquired                                                    |       | (4,465                                        | )          | — |   |
| Net cash used in investing activities                                                        |       | (11,694                                       | )          | (1,215 | ) |
|                                                                                         |       |                                          |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                   |       |                                          | ** ** | ** ** | ** ** |
| Proceeds from issuance of common stock                                                       |       | 460                                           |       | 264 |   |
| Excess tax benefits from stock-based compensation                                            |       | 118                                           |       | 3 |   |
| Payment for repurchase of shares                                                             |       | (842                                          | )          | (7,262 | ) |
| Net cash used in financing activities                                                        |       | (264                                          | )          | (6,995 | ) |
|                                                                                         |       |                                          |       |   |   |
| Net decrease in cash and cash equivalents from  continued operations                         |       | (13,364                                       | )          | (8,180 | ) |
| Net cash used in discontinued operations by  operating activities                            |       | (42                                           | )          | (195 | ) |
| Net decrease in cash and cash equivalents                                                    |       | (13,406                                       | )          | (8,375 | ) |
| Cash and cash equivalents at beginning of period                                             |       | 15,143                                        |       | 19,103 |   |
| Cash and cash equivalents at end of period                                                   |       | $                                             | 1,737      |   | $ | 10,728 |   |
|                                                                                         |       |                                          |       |   |   |
| **SUPPLEMENTAL  INFORMATION—CASH PAID FOR:**                                            |       |                                          |       |   |   |
| Income taxes                                                                                 |       | $                                             | 2,135      |   | $ | 627 |   |
|                                                                                         |       |                                          |       |   |   |
| **SUPPLEMENTAL  DISCLOSURE OF NON-CASH TRANSACTIONS:**                                       |       |                                          |       |   |   |
| Common stock issued for an acquisition                                                       |       | $                                             | 2,213      |   | $ | — |   |
| Common stock  issued to an employee                                                          |       | $                                             | 50         |   | $ | — |   |

 

*Seeaccompanying notes to condensed consolidated financial statements*

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**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For theThree and Six Months Ended June 30, 2007 and 2006**

**(UNAUDITED)**

**Note 1.       Basis of Presentation and SignificantAccounting Policies**

The condensed consolidated financial statements includedherein are unaudited; such financial statements contain all normal recurringaccruals and adjustments that, in the opinion of management, are necessary topresent fairly the consolidated financial position of SM&A at June 30,2007, the consolidated results of operations for the three and six months endedJune 30, 2007 and 2006, and cash flows for the six months ended June 30, 2007and 2006.  Comprehensive income isequivalent to net income for the three and six month periods ended June 30, 2007and 2006, respectively.

It should be understood that accounting measurements atinterim dates inherently involve greater reliance on estimates than atyear-end.  The results of operations forthe three and six months ended June 30, 2007 are not necessarily indicative ofthe results to be expected for the full fiscal year.

The accompanying unaudited condensed consolidated financialstatements do not include footnotes and certain financial presentationsnormally required under generally accepted accounting principles.  Therefore, these financial statements shouldbe read in conjunction with our audited consolidated financial statements andnotes thereto for the year ended December 31, 2006, included in our AnnualReport on Form 10-K/A filed with the Securities and Exchange Commission (“SEC”)on March 16, 2007.

***Recent AccountingPronouncements***

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued Financial AccountingStandards Board Interpretation No. 48, *“Accountingfor Uncertainty in Income Taxes”* (“FIN 48”).  FIN 48 is aninterpretation of Statement of Financial Accounting Standards (“SFAS”)No. 109, *“Accounting for Income Taxes.”*FIN 48 prescribes a recognition threshold and measurement of a taxposition taken or expected to be taken in an enterprise’s tax return.  FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, and disclosure related to uncertain tax positions.  The Company adopted the provisions of FIN 48on January 1, 2007.

Based on our evaluation,we have concluded that there are no significant uncertain tax positionsrequiring recognition in our financial statements.  Our evaluation was performed for the taxyears which remain subject to examination by major tax jurisdictions as of June30, 2007.

We may from time to timebe assessed interest or penalties by major tax jurisdictions, although any suchassessments historically have been minimal and immaterial to our financialresults.  In the event we have receivedan assessment for interest and/or penalties, it has been classified in thefinancial statements as selling, general and administrative expense.

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities.” SFAS No. 159 permits entities toelect to measure financial assets and liabilities (except for those that arespecifically scoped out of the Statement) at fair value. The election tomeasure a financial asset or liability at fair value can be made on an instrument-by-instrumentbasis and is irrevocable. The difference between the carrying value and thefair value at the election date is recorded as a transition adjustment toopening retained earnings.  Subsequent changesin fair value are recognized in earnings. The Company will adopt SFAS No. 159effective January 1, 2008. The Company does not expect the adoption of SFAS No.159 to have a material impact on the condensed consolidated financialstatements of the Company.

***SignificantAccounting Policies***

*Revenue Recognition. *We recognize revenue fromservices rendered when the following four revenue recognition criteria aremet:  persuasive evidence of anarrangement exists, delivery has occurred or services have been rendered, theselling price is fixed or determinable, and collection is reasonablyassured.  The majority of our servicesare provided under “time and expenses” billing arrangements and revenue isrecognized on the basis of hours worked plus other reimbursable contract costsincurred during the period.  Revenue isdirectly related to the total number of hours billed to clients and theassociated hourly billing rates.  Alimited amount of revenue is also derived from success fees, offered to clientsas a pricing option, and recorded as revenue only upon attainment of thespecified incentive criteria.  Successfees are not billable and revenue is not recorded until the client wins acontract.

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*Cash and Cash Equivalents. *The Company considers allhighly liquid investments with an original maturity of three months or lesswhen purchased to be cash equivalents.

*Investments.*  Securities investments that the Company hasthe positive intent and ability to hold to maturity are classified as held-to-maturitysecurities.  Investments held to maturitymature between one and twelve months and are reported at amortized cost.

*Stock-BasedCompensation*. Effective January 1, 2006, the Company adopted SFAS No. 123(R) whichrequires the measurement and recognition of compensation expense for allshare-based payment awards made to employees and directors, including employeestock options and employee stock purchases related to the Employee StockPurchase Plan (“ESPP”), based on estimated fair values.

*Concentrations of Credit Risk and Major Customers*.  Financial instruments that potentiallysubject the Company to concentrations of credit risk consist of accountsreceivable.  The Company’s accountsreceivable are derived from revenue earned from customers primarily in theUnited States.  The majority of theCompany’s receivables are from large companies in the aerospace and defenseindustries.  The Company controls creditrisk through credit approvals and monitoring procedures and, generally, doesnot require collateral or other security to support financial instruments subjectto credit risk.  Management must makehistorical bad debts, customer concentrations, customer credit-worthiness,current economic trends, and changes in its customer payment terms whenevaluating the adequacy of the allowance for doubtful accounts.  Credit losses have historically been withinmanagement’s expectations.

For the six monthsended June 30, 2007, three customers represented more than 10% of the Company’srevenue and accounts receivable.  As ofJune 30, 2007 and 2006, these three customers account for 53% and 48% ofrevenues and 54% and 63% of accounts receivable, respectively.  Included in accounts receivable at June 30,2007 and December 31, 2006 is $4.8 million and $2.0 million, respectively, ofunbilled receivables related to earned revenues for which invoices have not yetbeen sent to clients.

#### **Note 2.       NetIncome Per Share**

The following table illustrates the number of sharesused in the computation of basic and diluted net income per share (inthousands):
|                                                                                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                     | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** |
| ** **                                                                                     | ** ** | **2007**               | ** ** | **2006**             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Denominator for basic  income per share: weighted average shares outstanding during the period |       | 18,787                 |       | 19,170               |       | 18,698 |   | 19,492 |   |
| Incremental shares  attributable to dilutive outstanding stock options                         |       | 177                    |       | 202                  |       | 184 |   | 214 |   |
| Denominator for diluted  income per share                                                      |       | 18,964                 |       | 19,372               |       | 18,882 |   | 19,706 |   |

 

Anti-dilutive shares excluded from the foregoingreconciliation are 1,148,551, 1,493,158, 1,365,077 and 1,322,250 for the threeand six months ended June 30, 2007 and 2006, respectively.

**Note3.       Investments in MarketableSecurities**

Duringthe six months ended June 30, 2007, the Company purchased short-term stateissued securities for $12.5 million and disposed of $6.0 million of its marketablesecurities for investment activities.  There were no realized gains or losses upon disposal.  For thethree and six months ended June 30, 2007 and 2006, our interest income wasapproximately $32,000 and $74,000 and $35,000 and $79,000, respectively.

#### **Note 4.       Stock-BasedCompensation**

The Company currentlygrants stock options under its 1997 Stock Option Plan and 2007 Equity Incentive Plan.  Under the fair value recognition provisions,stock-based compensation cost is measured at the grant date based on the fairvalue of the award and is recognized as expense on a straight-line basis overthe requisite service period, which is the vesting period.

8

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TheCompany currently uses the Black-Scholes-Merton option pricing model todetermine the fair value of stock options. The determination of the fair value of stock-based payment awards on thedate of grant using an option-pricing model is affected by the Company’s stockprice as well as assumptions regarding a number of complex and subjectivevariables.  These variables include theexpected term of the awards, the Company’s expected stock price volatility overthe term of the awards, actual and projected employee stock option exercisebehaviors, risk-free interest rate and expected dividends.  The Company estimates the volatility of itscommon stock-based upon its historical stock price volatility.  Beginning April 1, 2007, volatility isestimated over the expected life of the option. The Company bases the risk-free interest rate that it uses in the optionvaluation model on U.S. Treasury zero-coupon issues with remaining maturitiessimilar to the expected term of the options. The Company does not anticipate paying any cash dividends in theforeseeable future and therefore uses an expected dividend yield of zero in theoption valuation model.  The Company isrequired to estimate forfeitures at the time of grant and revise thoseestimates in subsequent periods if actual forfeitures differ from thoseestimates.  The Company uses historicaldata to estimate pre-vesting option forfeitures and record stock-basedcompensation expense only for those awards that are expected to vest.

The fair value of eachstock option is estimated on the date of grant using the Black-Scholes optionpricing model with the following weighted average assumptions for the three andsix months ended June 30, 2007 and 2006, respectively:
|                                                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Stock price  volatility                         |       | 42.00                                           | %          | 82.09                                         | %          | 67.20 | % | 82.49 | % |
| Risk-free  interest rate                        |       | 4.54                                            | %          | 4.95                                          | %          | 4.77 | % | 4.88 | % |
| Expected life  (in years)                       |       | 3.74                                            |       | 3.13                                          |       | 3.80 |   | 3.11 |   |
| Forfeiture rate                                 |       | 9.06                                            | %          | 12.18                                         | %          | 9.54 | % | 12.29 | % |
| Stock dividend  yield                           |       | N/A                                             |       | N/A                                           |       | N/A |   | N/A |   |
| Weighted-average fair  value per option granted |       | $                                               | 2.68       |                                          | $          | 3.59 |   | $ | 3.36 |   | $ | 4.28 |   |
|                                                 |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |

 

The followingtable summarizes stock option activity for the six months ended June 30, 2007:
|                                   | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted-Average  Fair Value of  Options Granted** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------|------------|------------|------------|---------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  December 31, 2006 |       | 1,851,787  |       | $                                           | 7.43       |                                                                |       |                            |       |   |
| Granted                           |       | 650,194    |       | 6.44                                        |       | $                                                                   | 3.36       |                            |       |   |
| Exercised                         |       | (93,137    | )          | 2.53                                        |       |                                                                |       |                            |       |
| Cancelled, Forfeited or Expired   |       | (20,500    | )          | 9.89                                        |       |                                                                |       |                            |       |
| Outstanding at  June 30, 2007     |       | 2,388,344  |       | $                                           | 7.33       |                                                                |       |                            | $          | 17,515,000 |   |
| Exercisable at June 30,  2007     |       | 1,179,794  |       | $                                           | 7.75       |                                                                |       |                            | $          | 9,147,000 |   |
|                                   |            |            |            |                                             |            |                                                                     |            |                                 |            |  |  |  |

 

The totalintrinsic value of options exercised during the six months ended June 30, 2007and 2006 were $439,000 and $38,000, respectively.

TheCompany recorded $448,000 and $848,000 and $314,000 and $629,000 in stock-basedcompensation expense before income tax benefit for stock options in its resultsof operations for the three and six months ended June 30, 2007 and 2006,respectively.  As of June 30, 2007, therewas $3.3 million of total unrecognized compensation cost related to unvestedawards which will be amortized to expense over the weighted-average period of4.0 years.

TheCompany received $236,000 and $10,000 in cash from option exercises during thesix months ended June 30, 2007 and 2006, respectively.  The Company received $223,000 and $254,000from the purchase of shares under the ESPP during the six months ended June 30,2007 and 2006, respectively.  Upon theexercise of options and stock purchase shares granted under the ESPP, theCompany issues new common stock from its authorized shares.

9

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**Note5.       Acquisition**

OnFebruary 9, 2007, the Company acquired Project Planning, Incorporated (“PPI”),a provider of consulting, education, implementation and support services forenterprise project management solutions. The acquisition continues SM&A’s focus on adding capabilities toprovide end-to-end customer solutions and will further expand our ProgramServices business.  The total purchaseprice was $7.1 million, which consisted of cash, shares of the Company’s commonstock and other direct acquisition costs. As of June 30, 2007, the Company has paid an additional $1.0 million aspart of the purchase price.  Thefollowing table sets forth the determination of the consideration paid for PPI asof June 30, 2007 (in thousands):
| Cash                                                          |   | $     | 4,465  |   |
|---------------------------------------------------------------|--------|-------|--------|--------|
| Issuance of  common stock (333,333 shares at $6.64 per share) |   | 2,213 |   |
| Other direct  acquisition costs                               |   | 378   |   |
|                                                          |   | $     | 7,056  |   |

 

Aspart of the purchase of PPI, SM&A could pay up to an additional $9.5million over a three year period upon satisfaction of certain revenue goals inexcess of the results realized for the twelve month period ended on February 9,2007.  

ThePPI acquisition was accounted for using the purchase method of accountingwhereby the total purchase price, including transaction expenses, was allocatedto tangible and intangible assets acquired based on estimated fair market values,with the remainder classified as goodwill. The Company obtained an independent third party valuation.  Net tangible assets were valued at theirrespective historical carrying amounts as these approximate fair values.

Thefollowing table sets forth the allocation of the purchase price as of June 30,2007 (in thousands):
| Cash and cash equivalents                        |   | $     | 345    |   |
|--------------------------------------------------|--------|-------|--------|--------|
| Accounts  receivable, no allowance               |   | 1,786 |   |
| Fixed assets,  net                               |   | 41    |   |
| Other assets                                     |   | 144   |   |
| Assumed  liabilities                             |   | (708  | )      |
| Customer  relationships, average life of 6 years |   | 1,130 |   |
| Non compete  agreements, average life of 3 years |   | 30    |   |
| Goodwill                                         |   | 4,288 |   |
|                                             |   | $     | 7,056  |   |

 

Theresults of operations for PPI are included in the statements of income of theCompany beginning on February 10, 2007. The following unaudited pro forma condensed consolidated financialinformation has been prepared assuming the PPI acquisition had occurred onJanuary 1, 2007 and 2006, and is as follows:
| **(in thousands, except per share amounts)** | ** ** | **Three Months  Ended  June 30, 2007** | ** ** | **Three Months  Ended  June 30, 2006** | ** ** | **Six Months  Ended  June 30, 2007** | ** ** | **Six Months  Ended  June 30, 2006** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| Revenue                                                               |       | $                                                     | 25,568     |                                                  | $          | 20,092                                              |       | $                                                   | 49,931     |   | $ | 39,484 |   |
| Net income                                                            |       | $                                                     | 2,003      |                                                  | $          | 1,842                                               |       | $                                                   | 3,460      |   | $ | 3,540 |   |
| Net income per  share:                                                |       |                                                  |       |                                                  |       |                                                |       |                                                |       |
| Basic                                                                 |       | $                                                     | 0.11       |                                                  | $          | 0.09                                                |       | $                                                   | 0.19       |   | $ | 0.18 |   |
| Diluted                                                               |       | $                                                     | 0.11       |                                                  | $          | 0.09                                                |       | $                                                   | 0.18       |   | $ | 0.18 |   |

 

Theunaudited pro forma condensed consolidated financial statements have beenprepared based upon currently available information and assumptions that aredeemed appropriate by management.  Thepro forma information is for informational purposes only and is not intended tobe indicative of the actual consolidated financial position or consolidatedresults that would have been reported had the transactions occurred on thedates indicated, nor does this information represent a forecast of theconsolidated financial position at any future date or the combined financialresults for any future period.

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**Note6.       Goodwill and Intangible Assets**

Intangibleassets consist of customer relationships and non-competition agreements.  Intangible assets are stated at cost lessaccumulated amortization and are being amortized over their estimated usefullives of three to six years.  Thefollowing tables provide a summary of the carrying amounts of purchased intangibleassets that continue to be amortized (in thousands):
|                         | ** ** | **June 30, 2007** | ** ** | **Original**                  | ** ** |
|-------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **              | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** | **Weighted  Average  Useful Life** | ** ** |
| Customer  relationships |       | $                           | 1,130      |                          | $          | 73 |   | $ | 1,057 |   | 6.0 Years |   |
| Non compete  agreements |       | 30                          |       | 4                             |       | 26 |   | 3.0 Years |   |
|                    |       |                        |       |                          |       |   |   |   |   |
| Total                   |       | $                           | 1,160      |                          | $          | 77 |   | $ | 1,083 |   |   |   |

 

Thetotal expected future amortization related to intangible assets are as followsfor the years ending December 31:
| (in thousands) | ** ** | **Expected Future  Amortization** | ** ** |
|---------------------|------------|----------------------------------------|------------|
| 2007                |       | $                                      | 99         |   |
| 2008                |       | 198                                    |       |
| 2009                |       | 198                                    |       |
| 2010                |       | 189                                    |       |
| 2011                |       | 188                                    |       |
| Thereafter          |       | 211                                    |       |
|                |       | $                                      | 1,083      |   |

Goodwill of $4.3 millionis reviewed annually for impairment (or more frequently if indicators ofimpairment arise).  During the six monthsended June 30, 2007, there were no indicators of impairment of goodwill andidentified intangible assets.  The annualreview for impairment for fiscal 2007 will be completed in the fourth quarter.

**Note 7.       RevolvingLine of Credit**

The Company has a revolving credit agreement which allows forborrowings up to $10.0 million at the prime rate minus one half of one percent(-0.50%) per annum or LIBOR plus two and one quarter percent (2.25%) perannum.  The revolving credit agreement isrenewable annually on April 30th of each year.  Borrowings under the revolving creditagreement are unsecured.  The agreementrequires the Company to comply with certain financial covenants pertaining toits tangible net worth, ratio of total liabilities to tangible net worth, andratio of current assets to current liabilities (as defined in theagreement).  The agreement also containscertain negative covenants which, among other things, restricts the Company’sability to incur additional indebtedness of more than $1.0 million in excess ofthe $10.0 million limit set forth in the credit agreement and make capitalexpenditures in excess of $3.0 million without the prior written approval ofthe lender.  At June  30, 2007, the Company was in compliance withits covenants and had no outstanding borrowings under the line of credit, thebank had issued a letter of credit for $64,000 and $9.9 million was available.

#### **Note 8.       IncomeTaxes**

The Company’s effective income tax rates for the three months andsix months ended June 30, 2007 and 2006 were 40.2%, 40.5% and 41.1% and 41.2%,respectively.

#### **Note 9.       Stockholders’ Equity**

InMay 2004, the Company’s Board of Directors (“Board”) authorized a plan torepurchase up to $7.0 million of the Company’s common stock.  In April and October 2005, the Boardauthorized an increase of an additional $5.0 million and $8.0 million,respectively, increasing the total authorization to repurchase the Company’scommon stock to $20.0 million.  InJanuary 2006, the Board authorized an increase of an additional $10.0 millionincreasing the total authorization to repurchase the Company’s common stock to$30.0 million.  The Company intends torepurchase shares from time to time, at prevailing prices, in the openmarket.  The timing and amount of the sharerepurchases will be at the discretion of management and will 

11

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be based on suchfactors as the stock price, general economic and market conditions, and otherfactors.  The share repurchase plan maybe suspended or discontinued at any time. Shares repurchased under the plan prior to our reincorporation in thestate of Delaware were cancelled.  Afterthe date of reincorporation (November 30, 2006), the shares are included intreasury shares.  For the six monthsended June 30, 2007 and 2006, the Company repurchased 139,417 shares at a totalcost of $842,000 and 1,153,900 shares at a total cost of $7.3 million,respectively.  Since the inception of theshare repurchase plan, the Company has repurchased 3,354,860 shares at a totalcost of $24.2 million.  Share repurchasesare being completed with cash on hand. As of June 30, 2007, the Company has approximately $5.8 millionremaining in share repurchase authorization.

On November 30, 2006, SM&A, a Californiacorporation (“SM&A-California”), consummated a merger (the “Reincorporation”)with and into its wholly owned subsidiary, SM&A, a Delaware corporation (“SM&A-Delaware”or the “Company”).  As a result of theReincorporation, the Company is now a Delaware corporation.  As provided by the Merger Agreement, eachoutstanding share of SM&A-California common stock was automaticallyconverted into one share of SM&A-Delaware common stock, $0.0001 parvalue.  Each stock certificaterepresenting issued and outstanding shares of SM&A-California common stockcontinues to represent the same number of shares of SM&A-Delaware commonstock.  In accordance with Rule 12g-3(a)under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), theCommon Stock, $0.0001 per share, of SM&A-Delaware, are deemed to be registeredunder Section 12(b) of the Exchange Act. Following the Reincorporation, SM&A-Delaware common stock continuesto be quoted on the NASDAQ National Market under the same symbol (“WINS”) asthe shares of SM&A-California common stock had been traded.  The Company’s reincorporating in Delaware hadno impact on the Company’s financial statements.

In 2007, the Company’s Compensation Committee adpoted theExecutive Incentive Plan (the “Plan”) which includes a long-term incentivebased compensation component titled Long Term Incentive Plan (“LTIP”).  This Plan is designed to drive behavior toreach revenue, net income, and earnings per share targets established by theCompensation Committee.  The LTIP will reward sustained performance over athree-year period that substantially increases shareholder value and will coverthe calendar period 2007 through 2009. The Compensation Committee intends to issue performance stock on anannual basis with successive three-year performance periods.  Executives participating in the LTIP wereissued a promissory note in January 2007 indicating the criteria and the amountof the performance stock grant but no stock certificates will be issued untilthe targets are reached as discussed below. The criteria in the LTIP will be the achievement of $0.95 earnings pershare (EPS), over a twelve month period, on or before December 31, 2009.  If the $0.95 EPS is met prior to December 31,2009, the performance stock will be issued within 30 days of reaching themaximum target.  Determination that theEPS target has been achieved will be by Audit Committee of the Board ofDirectors.  If the criteria are not metby December 31, 2009, the number of shares granted will be determined inaccordance with a predetermined sliding scale. EPS performance below $0.65 a share will receive no award.

### **Note 10.     RelatedParties**

The Company periodicallyleases aircraft from SummitJets, Inc., which is owned by the Company’s formerChairman and Chief Executive Officer who retired on April 1, 2007.  The lease rate was determined through areview of prevailing market rates for such services.  No services were rendered during 2007.  During the three and six months ended June30, 2006, the Company recorded an expense of $27,000 and $89,000,respectively.  The expense is included inselling, general and administrative expenses.

**Note 11.     Discontinued Operations**

Prior to fiscal year 2003,the Company sold and dissolved two of its business segments.  There were no balances owed at June 30, 2007as our remaining office lease commitments, net of subleases, expired on April1, 2007.  During the six months endedJune 30, 2007, the Company paid $42,000 net of sublease receipts, related tothe leased property.

**Note 12.     Commitment and Contingencies**

TheCompany entered into employment agreements with its Chief Executive Officer andits President and Chief Operating Officer and into benefit agreements withother executives of the Company (collectively “Agreements”).  Under the terms of each of the Agreements,the Company may be obligated to pay a severance payment ranging from six monthsto one year of the respective employee’s base salary, depending on the date oftermination, if the employment is terminated by the Company without cause.  In addition, the Agreements have a change ofcontrol provisions that may require the Company to pay up to twelve months ofcurrent annual base salary and up to eighteen months of health and lifeinsurance benefits.

12

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**Note 13.     Subsequent Events**

OnMarch 31, 2007, the Company’s Chairman and Chief Executive Officer, Steven S.Myers, retired and on April 1, 2007, was replaced by Cynthia Davis as ChiefExecutive Officer.  Ms. Davis was electedto the Board of Directors.   A currentboard member, Dwight Hanger, replaced Mr. Myers as Chairman of the Board.  The expense associated with this transition,which includes a retirement payment of $500,000 and legal and professional feesof approximately $200,000, are included in SG&A for the six months endedJune 30, 2007.

Subsequently,effective July 18, 2007, the Board of Directors accepted the resignation ofCynthia A. Davis as Chief Executive Officer and as a Director, and the Companyand Ms. Davis entered into a separation agreement including a mutual release ofclaims and a payment of up to $475,000 by the Company.  Cathy L. McCarthy was elected as Presidentand Chief Executive Officer following the resignation of Ms. Davis and enteredinto an employment agreement with the Company, including the grant of 200,000stock options vesting over four years. The Company will recognize selling, general and administrative expenserelated to these events in the third quarter of 2007.

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**Item 2.****        Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

SM&A is theworld’s leading provider of competition management (business capture andproposal development) services, and a leading provider of program services (post-awardrisk mitigation and profit maximizing) services.  Under these two service lines, ourapproximately 350 employees and consultants provide strategy, proposalmanagement, program management, systems engineering, program planning, andother high-value technical support to major industrial customers in thedefense, homeland security, aerospace, information technology, and engineeringsectors.  Since 1982, we have managedmore than 1,000 proposals worth more than $340 billion for our clients and haveachieved an 85% win rate on awarded contracts.

**Resultsof Operations**

The following table sets forth certain historical operatingresults (in millions):
|                                               | ** ** | **Three Months Ended June 30,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                            | ** ** | **2006** | ** ** | **Change** | ** ** |
| ** **                                    | ** ** | **$**                                               | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| Revenue                                       |       | 25.6                                                |       | 100.0 |   | 18.3 |   | 100.0 |   | 7.3 |   | 39.9 |   |
| Cost of revenue                               |       | 15.7                                                |       | 61.3 |   | 10.3 |   | 56.3 |   | 5.4 |   | 52.4 |   |
| Gross margin                                  |       | 9.9                                                 |       | 38.7 |   | 8.0 |   | 43.7 |   | 1.9 |   | 23.8 |   |
| Selling, general and  administrative expenses |       | 6.6                                                 |       | 25.8 |   | 6.1 |   | 33.3 |   | 0.5 |   | 8.2 |   |
| Operating income                              |       | 3.3                                                 |       | 12.9 |   | 1.9 |   | 10.4 |   | 1.4 |   | 73.7 |   |
| Interest income                               |       | 0.1                                                 |       | 0.4 |   | 0.3 |   | 1.6 |   | (0.2 | ) | (66.7 | ) |
| Income tax expense                            |       | 1.3                                                 |       | 5.1 |   | 0.9 |   | 4.9 |   | 0.4 |   | 44.4 |   |
| Net income                                    |       | 2.0                                                 |       | 7.8 |   | 1.3 |   | 7.1 |   | 0.7 |   | 53.8 |   |

 

## **Three Months Ended June 30, 2007Compared to Three Months Ended June 30, 2006**

*Revenue.*  Revenue increased $7.3 million, or 39.9%, toa record $25.6 million for the three months ended June 30, 2007 compared to$18.3 million for the same period of the prior year.  The acquisition of PPI on February 9, 2007contributed $2.0 million or 7.8% of total revenue for the three months endedJune 30, 2007.   The increase in ourrevenue was realized across all of our service lines and market verticals.  Our non aerospace and defense vertical,titled system integration and information technology (“SIIT”) increased $1.7million year-over-year for the three months ended June 30, 2007.  The following table is provided to displayour revenue results compared to the same period of the prior year.
| For the three months ended June 30, | ** ** | **2007** | ** ** | **2006** | ** ** | **% Growth** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|-------------------|------------|
| **Revenues by Market Vertical (in  millions)**                    |       |     |       |     |       |              |       |
| Aerospace and Defense  (A&D)                                  |       | $        | 20.1       |     | $          | 14.5              |       | 39 | % |
| Non Aerospace and  Defense (SIIT)                                 |       | 5.5      |       | 3.8      |       | 45                | %          |
| Total                                                             |       | $        | 25.6       |     | $          | 18.3              |       | 40 | % |
|                                                              |       |     |       |     |       |              |       |
| **Revenues by Service Line (in  millions)**                       |       |     |       |     |       |              |       |
| Competition Management                                            |       | $        | 14.9       |     | $          | 11.7              |       | 27 | % |
| Program Services                                                  |       | 10.7     |       | 6.6      |       | 62                | %          |
| Total                                                             |       | $        | 25.6       |     | $          | 18.3              |       | 40 | % |

 

Weattribute this revenue performance to our strategy to continue to build clientrelationships with our strategic clients and offering our services andsolutions across our clients’ program life cycle.  Another significant contributor is ourAccount Executive team which has experienced minimal turnover over the past 18months.  Minimal turnover has allowed theCompany to better understand our clients’ needs and build valuedrelationships.  Since last year, ourfocus on expanding our Program Services service line has also producedconsistent sequential quarterly revenue growth. The acquisition of PPI also contributed to our revenue performance.

*Gross Margin.* Gross marginincreased $1.9 million, or 23.8%, to $9.9 million for the three months endedJune 30, 2007 compared to $8.0 million for the same period of the prioryear.  The increase in gross margindollars is due to the increase in sales as discussed above offset by a decreasein gross margin as a percentage of revenue. As a percentage of revenue, gross margin decreased to 38.7% for thethree months ended June 30, 2007 compared to 43.7% for the same period of theprior year.  The decline was due to areduction in the level of success fees earned and revenue mix.  We recorded success fees of $118,000 and$706,000 for the three months ended June 30, 2007 and 2006, respectively.  We expect the gross margins to be approximately39.0% to 40% for fiscal year 2007.

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*Selling, General and Administrative Expenses. *Selling,**general and administrative expenses consist principally ofsalary and benefit costs for executive, sales and administrative personnel,stock-based employee compensation, depreciation and amortization, professionalservices and other general corporate activities. * *Selling, general and administrativeexpenses increased $500,000, or 8.2%, to $6.6 million for the three monthsended June 30, 2007, as compared to $6.1 million for the same period of theprior year.

OnApril 1, 2007, the Company’s Founder, Chairman and Chief Executive Officer,Steven S. Myers, was succeeded by Cynthia A. Davis as Chief Executive Officer.  The one-time expenses related to this changein management totaled approximately $100,000 during the three months ended June30, 2007.  The following table isprovided to display our SG&A results segregating these areas of cost forcomparison purposes
| For the three months ended June 30,  (in millions) | ** ** | **2007** | ** ** | **2006** | ** ** | **% Growth** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|-------------------|------------|
| SG&A before PPI and  management transition expenses                               |       | $        | 6.1        |     | $          | 6.1               |       | — |   |
| PPI selling, general  and administrative expenses                                     |       | 0.4      |       | —   |       | 100               | %          |
| Management transition  related expenses (non-recurring)                               |       | 0.1      |       | —   |       | 100               | %          |
| Total SG&A                                                                        |       | $        | 6.6        |     | $          | 6.1               |       | 8 | % |

 

Excludingthe acquisition and management transition related expenses, SG&A as apercentage of revenue decreased to 23.8% for the three months ended June 30,2007, as compared to 33.3% for the same period of the prior year.  The increase of approximately $100,000 inselling, general and administrative expenses, excluding the acquisition andmanagement transition related expenses, was due to an increase in stock based compensationexpense of $134,000 and recruiting and training expense of $272,000 offset by adecline in sales and marketing and general and administrative expenses of$285,000.

*Operating Income*.  Operating income increased $1.4 million, or73.7% to $3.3 million for the three months ended June 30, 2007, compared to$1.9 million for the same period of the prior year.  As a percentage of revenue, operating incomeincreased to 12.9% for the three months ended June 30, 2007, as compared to10.4% for the same period of the prior year. Operating income primarily increased due to the increase in sales andgross profit offset by an increase in selling, general and administrativeexpenses, as discussed above.

*IncomeTax Expense*.  Our effective income tax rates for thethree months ended June 30, 2007 and 2006 were 40.2% and 41.1%, respectively.

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**Resultsof Operations**

The following table sets forth certain historical operatingresults (in millions):
|                                               | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                          | ** ** | **2006** | ** ** | **Change** | ** ** |
| ** **                                    | ** ** | **$**                                             | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| Revenue                                       |       | 49.2                                              |       | 100.0 |   | 36.0 |   | 100.0 |   | 13.2 |   | 36.7 |   |
| Cost of revenue                               |       | 30.1                                              |       | 61.2 |   | 20.8 |   | 57.8 |   | 9.3 |   | 44.7 |   |
| Gross margin                                  |       | 19.1                                              |       | 38.8 |   | 15.2 |   | 42.2 |   | 3.9 |   | 25.7 |   |
| Selling, general and  administrative expenses |       | 13.5                                              |       | 27.4 |   | 11.4 |   | 31.7 |   | 2.1 |   | 18.4 |   |
| Operating income                              |       | 5.6                                               |       | 11.4 |   | 3.7 |   | 10.3 |   | 1.9 |   | 51.4 |   |
| Interest income                               |       | 0.2                                               |       | 0.4 |   | 0.4 |   | 1.1 |   | (0.2 | ) | (50.0 | ) |
| Income tax expense                            |       | 2.4                                               |       | 4.9 |   | 1.7 |   | 4.7 |   | 0.7 |   | 41.2 |   |
| Net income                                    |       | 3.5                                               |       | 7.1 |   | 2.5 |   | 6.9 |   | 1.0 |   | 40.0 |   |

 

## **Six Months Ended June 30, 2007Compared to Six Months Ended June 30, 2006**

*Revenue.*  Revenue increased $13.2 million, or 36.7%, to$49.2 million for the six months ended June 30, 2007 compared to $36.0 millionfor the same period of the prior year. The acquisition of PPI on February 9, 2007 contributed $3.0 million or6.1% of total revenue for the six months ended June 30, 2007.   The increase in our revenue was realizedacross all of our service lines and our traditional aerospace and defensevertical.  Our SIIT vertical declinedslightly year-over-year.  This decline isdue to our largest client in this vertical reducing its use of our servicesstarting in the second quarter of 2006 due to their internal budgetpressures.  However, indicating ourefforts to diversify, excluding this one client, our SIIT revenue increased by$2.3 million, or 79.9% compared to the same period of the prior year.  The following table is provided to displayour revenue results compared to the same period of the prior year.
| For the six months ended June 30, | ** ** | **2007** | ** ** | **2006** | ** ** | **% Growth** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|-------------------|------------|
| **Revenues by Market Vertical (in  millions)**                  |       |     |       |     |       |              |       |
| Aerospace and Defense  (A&D)                                |       | $        | 40.0       |     | $          | 26.7              |       | 50 | % |
| Non Aerospace and  Defense (SIIT)                               |       | 9.2      |       | 9.3      |       | (1                | )%         |
| Total                                                           |       | $        | 49.2       |     | $          | 36.0              |       | 37 | % |
|                                                            |       |     |       |     |       |              |       |
| **Revenues by Service Line (in  millions)**                     |       |     |       |     |       |              |       |
| Competition Management                                          |       | $        | 29.3       |     | $          | 23.2              |       | 26 | % |
| Program Services                                                |       | 19.9     |       | 12.8     |       | 56                | %          |
| Total                                                           |       | $        | 49.2       |     | $          | 36.0              |       | 37 | % |

 

Weattribute this record revenue performance from executing on our strategy tocontinue to build client relationships with our strategic clients and offeringour services and solutions across our clients’ program life cycle.  Another significant contributor is ourAccount Executive team which has experienced minimal turnover over the past 18months.  Minimal turnover has allowed theCompany to better understand our clients’ needs and build valuedrelationships.   Since last year, ourfocus on expanding our Program Services service line has also producedconsistent sequential quarterly revenue growth.   The acquisition of PPI also contributed toour revenue performance.  The results inthe table above reflect the success of our efforts.

*Gross Margin.* Gross marginincreased $3.9 million, or 25.7%, to $19.1 million for the six months endedJune 30, 2007 compared to $15.2 million for the same period of the prioryear.  The increase in gross margindollars is due to the increase in sales as discussed above offset by a decreasein gross margin as a percentage of revenue. As a percentage of revenue, gross margin decreased to 38.8% for the sixmonths ended June 30, 2007 compared to 42.2% for the same period of the prioryear.  The decline was due to a reductionin the level of success fees earned and revenue mix.  We recorded success fees of $118,000 and$807,000 for the six months ended June 30, 2007 and 2006, respectively.  We expect the gross margins to be approximately39.0% - 40% for fiscal year 2007.

*Selling, General and Administrative Expenses. *Selling,**general and administrative expenses consist principally ofsalary and benefit costs for executive, sales and administrative personnel,stock-based employee compensation, depreciation and amortization, professionalservices and other general corporate activities. * *Selling, general and administrativeexpenses increased $2.1 million, or 18.4%, to $13.5 million for the six monthsended June 30, 2007, as compared to $11.4 million for the same period of theprior year.

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Duringthe six months ended June 30, 2007, the Company completed the acquisition ofPPI.  Additionally, the Company’sFounder, Chairman and Chief Executive Officer, Steven S. Myers, retired and wassucceeded by Cynthia A. Davis as Chief Executive Officer.  Ms. Davis was elected to the Board of Directors.  A current board member, Dwight Hanger,replaced Mr. Myers as Chairman of the Board. The expenses related to the changes in management which included aretirement payment and executive search firm fees totaled approximately$800,000.  The approximately $100,000 inexpenses related to the acquisition of PPI includes travel, advisory, meetingand miscellaneous other expenses incurred outside the normal course ofbusiness.  The following table isprovided to display our SG&A results segregating these areas of cost forcomparison purposes:
| For the six months ended June 30,  (in millions) | ** ** | **2007** | ** ** | **2006** | ** ** | **% Growth** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|-------------------|------------|
| SG&A before  PPI and management transition expenses                             |       | $        | 11.9       |     | $          | 11.4              |       | 4 | % |
| PPI selling,  general and administrative expenses                                   |       | 0.7      |       | —   |       | 100               | %          |
| PPI acquisition  related expenses (non-recurring)                                   |       | 0.1      |       | —   |       | 100               | %          |
| Management  transition related expenses (non-recurring)                             |       | 0.8      |       | —   |       | 100               | %          |
| Total SG&A                                                                      |       | $        | 13.5       |     | $          | 11.4              |       | 18 | % |

 

Excludingthe acquisition and management transition related expenses, SG&A as apercentage of revenue decreased to 24.2% for the six months ended June 30,2007, as compared to 31.7% for the same period of the prior year.  The increase of approximately $500,000 inselling, general and administrative expenses, excluding the acquisition andmanagement transition related expenses, was due to an increase in stock basedcompensation expense of $200,000 and recruiting and training expense of$478,000 offset by a decline in sales and marketing and general andadministrative expenses of approximately $100,000.

*Operating Income*.  Operating income increased $1.9 million, or51.4% to $5.6 million for the six months ended June 30, 2007, compared to $3.7million for the same period of the prior year. As a percentage of revenue, operating income decreased to 11.4% for thesix months ended June 30, 2007, as compared to 10.3% for the same period of theprior year.  Operating income primarilyincreased due to the increase in sales and gross profit offset by an increasein selling, general and administrative expenses, as discussed above.

*IncomeTax Expense*.  Our effective income tax rates for thesix months ended June 30, 2007 and 2006 were 40.5% and 41.2%, respectively.

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**CapitalResources and Liquidity**

Ourworking capital increased to $28.6 million at June 30, 2007 from $28.4 millionat December 31, 2006.  In addition, ourcash and cash equivalents plus investments decreased to $8.2 million at June30, 2007, from $15.1 million at December 31, 2006.  The decrease in cash and cash equivalents plusinvestments was due to the funds used to acquire PPI and professional servicefees associated with the acquisition, the share buyback activity in which theCompany repurchased $842,000 of common shares during the six months ended June30, 2007, and the increase in the number of day’s sales outstanding (“DSO”).  The change in accounts receivable was dueprimarily to the increase in sales and the timing of cash receipts related totwo of our largest clients. Periodically, when our larger client’s contracts are under renewal weare authorized to continue providing our services while the extended contractis being processed.  This process cantake two to three months to finalize at which time we invoice all unbilled amounts.  Our clients will typically pay the balanceswithin 60 days upon receipt of our invoices. We expect to reduce our DSO’s to approximately our historical averageDSO of 70 days before the end of the calendar year.

Cashflows from operating activities of continuing operations used $1.4 millionduring the six months ended June 30, 2007, compared to cash flows provided byoperating activities of $30,000 for the same period during the prior year.  The decrease in our cash flows from operatingactivities is due primarily to the increase in our day’s sales outstandingdiscussed above offset by the timing of our payroll cycles.

InMay 2004, the Company’s Board of Directors (“Board”) authorized a plan torepurchase up to $7.0 million of the Company’s common stock.  In April and October 2005, the Boardauthorized an increase of an additional $5.0 million and $8.0 million,respectively, increasing the total authorization to repurchase the Company’scommon stock to $20.0 million.  InJanuary 2006, the Board authorized an increase of an additional $10.0 millionincreasing the total authorization to repurchase the Company’s common stock to$30.0 million.  The Company intends torepurchase shares from time to time, at prevailing prices, in the openmarket.  The timing and amount of theshare repurchases will be at the discretion of management and will be based onsuch factors as the stock price, general economic and market conditions, andother factors.  The share repurchase planmay be suspended or discontinued at any time. Shares repurchased under the plan prior to our reincorporation in thestate of Delaware were cancelled.  Afterthe date of reincorporation (November 30, 2006), the shares are included intreasury shares.  For the six monthsended June 30, 2007 and 2006, the Company repurchased 139,417 shares at a totalcost of $842,000 and 1,153,900 shares at a total cost of $7.3 million,respectively.  Since the inception of theshare repurchase plan, the Company has repurchased 3,354,860 shares at a totalcost of $24.2 million.  Share repurchasesare being completed with cash on hand. As of June 30, 2007, the Company has approximately $5.8 millionremaining in share repurchase authorization.

The Company has a revolving credit agreement which allows forborrowings up to $10.0 million at the prime rate minus one half of one percent(-0.50%) per annum or LIBOR plus two and one quarter percent (2.25%) perannum.  The revolving credit agreement isrenewable annually on April 30th of each year.  Borrowings under the revolving creditagreement are unsecured.  The agreementrequires the Company to comply with certain financial covenants pertaining toits tangible net worth, ratio of total liabilities to tangible net worth, andratio of current assets to current liabilities (as defined in theagreement).  The agreement also containscertain negative covenants which, among other things, restrict the Company’sability to incur additional indebtedness of more than $1.0 million in excess ofthe $10.0 million limit set forth in the credit agreement and make capital expendituresin excess of $3.0 million without the prior written approval of thelender.  At June  30, 2007, the Company was in compliance withits covenants and had no outstanding borrowings under the line of credit, thebank had issued a letter of credit for $64,000 and $9.9 million was available.

Webelieve we have sufficient working capital available under the line of creditand cash generated by continuing operations will be sufficient to fundoperations for at least the next twelve months.

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**Item 3.****        Quantitativeand Qualitative Disclosures About Market Risk**

The Companycurrently has no instruments that are sensitive to market risk.

**Item 4.****        Controls andProcedures**

***Evaluation of Disclosure Controls and Procedures***

Ourmanagement, with the participation of our principal executive officer andprincipal financial officer, has evaluated the effectiveness of the design andoperation of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)as of the end of the period covered by this quarterly report on Form 10-Q.  Based on this evaluation, our principalexecutive officer and principal financial officer concluded that thesedisclosure controls and procedures are effective and designed to ensure thatthe information required to be disclosed in our reports filed or submittedunder the Securities Exchange Act of 1934 is recorded, processed, summarized,and reported within the requisite time periods.

Whilethe Company’s disclosure controls and procedures provide reasonable assurancethat the appropriate information will be available on a timely basis, thisassurance is subject to limitations inherent in any control system, no matterhow well designed and administered.

***Changes in Internal Controls***

Therewas no change in our internal control over financial reporting (as defined inRules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, asamended) identified in connection with the evaluation of our internal controlperformed during our last fiscal quarter that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

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**PART II – OTHER INFORMATION**

**Item 1.****        LegalProceedings**

Weare involved in routine litigation incidental to the conduct of ourbusiness.  There are currently nomaterial pending litigation proceedings to which we are a party or to which anyof our property is subject.

**Item 1A.****     Risk Factors**

**ADDITIONAL FACTORS THATMAY AFFECT FUTURE RESULTS**

*In addition to the other information in thisQuarterly Report on Form 10-Q, the following factors should be consideredcarefully in evaluating our business and prospects.*

## ***Our business dependssubstantially on the defense industry.***

Ourcompetition management and program services business depends substantially onU.S. Government expenditures for defense products.  Any decline in the future defense,information technology or homeland security procurement expenditures couldaffect the opportunities available to our clients and, indirectly, ourbusiness. A number of factors could contribute to such a decline inopportunities, including:

·      Lossof political support for current or increased levels of spending;

·      Changesof presidential administration, particularly changes from one political partyto another, that typically result in a mass reordering of priorities thatreduce new proposal activity for up to a year;

·      Threat scenarios evolvingaway from global conflicts to regional conflicts;

·      Spendingfor ongoing operations, such as the war on terrorism or the occupation of Iraq,creating downward pressure on spending for procurement of new systems andresearch and development spending; and

·      Cancellation of programs oremphasis on government shifting programs.

In theevent expenditures for products of the type manufactured by our clients arereduced and not offset by other new programs or products, there will be areduction in the volume of contracts or subcontracts to be bid upon by ourclients and, as a result, a reduction in the volume of proposals wemanage.  Unless offset, such reductionscould materially and adversely affect our business, operating results andfinancial condition.

## ***We rely on a relatively limited number ofclients.***

Wederive a significant portion of revenue from continuing operations from arelatively limited number of clients. Our seven largest customers accounted for 77% and 80% of our revenue for2006 and 2005, respectively.  Clientstypically retain our services as needed on an engagement basis rather than pursuantto long-term contracts, and a client can usually terminate the engagement atany time without a significant penalty. Moreover, there can be no assurance that existing clients will continueto engage us for additional assignments or do so at the same revenuelevels.  The loss of any significantclient could materially and adversely affect our business, financial conditionand results of operations.  In addition,the level of services required by an individual client may diminish over thelife of the relationship, and there can be no assurance we will be successfulin establishing relationships with new clients as this occurs.

***Themarkets in which we operate are highly competitive.***

The market for competition management services in theprocurement of government and commercial contracts for aerospace and defensework is a niche market with a number of competitors.  We are the largest provider of such servicesand principally compete with the in-house capability of our clients.  In addition, numerous smaller proposalmanagement companies compete in this highly specialized industry.  With sufficient resources in the form ofmoney and excellent talent with current security clearances, our competitorscould erode our current market share and such a reduction could materially andadversely affect our business, operating results and financial condition.

***Werely heavily upon our key senior management personnel and our ability torecruit and maintain skilled professionals.***

Our success is highly dependent upon the efforts,abilities, and business generation capabilities and project execution of ourstrategic account managers and account executives.  The loss of the services of theseindividuals, for any reason, could materially and adversely affect ourbusiness, operating results and financial condition.

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Our business involves the delivery of professionalservices and is highly labor-intensive. Our success depends largely on our general ability to attract, develop,motivate and retain highly skilled professionals.  The loss of some or a significant number ofour professionals or the inability to attract, hire, develop, train and retainadditional skilled personnel could have a serious negative effect on us,including our ability to obtain and successfully complete important engagementsand thus maintain or increase our revenue.

***Quarterlyresults may fluctuate.***

We mayexperience fluctuations in future quarterly operating results due to a numberof factors, including the size, timing and duration of client engagements.

***Ourstock price is subject to significant volatility.***

Ourcommon stock was first publicly traded on January 29, 1998 after our initialpublic offering at $12.00 per share. Between January 29, 1998 and June 30,2007, the closing sale price has ranged from a high of $31.13 per share to alow of $0.75 per share. The market price of our common stock could continue tofluctuate substantially due to a variety of factors, including:

·      Quarterlyfluctuations in results of operations;

·      Adversecircumstances affecting the introduction, or market acceptance of new serviceswe offer;

·      Announcementsof new services by competitors;

·      Announcementsof poor operating results by us or our competitors;

·      Lossof key employees;

·      Changesin the regulatory environment or market conditions affecting the defense andaerospace industry;

·      Changesin earnings estimates and ratings by analysts;

·      Lackof market liquidity resulting from a relatively small amount of public stockfloat;

·      Changesin generally accepted accounting principles;

·      Salesof common stock by existing holders;

·      Theannouncement of proposed acquisitions and dispositions; and

·      The repurchase of commonshares under the share repurchase plan.

***We cannot guarantee that futureacquisitions, mergers or investments in other companies will be successful.***

**If appropriate opportunitiespresent themselves, we may consider acquiring, merging with or makinginvestments in companies or assets that we believe will complement, enhance orexpand our current business or otherwise offer us growth opportunities.  We will likely compete for such opportunitieswith companies with greater financial and management resources than us.  There can be no assurance that suitableacquisition or other investment opportunities will be identified, that any ofthese transactions can be consummated, or that, if acquired, the new businessescan be integrated successfully and profitably into our operations.  These acquisitions and investments may alsoentail the following risks:**

**·**      the diversion of our management’sattention from our existing business while evaluating acquisitions, investmentsand other prospective business combinations and thereafter while assimilatingthe operations and personnel of the new business;

**·**      adverse short-termeffects on our operating results;

**·**      the inability tosuccessfully and rapidly integrate the new businesses, personnel and productswith our existing business, including financial reporting, management andinformation technology systems;

**·**      higher than anticipatedcosts of integration;

**·**      customer concentrationrisk in the acquired business;

**·**      unforeseen operatingdifficulties and expenditures;

**·**      the need to manage asignificantly larger business;

**·**      potential dilution to ourstockholders to the extent we use our common stock as currency for anacquisition;

**·**      the assumption ofliabilities;

**·**      the use of a substantialamount of our available cash to consummate acquisitions;

**·**      difficulties inherent inthe implementation and application of the provisions of the Sarbanes-Oxley Act of2002 to the operations of a privately-held entity acquired by the Company; and

**·**      loss of employees of anacquired business, including employees who may have been instrumental to thesuccess or growth of that business.

**·**      We may not be able tosuccessfully integrate or operate profitably any new business we acquire and wecannot assure you that any other investments we make, or strategic alliances weenter into, will be successful.

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**Item 2.****        Changes inSecurities, Use of Proceeds and Issuer Purchase of Equity Securities**

***Issuer Purchases of EquitySecurities***

Information aboutsecurities purchased under the Company’s share repurchase program isincorporated by reference to Note 9 to the condensed consolidated financialstatements.
| Period                                    | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average  Price Paid  Per Share** | ** ** | **Total Number  of Shares  Purchased as  Part of a  Publicly  Announced  Plan** | ** **    | **Approximate  Dollar Value of  Shares That  May Yet Be  Purchased  Under The Plan** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|---------------|-------------------------------------------------------------------------------------------------------------------------|------------|
| **Beginning  balance at January 1, 2007** | ** ** | **3,215,443**                                    | ** ** | **$**                                        | **7.27**   | ** **                                                                                               | **3,215,443** | ** **                                                                                                              | **$**      | **6,639,411** | ** ** |
| January 2007                              |       | 139,417                                          |       | 6.04                                         |       | 139,417                                                                                                  |          | 5,797,093                                                                                                               |       |
| February 2007                             |       | —                                           |       | —                                       |       | —                                                                                                   |          | —                                                                                                                  |       |
| March 2007                                |       | —                                           |       | —                                       |       | —                                                                                                   |          | —                                                                                                                  |       |
| April 2007                                |       | —                                           |       | —                                       |       | —                                                                                                   |          | —                                                                                                                  |       |
| May 2007                                  |       | —                                           |       | —                                       |       | —                                                                                                   |          | —                                                                                                                  |       |
| June 2007                                 |       | —                                           |       | —                                       |       | —                                                                                                   |          | —                                                                                                                  |       |
| **Total as of June 30, 2007**             | ** ** | **3,354,860**                                    | ** ** | **$**                                        | **7.21**   | ** **                                                                                               | **3,354,860** | ** **                                                                                                              | **$**      | **5,797,093** | ** ** |

 

**Item 3.**        DefaultsUpon Senior Securities

**NotApplicable.**

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

**(a)**           The Annual Meeting ofShareholders was held on June 5, 2007.

**(b)**           Elected all of ourDirectors:

**William C.Bowes, Cynthia A. Davis, J. Christopher Lewis, Dwight L. Hanger, Joseph B.Reagan, Robert Rodin, John P. Stenbit and Robert J. Untracht.**

**(c)(i)**        Election of eight directors as follows:
|                      | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|----------------------|------------|------------|------------|--------------|------------|
| William C. Bowes     |       | 14,186,025 |       | 3,455,491    |       |
| Cynthia A. Davis     |       | 17,568,003 |       | 73,513       |       |
| J. Christopher Lewis |       | 17,370,054 |       | 262,462      |       |
| Dwight L. Hanger     |       | 17,568,003 |       | 73,513       |       |
| Joseph B. Reagan     |       | 17,379,054 |       | 262,462      |       |
| Robert Rodin         |       | 17,568,003 |       | 73,513       |       |
| John P. Stenbit      |       | 14,374,974 |       | 3,266,542    |       |
| Robert J. Untracht   |       | 17,568,003 |       | 73,513       |       |

 

**(c)(ii)**       Approval of the 2007 Equity Incentive Plan

**For:  14,180,589**                     Against: 354,295                  Abstain:  196,252

**BrokerNon-Votes:  2,910,380**

**Item 5.****        OtherInformation**

None.

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**Item 6.****        Exhibits**

**INDEX TO EXHIBITS**

***Exhibits(numbered in accordance with item 601 of Regulation S-K).***

2.1           Stock Purchase Agreement, byand among Project Planning Inc., Richard Bowe, its Shareholder, and SM&A.

Filed onFebruary 12, 2007 as Exhibit 99.2 to the registrant’s Current Report on Form8-K and incorporated herein by reference.

3.1           Amended and RestatedArticles of Incorporation, a California corporation.

Filed onMarch 15, 2002 as Exhibit 3.1 to the registrant’s Annual Report on Form 10-Kand incorporated herein by reference.

3.2           Amended and Restated Bylawsof the Registrant, a California corporation.

Filed onMay 3, 2002 as Exhibit 3.2 to the registrant’s Quarterly Report on Form 10-Qand incorporated herein by reference.

3.3           Certificate of Incorporationof SM&A, a Delaware corporation.

Filed onDecember 6, 2006 as Exhibit 3.1 to the registrant’s Current Report on Form 8-Kand incorporated herein by reference.

3.4           Bylaws of SM&A, aDelaware corporation.

Filed onDecember 6, 2006 as Exhibit 3.3 to the registrant’s Current Report on Form 8-Kand incorporated herein by reference.

3.5           Agreement and Plan ofMerger, between SM&A, a California corporation, and SM&A, a Delawarecorporation.

Filed onDecember 6, 2006 as Exhibit 2.1 to the registrant’s Current Report on Form 8-Kand incorporated herein by reference.

10.1         Amended and Restated 1997Stock Option Plan and related form of Stock Option Agreement.

Filed onApril 17, 2001 as Exhibit 10.1 to the registrant’s Annual Report on Form 10-Kand incorporated herein by reference.

10.2         Second Amended and Restated EquityIncentive Plan.

Filed onFebruary 24, 2006, as Exhibit 10.2 to the registrant’s Annual Report on Form10-K and incorporated herein by reference.

10.3         2007 Equity Incentive Plan

Filed onApril 23, 2007 as Appendix A to the registrant’s Annual Proxy Statement on Form14A and incorporated herein by reference.

10.4         Amended and RestatedEmployee Stock Purchase Plan.

Filed onMay 1, 2006 as Appendix A to the registrant’s Annual Proxy Statement on Form14A and incorporated herein by reference.

10.5         Office Facility Lease.

Filed onNovember 21, 1997 as Exhibit 10.3 to the registrant’s Registration Statement333-4075 on Form S-1 (Registration No. 333-4075) and incorporated herein byreference.

10.6         Amendment No. 1 to OfficeFacility Lease.

Filed onOctober 22, 2004 as Exhibit 10.25 to the registrant’s Quarterly Report on Form10-Q and incorporated herein by reference.

10.7         Retirement Agreement ofSteven S. Myers.

Filed onMarch 13, 2007 as Exhibit 10.2 to the registrant’s Current Report on Form 8-Kand incorporated herein by reference.

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10.8         Employment Agreement ofCathy L. McCarthy

Filed onJuly 23, 2007 as Exhibit 10.1 to the registrant’s Current Report on Form 8-Kand incorporated herein by reference.

10.9         Employment Agreement ofCynthia Davis-Sailar.

Filed onMarch 13, 2007 as Exhibit 10.1 to the registrant’s Current Report on Form 8-Kand incorporated herein by reference.

10.10       Separation Agreement of Cynthia A. Davis.

Filed onJuly 23, 2007 as Exhibit 10.2 to the registrant’s Current Report on Form 8-Kand incorporated herein by reference.

10.11       Employment Agreement of Richard Bowe.

Filed onFebruary 12, 2007 as Exhibit 99.3 to the registrant’s Current Report on Form8-K and incorporated herein by reference.

10.12       Accounts Receivable Loan Agreement dated January 10, 2002,by and between the Registrant and City National Bank, a national bankingassociation.

Filed on January 25, 2002 as Exhibit 99.2 to the registrant’sCurrent Report on Form 8-K and incorporated herein by reference.

10.13       Commercial Guaranty dated January 10, 2002, executed bySteven Myers & Associates, Inc. in favor of City National Bank, a nationalbanking association.

Filed on January 25, 2002 as Exhibit 99.3 to the registrant’sCurrent Report on Form 8-K and incorporated herein by reference.

10.14       Revolving Loan Agreement dated October 14, 2003, by andbetween the registrant and City National Bank, a national association.

Filed onFebruary 6, 2004 as Exhibit 10.18 to the registrant’s Annual Report on Form10-K and incorporated herein by reference.

10.15       Revolving Note dated April 10, 2003, executed by SM&A,in favor of City National Bank.

Filed on July 31, 2003 as Exhibit 10.16 to the registrant’sQuarterly Report on Form 10-Q and incorporated herein by reference.

10.16       Renewal of Revolving Note dated April 27, 2004, executed bySM&A, in favor of City National Bank.

Filed onJuly 21, 2004 as Exhibit 10.20 to the registrant’s Quarterly Report on Form10-Q and incorporated herein by reference.

10.17       Renewal of Revolving Note dated April 29, 2005, executed bySM&A, in favor of City National Bank.

Filed onJuly 14, 2005 as Exhibit 10.25 to the registrant’s Quarterly Report on Form10-Q and incorporated herein by reference.

10.18       Renewal of Revolving Note dated April 24, 2006, executed bySM&A, in favor of City National Bank.

Filed onMay 15, 2006 as Exhibit 10.29 to the registrant’s Quarterly Report on Form 10-Qand incorporated herein by reference.

10.19       Renewal of Revolving Note dated April 27, 2007, executed bySM&A, in favor of City National Bank.

Filed onMay 4, 2007 as Exhibit 10.31 to the registrant’s Quarterly Report on Form 10-Qand incorporated herein by reference.

10.20       Consultant Agreement of Bowes Enterprises.

Filed onOctober 22, 2004 as Exhibit 10.23 to the registrant’s Quarterly Report on Form10-Q and incorporated herein by reference.

10.21       Consultant Agreement of Joseph B. Reagan.

Filed onOctober 22, 2004 as Exhibit 10.24 to the registrant’s Quarterly Report on Form10-Q and incorporated herein by reference.

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10.22       Indemnification Agreements.

Filed onDecember 6, 2006 as Exhibits 10.1 through 10.10 to the registrant’s CurrentReport on Form 8-K and incorporated herein by reference.

21.1         Subsidiaries of theRegistrant.

Filed onMarch 16, 2007 as Exhibit 21.1 to the registrant’s Annual Report on Form 10-K/Aand incorporated herein by reference.

31.1         Certificate of ChiefExecutive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Filed herewith.

31.2         Certificate of ChiefFinancial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Filed herewith.

32            Certification of ChiefExecutive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Filed herewith.

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
|                       | SM&A                                       |   |
|-----------------------|------------------------------------------------|--------|
|                  | (Registrant)                                   |
|                  |                                           |
|                  |                                           |
| Dated: August 6, 2007 | /s/ STEVE D. HANDY                             |   |
|                  | Steve D. Handy                                 |
|                  | Senior Vice President, Chief Financial Officer |
|                  | and Secretary                                  |
|                  |                                           |
|                  |                                           |
| Dated: August 6, 2007 | /s/ CATHY McCARTHY                             |   |
|                  | Cathy McCarthy                                 |
|                  | President and Chief Executive Officer          |

 

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