**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-Q**

(Mark one)

**x****     ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

For the quarterlyperiod ended September 30, 2006

OR

**o****        ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

For the transitionperiod from            to           

Commission filenumber **0-23585**.

**SM&A**

(Exact name ofregistrant as specified in its charter)

 

| **California**                                                                      |   | **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 since last report) |   |
|                                                                                     |        |                                       |  |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes x     No o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  (See definitionof “accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct). (Check one):

Large acceleratedfiler o     Acceleratedfiler x     Non-acceleratedfiler o

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

Yes o     No x

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date:

**CommonStock, no par value—18,732,209 shares outstanding as of September 30, 2006**

 

 

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**SM&A**

**INDEX**
|                | ** ** | **PART I. FINANCIAL INFORMATION**                                                                                         | ** ** | ** ** | ** ** |
|----------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
|           | ** ** | ** **                                                                                                                | ** ** | ** ** | ** ** |
|           |       |                                                                                                                      |       |       |       |
|           |       | Cautionary  Statement Related to Forward Looking Statements                                                               |       |       |       |
|           |       |                                                                                                                      |       |       |       |
|           |       | How to Obtain SM&A  SEC Filings                                                                                       |       |       |       |
|           |       |                                                                                                                      |       |       |       |
| Item 1.        |       | Financial  Statements:                                                                                                    |       |       |       |
|           |       | Condensed  Consolidated Balance Sheets as of September 30, 2006 (unaudited) and December  31, 2005                        |       |       |       |
|           |       | Condensed  Consolidated Statements of Income for the three and nine months ended  September 30, 2006 and 2005 (unaudited) |       |       |       |
|           |       | Condensed  Consolidated Statements of Cash Flows for the nine months ended September 30,  2006 and 2005 (unaudited)       |       |       |       |
|           |       | Notes to  Condensed Consolidated Financial Statements (unaudited)                                                         |       |       |       |
| Item 2.        |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                               |       |       |       |
| Item 3.        |       | Quantitative  and Qualitative Disclosures About Market Risk                                                               |       |       |       |
| Item 4.        |       | Controls and  Procedures                                                                                                  |       |       |       |
|           |       |                                                                                                                      |       |       |       |
|           | ** ** | **PART II. OTHER  INFORMATION**                                                                                           | ** ** | ** ** | ** ** |
|           |       |                                                                                                                      |       |       |       |
| Item 1.        |       | Legal Proceedings                                                                                                         |       |       |       |
| Item  1A.      |       | Risk Factors                                                                                                              |       |       |       |
| Item 2.        |       | Changes in  Securities, Use of Proceeds and Issuer Purchase of Equity Securities                                          |       |       |       |
| Item 3.        |       | Defaults Upon  Senior Securities                                                                                          |       |       |       |
| Item 4.        |       | Submission of  Matters to a Vote of Security Holders                                                                      |       |       |       |
| Item 5.        |       | Other Information                                                                                                         |       |       |       |
| Item  6.       |       | Exhibits                                                                                                                  |       |       |       |
|           |       |                                                                                                                      |       |       |       |
| **Signatures** |       |                                                                                                                      |       |

 

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 12-16. 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.*

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**SM&A**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(in thousands)**
| ** **                                     | ** ** | **September 30,  2006** | ** ** | **As Restated  December 31,  2005** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|-----------------------------------------------|------------|
| **ASSETS**                                     | ** ** | **(unaudited)**              | ** ** | ** **                                    | ** ** |
| Current assets:                                |       |                         |       |                                          |       |
| Cash and cash  equivalents                     |       | $                            | 15,158     |                                          | $          | 19,103 |   |
| Investments                                    |       | —                       |       | 4,950                                         |       |
| Accounts  receivable, net                      |       | 16,715                       |       | 10,435                                        |       |
| Prepaid expenses  and other current assets     |       | 512                          |       | 380                                           |       |
| Prepaid income  taxes                          |       | 460                          |       | 924                                           |       |
| Deferred tax  asset—current               |       | 201                          |       | 319                                           |       |
| Total current  assets                          |       | 33,046                       |       | 36,111                                        |       |
| Fixed assets, net                              |       | 3,213                        |       | 2,571                                         |       |
| Deferred tax asset                             |       | 264                          |       | —                                        |       |
| Other assets                                   |       | 53                           |       | 60                                            |       |
|                                           |       | $                            | 36,576     |                                          | $          | 38,742 |   |
| ** **                                     | ** ** | ** **                   | ** ** | ** **                                    | ** ** |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY** | ** ** | ** **                   | ** ** | ** **                                    | ** ** |
|  Current liabilities:                     |       |                         |       |                                          |       |
| Accounts payable                               |       | $                            | 999        |                                          | $          | 762 |   |
| Accrued  compensation and related benefits     |       | 3,064                        |       | 2,129                                         |       |
| Net liabilities  of discontinued operations    |       | 130                          |       | 396                                           |       |
| Total current  liabilities                     |       | 4,193                        |       | 3,287                                         |       |
| Deferred income taxes                          |       | —                       |       | 56                                            |       |
| Other liabilities                              |       | 554                          |       | 539                                           |       |
| Total  liabilities                             |       | 4,747                        |       | 3,882                                         |       |
|                                           |       |                         |       |                                          |       |
| Commitments and  contingencies                 |       |                         |       |                                          |       |
|                                           |       |                         |       |                                          |       |
| Shareholders’ equity:                     |       |                         |       |                                          |       |
| Preferred stock                                |       | —                       |       | —                                        |       |
| Common stock, no  par value                    |       | 40,218                       |       | 46,126                                        |       |
| Accumulated  deficit                           |       | (8,389                       | )          | (11,266                                       |       |
| Total  shareholders’ equity               |       | 31,829                       |       | 34,860                                        |       |
|                                           |       | $                            | 36,576     |                                          | $          | 38,742 |   |

 

See accompanyingnotes to condensed consolidated financial statements

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**SM&A**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

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

**(UNAUDITED)**
| ** **                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                        | ** ** | **2006**                         | ** ** | **As Restated  2005**      | ** ** | **2006** | ** ** | **As Restated  2005** | ** ** |
| ** **                                        | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                           |       | $                                | 17,025     |                            | $          | 19,678 |   | $ | 53,017 |   | $ | 60,184 |   |
| Cost of revenue                                   |       | 10,645                           |       | 11,471                          |       | 31,487 |   | 34,577 |   |
| Gross margin                                      |       | 6,380                            |       | 8,207                           |       | 21,530 |   | 25,607 |   |
|                                              |       |                             |       |                            |       |   |   |   |   |
| Selling, general  and administrative expenses     |       | 5,859                            |       | 4,438                           |       | 17,272 |   | 16,241 |   |
| Operating income                                  |       | 521                              |       | 3,769                           |       | 4,258 |   | 9,366 |   |
|                                              |       |                             |       |                            |       |   |   |   |   |
| Interest income,  net                             |       | 158                              |       | 158                             |       | 602 |   | 361 |   |
| Income before  income taxes                       |       | 679                              |       | 3,927                           |       | 4,860 |   | 9,727 |   |
|                                              |       |                             |       |                            |       |   |   |   |   |
| Income tax  expense                               |       | 261                              |       | 1,369                           |       | 1,983 |   | 3,442 |   |
|                                              |       |                             |       |                            |       |   |   |   |   |
| Net income                                        |       | $                                | 418        |                            | $          | 2,558 |   | $ | 2,877 |   | $ | 6,285 |   |
|                                              |       |                             |       |                            |       |   |   |   |   |
| Net income per  share:                            |       |                             |       |                            |       |   |   |   |   |
| Basic                                             |       | $                                | 0.02       |                            | $          | 0.13 |   | $ | 0.15 |   | $ | 0.31 |   |
| Diluted                                           |       | $                                | 0.02       |                            | $          | 0.12 |   | $ | 0.15 |   | $ | 0.30 |   |
|                                              |       |                             |       |                            |       |   |   |   |   |
| Shares used in  calculating net income per share: |       |                             |       |                            |       |   |   |   |   |
| Basic                                             |       | 18,730                           |       | 20,432                          |       | 19,235 |   | 20,356 |   |
| Diluted                                           |       | 18,910                           |       | 20,870                          |       | 19,419 |   | 20,942 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

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**SM&A**

## **CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(in thousands)**

**(UNAUDITED)**
| ** **                                                                                   | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2006**                                            | ** ** | **As Restated  2005** | ** ** |
| ** **                                                                                   | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                   | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Net income                                                                                   |       | $                                                   | 2,877      |   | $ | 6,285 |   |
| Adjustments to reconcile net income to net cash  (used in) provided by operating activities: |       |                                                |       |   |   |
| Depreciation and amortization                                                                |       | 639                                                 |       | 449 |   |
| Deferred income taxes                                                                        |       | (202                                                | )          | 383 |   |
| Excess tax benefits from stock-based compensation                                            |       | —                                              |       | 1,643 |   |
| Stock-based compensation expense                                                             |       | 942                                                 |       | 1,346 |   |
| Changes in operating assets and liabilities:                                                 |       |                                                |       |   |   |
| Accounts receivable                                                                          |       | (6,280                                              | )          | (2,275 | ) |
| Prepaid expenses and other assets                                                            |       | (125                                                | )          | (467 | ) |
| Prepaid income taxes                                                                         |       | 464                                                 |       | — |   |
| Accounts payable                                                                             |       | 237                                                 |       | (300 | ) |
| Accrued compensation and related benefits                                                    |       | 935                                                 |       | 2,054 |   |
| Income taxes payable                                                                         |       | —                                              |       | (126 | ) |
| Other liabilities                                                                            |       | 15                                                  |       | 358 |   |
| Net cash (used in) provided by operating activities                                          |       | (498                                                | )          | 9,350 |   |
|                                                                                         |       |                                                |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                   | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Proceeds from disposition of marketable securities                                           |       | 4,950                                               |       | — |   |
| Purchases of fixed assets                                                                    |       | (1,281                                              | )          | (1,743 | ) |
| Net cash provided by (used in) investing activities                                          |       | 3,669                                               |       | (1,743 | ) |
|                                                                                         |       |                                                |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                   | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Proceeds from issuance of common stock                                                       |       | 409                                                 |       | 1,638 |   |
| Excess tax benefits from stock-based compensation                                            |       | 3                                                   |       | — |   |
| Payment for repurchase of shares                                                             |       | (7,262                                              | )          | (3,675 | ) |
| Net cash used in financing activities                                                        |       | (6,850                                              | )          | (2,037 | ) |
|                                                                                         |       |                                                |       |   |   |
| Net (decrease) increase in cash and cash equivalents  from continuing operations             |       | (3,679                                              | )          | 5,570 |   |
| Net cash used in discontinued operations by  operating activities                            |       | (266                                                | )          | (305 | ) |
| Net (decrease) increase in cash and cash equivalents                                         |       | (3,945                                              | )          | 5,265 |   |
| Cash and cash equivalents at beginning of period                                             |       | 19,103                                              |       | 22,148 |   |
| Cash and cash equivalents at end of period                                                   |       | $                                                   | 15,158     |   | $ | 27,413 |   |

 

See accompanyingnotes to condensed consolidated financial statements

 

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**SM&A**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three and Nine MonthsEnded September 30, 2006 and 2005**

**(UNAUDITED)**

**Note 1.         Basisof Presentation and Significant Accounting 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 September 30,2006, the consolidated results of operations for the three and nine monthsended September 30, 2006 and 2005, and cash flows for the nine months endedSeptember 30, 2006 and 2005. Comprehensive income is equivalent to net income for the three and ninemonth periods ended September 30, 2006 and 2005, 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 nine months ended September 30, 2006 are not necessarilyindicative of the results to be expected for the full fiscal year.

The accompanying unaudited condensed consolidated financialstatements do not include certain footnotes and financial presentationsnormally required under generally accepted accounting principles.  Therefore, these financial statements shouldbe read in conjunction with our audited condensed consolidated financialstatements and notes thereto for the year ended December 31, 2005, included inour Annual Report on Form 10-K/A filed with the Securities and ExchangeCommission on May 15, 2006.

***Recent Accounting Pronouncements***

In July 2006,the Financial 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 attributefor the financial statement recognition and measurement of a tax position takenor expected to be taken in an enterprise’s tax return. This interpretation alsoprovides guidance on the de-recognizing, classification, interest andpenalties, accounting in interim periods, disclosure, and transition of taxpositions.  The recognition threshold andmeasurement attribute is part of a two step tax position evaluation processprescribed in FIN 48.  This interpretationis effective for fiscal years beginning after December 15, 2006.  The Company will adopt FIN 48 in 2007 and theCompany does not expect the adoption of FIN 48 to have a material impact on itsconsolidated financial position, results of operations or cash flows.

InSeptember 2006, the SEC issued Staff Accounting Bulletin (“SAB”)No. 108, “*Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements”*.  SAB108 addresses the process and diversity in practice of quantifying financialstatement misstatements resulting in the potential build up of improper amountson the balance sheet.  The Company willadopt SAB 108 as required in the fourth quarter of 2006 and does notexpect the adoption of SAB 108 to have a material impact on its financialstatements.

InSeptember 2006, the FASB issued SFAS No. 157, “*Fair Value Measurements.*”  SFAS 157 establishes a framework formeasuring fair value and expands disclosures about fair valuemeasurements.  The changes to currentpractice resulting from the application of this Statement relate to thedefinition of fair value, the methods used to measure fair value, and theexpanded disclosures about fair value measurements.  The Statement is effective for fiscal yearsbeginning after November 15, 2007 and interim periods within those fiscalyears.  The Company does not expect theadoption of the provisions of SFAS 157 will materially impact our financialposition and results of operations.

***Significant Accounting 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 

7

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option, and recorded asrevenue only upon attainment of the specified incentive criteria.  Success fees are not billable and revenue isnot recorded until the client wins a contract.

*Cash andCash Equivalents. *TheCompany considers all highly liquid investments with an original maturity ofthree months or less when 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*.  OnJanuary 1, 2006, the Company adopted SFAS 123(R) which requires the measurementand recognition of compensation expense for all share-based payment awards madeto employees and directors, including employee stock options and employee stockpurchases related to the Employee Stock Purchase Plan (“employee stockpurchases”), based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting underAccounting Principles Board (“APB”) Opinion No. 25, “*Accountingfor Stock Issued to Employees*” and related interpretations, aspermitted by SFAS No. 123, “*Accounting for Stock-BasedCompensation,*” for periods beginning in fiscal 2006.  In March 2005, the Securities andExchange Commission issued SAB 107 relating to SFAS 123(R).  The Company has applied the provisions of SAB107 in its adoption of SFAS 123(R).

The Companyadopted SFAS 123(R) using the modified prospective transition method, whichrequires the application of the accounting standard as of January 1, 2006, thefirst day of the Company’s fiscal year 2006. Under the modified prospective transition method, recognizedcompensation cost for the three and nine months ended September 30, 2006includes 1) compensation cost for all share-based payments granted prior to,but not yet vested as of, December 31, 2005, based on the grant date fair valueestimated in accordance with the original provisions of SFAS 123; and 2)compensation cost for all share-based payments granted on or after January 1,2006, based on the grant date fair value estimated in accordance with SFAS123(R).  In accordance with the modifiedprospective method, the Company has not restated prior period results.

The Company usesthe Black-Scholes option-pricing model as its method of valuation for share-basedawards.  The Company’s determination of fair value of share-based paymentawards on the date of grant using an option-pricing model is affected by theCompany’s stock price as well as assumptions regarding a number of highlycomplex and subjective variables.  Theseassumptions include, the Company’s expected stock price volatility over aperiod greater than the expected term of the awards, actual and projectedemployee stock option exercise behaviors, and expected forfeitures based on theawards that will ultimately not complete their vesting requirements.  Option-pricing models were developed for usein estimating the value of traded options that have no vesting or hedgingrestrictions and are fully transferable. Because the Company’s employee stock options have certaincharacteristics that are significantly different from traded options, andbecause changes in the subjective assumptions can materially affect theestimated value, in management’s opinion, the existing valuation models may notprovide an accurate measure of the fair value of the Company’s employee stockoptions. Although the fair value of employee stock options is determined inaccordance with SFAS 123(R) and SAB 107 using an option-pricing model, thatvalue may not be indicative of the fair value observed in a willingbuyer/willing seller market transaction.

Prior to theadoption of SFAS 123(R), the Company presented all tax benefits resulting fromthe exercise of stock options as operating cash inflows in the condensedconsolidated statements of cash flows, in accordance with the provisions of theEmerging Issues Task Force (“EITF”) Issue No 00-15, “*Classificationin the Statement of Cash Flows of the Income Tax Benefit Received by a Companyupon Exercise of a Nonqualified Employee Stock Option*.”  SFAS 123(R) requires the benefits of taxdeductions in excess of the compensation costs recognized for those options tobe classified as financing cash inflows rather than operating cash inflows, ona prospective basis.  This amount isshown as “Excess tax benefits from stock-based compensation” on the condensedconsolidated statement of cash flows.

*Concentrationsof 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 instrumentssubject to credit risk.  Management mustmake historical 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.

8

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Forthe nine months ended September 30, 2006, three customers represented more than10% of the Company’s revenue and accounts receivable.  As of September 30, 2006 and 2005, thesethree customers account for 58% and 54% of revenues and 57% and 50% of accountsreceivable, respectively.

**Note 2.         Restatementof Financial Statements**

The Company’scondensed consolidated financial statements for the nine months ended September30, 2005 have been restated to reflect a non-cash charge of $1.3 million, netof tax, in its consolidated statements of operations for additionalcompensation expense resulting from the accounting for certain share repurchasetransactions.

**Note 3.         NetIncome Per Share**

The followingtable illustrates the number of shares used in the computation of basic anddiluted net income per share (in thousands):
| ** **                                                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                     | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                                     | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Denominator for  basic income per share: weighted average shares outstanding during the period |       | 18,730                           |       | 20,432                          |       | 19,235 |   | 20,356 |   |
| Incremental  shares attributable to dilutive outstanding stock options                         |       | 180                              |       | 438                             |       | 184 |   | 586 |   |
| Denominator for diluted  income per share:                                                     |       | 18,910                           |       | 20,870                          |       | 19,419 |   | 20,942 |   |

 

Anti-dilutiveshares excluded from the foregoing reconciliation are 1,384,952, 487,600,1,320,250 and 537,252 for the three and nine months ended September 30, 2006and 2005, respectively.

**Note 4.         Investmentsin Marketable Securities**

In November 2005, the Companypurchased short-term state issued securities for $5.0 million.  In September 2006, the Company disposed ofits marketable securities.  There were norealized gains or losses upon disposal.  Asof September 30, 2006, our interest income was approximately $97,000.

**Note 5.         Stock-BasedCompensation**

On January 1, 2006, the Company adopted SFAS 123(R).  Prior to the adoption of SFAS 123(R), theCompany provided the disclosures required under SFAS 123, as amended by SFASNo. 148, “*Accounting for Stock-BasedCompensation — Transition and Disclosures*.”  The Company didnot recognize stock-based compensation expense in its statement of operationsfor periods prior to the adoption of SFAS 123(R) as the options granted had anexercise price equal to the market value of the underlying common stock on thedate of grant.  The pro forma effect onnet income and earnings per share if the Company had applied the fair valuerecognition provisions of SFAS 123 to stock-based employee compensation for thethree and nine months ended September 30, 2005 would have been (in thousandsexcept for per share information):

 
| ** **                                                                                                        | ** ** | **Three Months Ended  September 30, 2005** | ** ** | **Nine Months Ended  September 30, 2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Net income, as  reported                                                                                          |       | $                                                              | 2,558      |                                                          | $          | 6,285 |   |
| Stock-based  compensation expense related to share buyback of $2.2 million, net of tax                            |       | —                                                         |       | 1,346                                                         |       |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards |       | (300                                                           | )          | (2,827                                                        | )          |
| Tax benefit                                                                                                       |       | 123                                                            |       | 1,159                                                         |       |
| Total  stock-based employee compensation expense, net of tax                                                      |       | (177                                                           | )          | (1,668                                                        | )          |
| Pro forma net  income                                                                                             |       | $                                                              | 2,381      |                                                          | $          | 5,963 |   |
|                                                                                                              |       |                                                           |       |                                                          |       |
| Net income per  share:                                                                                            |       |                                                           |       |                                                          |       |
| Basic — as reported                                                                                          |       | $                                                              | 0.13       |                                                          | $          | 0.31 |   |
| Basic — pro forma                                                                                            |       | $                                                              | 0.12       |                                                          | $          | 0.29 |   |
| Diluted — as reported                                                                                        |       | $                                                              | 0.12       |                                                          | $          | 0.30 |   |
| Diluted — pro  forma                                                                                         |       | $                                                              | 0.11       |                                                          | $          | 0.28 |   |

####  

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The fair value of each stock option is estimated on the date of grantusing the Black-Scholes option pricing model with the following weightedaverage assumptions for the three and nine months ended September 30, 2006 and2005:
| ** **                                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Stock price  volatility                         |       | 77.75                                                | %          | 85.82                                               | %          | 77.14 | % | 88.80 | % |
| Risk-free  interest rate                        |       | 4.66                                                 | %          | 3.54                                                | %          | 4.86 | % | 3.89 | % |
| Expected life  (in years)                       |       | 3.21                                                 |       | 3.03                                                |       | 3.13 |   | 3.21 |   |
| Forfeiture rate                                 |       | 11.81                                                | %          | 13.04                                               | %          | 12.19 | % | 11.33 | % |
| Stock dividend  yield                           |       | N/A                                                  |       | N/A                                                 |       | N/A |   | N/A |   |
| Weighted-average fair  value per option granted |       | $                                                    | 3.50       |                                                | $          | 5.00 |   | $ | 4.20 |   | $ | 5.02 |   |
|                                                 |            |                                                      |            |                                                     |            |  |  |  |  |  |  |  |  |

 

The followingtable summarizes stock option activity for the nine months ended September 30,2006.

 
| ** **                         | ** ** | **Shares** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Weighted-Average  Fair Value of  Options Granted** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|------------------------------------|------------|------------|------------|-------------------------------------------|------------|---------------------------------------------------------------------|------------|--------------------------------|------------|
| Outstanding at  December 31, 2005  |       | 1,538,898  |       | $                                         | 7.56       |                                                                |       |                           |       |   |
| Granted                            |       | 263,618    |       | 7.41                                      |       | $                                                                   | 4.20       |                           |       |   |
| Exercised                          |       | (6,750     | )          | 1.49                                      |       |                                                                |       |                           |       |
| Cancelled,  Forfeited or Expired   |       | (42,500    | )          | 9.17                                      |       |                                                                |       |                           |       |
| Outstanding at  September 30, 2006 |       | 1,753,266  |       | 7.52                                      |       |                                                                |       | $                              | 13,192,000 |   |
| Exercisable at  September 30, 2006 |       | 1,103,640  |       | $                                         | 7.40       |                                                                |       |                           | $          | 8,169,000 |   |
|                                    |            |            |            |                                           |            |                                                                     |            |                                |            |  |  |  |

 

At September 30,2006, there was $2.4 million of total unrecognized compensation cost related tounvested awards which will be amortized to expense over the weighted-averageperiod of 4.0 years.

**Note 6.         RevolvingLine of Credit**

                TheCompany has a revolving credit agreement which allows for borrowings up to$10.0 million at the prime rate minus one half of one percent (-0.50%) perannum or LIBOR plus two and one quarter percent (2.25%) per annum.  The revolving credit agreement is renewableannually 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 September 30, 2006, theCompany was in compliance with its covenants and had no outstanding borrowingsunder the line of credit, the bank had issued a letter of credit for $64,000and $9.9 million was available.

**Note 7.         IncomeTaxes**

The Company’s effective income tax rates forthe three and nine months ended September 30, 2006 and 2005 were 39%, 35%, 41%and 35%, respectively.  During 2005, theCompany recorded a reduction of income tax expense of approximately $160,000,which related to the reduction of a federal income tax liability that wasreversed due to the expiration of a statute of limitations.

**Note 8.         Stockholders’Equity**

InMay 2004, the Company’s Board of Directors authorized a plan to repurchase upto $7.0 million of the Company’s common stock. In April and October 2005, the Company’s Board of Directors authorizedan increase of an additional $5.0 million and $8.0 million, respectively,increasing the total authorization to repurchase the Company’s common stock to$20.0 million.  In January 2006, theCompany’s Board of Directors authorized an increase of an additional $10.0million increasing the total authorization to repurchase the Company’s commonstock to $30.0 million.  The Companyintends to repurchase shares from time to time, at prevailing prices, in theopen market.

Thetiming and amount of the share repurchases will be at the discretion ofmanagement and will be based on such factors as the stock price, generaleconomic and market conditions, and other factors.  The share repurchase plan may be 

10

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suspended or discontinuedat any time.  Shares repurchased underthe plan are cancelled.  For the ninemonths ended September 30, 2006 and 2005, the Company repurchased 1,153,900shares at a total cost of $7.3 million and 446,995 shares at a total cost of$3.7 million, respectively.  Since theinception of the share repurchase plan, the Company has repurchased 2,967,066shares at a total cost of $21.9 million. The Company currently has approximately $8.1 million remaining in sharerepurchase authorization.

**Note 9.         RelatedParties**

The Company periodically leases aircraft from SummitJets, Inc., whichis owned by the Company’s Chairman and Chief Executive Officer.  The lease rate was determined through areview of prevailing market rates for such services.  During the three and nine months endedSeptember 30, 2006 and 2005, the Company recorded an expense of $60,000,$48,000, $149,000 and $124,000, respectively. The expense is included in selling, general and administrative expenses.

**Note 10.      DiscontinuedOperations**

Prior to fiscal year 2003, the Company sold anddissolved two of its business segments. The balance accrued at September 30, 2006 of $130,000 represents theremaining office lease commitments, net of subleases, over the remaining termsof the leases.  During the nine monthsended September 30, 2006, the Company paid $266,000 net of sublease receipts,related to the leased property.

**Note 11.      Commitmentand Contingencies**

The Companyentered into employment agreements with its Chairman and Chief ExecutiveOfficer and its President and Chief Operating Officer and into benefitagreements with other 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 ninemonths to two years of the respective employee’s base salary, depending on thedate of termination, if the employment is terminated by the Company withoutcause.  In addition, the Agreements havea change of control provisions that may require the Company to pay up to twelvemonths of current annual base salary and up to eighteen months of health andlife insurance benefits.

 

11

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

SM&Ais the world’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 300 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 September 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                                 | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                                    | ** ** | **$**                                                    | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| Revenue                                       |       | $                                                        | 17.0       |   | 100.0 |   | $ | 19.7 |   | 100.0 |   | ($2.7 | ) | (13.7 | ) |
| Cost of revenue                               |       | 10.6                                                     |       | 62.4 |   | 11.5 |   | 58.4 |   | (0.9 | ) | (7.8 | ) |
| Gross margin                                  |       | 6.4                                                      |       | 37.6 |   | 8.2 |   | 41.6 |   | (1.8 | ) | (22.0 | ) |
| Selling, general and  administrative expenses |       | 5.9                                                      |       | 34.7 |   | 4.4 |   | 22.3 |   | 1.5 |   | 34.1 |   |
| Operating income                              |       | 0.5                                                      |       | 2.9 |   | 3.8 |   | 19.3 |   | (3.3 | ) | (86.8 | ) |
| Interest income, net                          |       | 0.2                                                      |       | 1.2 |   | 0.2 |   | 1.0 |   | — |   | — |   |
| Income tax expense                            |       | 0.3                                                      |       | 1.8 |   | 1.4 |   | 7.1 |   | (1.1 | ) | (78.6 | ) |
| Net income                                    |       | $                                                        | 0.4        |   | 2.4 |   | $ | 2.6 |   | 13.2 |   | ($2.2 | ) | (84.6 | ) |

 

## **Three Months Ended September 30,2006 Compared to Three Months Ended September 30, 2005**

*Revenue.*  Revenue decreased $2.7 million, or 14%, to$17.0 million for the three months ended September 30, 2006 compared to $19.7million for the same period of the prior year. The decrease in our revenue was realized in our non- aerospace anddefense business and due primarily to one client who reduced our service levelsdue to their internal budget pressures. We have increased our service levels with this client at the end of thisquarter as the customer entered their new fiscal year.  This reduction accounted for a decrease of$1.8 million compared to the same period of the prior year.  Total non-aerospace and defense revenuedeclined $2.1 million, or 33% to $4.3 million as compared to $6.5 million forthe same period of the prior year.  Totalaerospace and defense revenue declined 4% to $12.7 million compared to $13.2million during the three months ended September 30, 2006 and 2005,respectively.

The percentage ofrevenues from competition management and program services was 58% and 42% forthe three months ended September 30, 2006, respectively, compared to 60% and40% for the same period of the prior year. The percentage of revenue coming from our aerospace and defense clientswas 74% and 67% for the three months ended September 30, 2006 and 2005,respectively.  During the three monthsended September 30, 2006, we were engaged by five new customers who accountedfor 4% of our total revenue.  Thiscompares to five new customers which accounted for 1% of our total revenueduring the same period of the prior year.

*GrossMargin.* Gross margin decreased $1.8 million, or 22%, to $6.4million for the three months ended September 30, 2006 compared to $8.2 millionfor the same period of the prior year. The decrease in gross margin dollars is due to the decrease in sales asdiscussed above and a decrease in gross margin as a percentage of revenue.  As a percentage of revenue, gross margindecreased to 38% for the three months ended September 30, 2006 compared to 42%for the same period of the prior year. The decease was due to three factors. First, we recorded success fees of $103,000 and $169,000 for the threemonths ended September 30, 2006 and 2005, respectively.  Second, we realized a planned increase in oursales compensation expense as a percentage of revenue triggered by AccountExecutives that had exceeded their annual sales goals; and third, we areevaluating a pricing structure in which we reduce our competition managementservice rates in lieu of extended Program Service revenue on the program ifawarded.  Excluding these three items,our gross margins would have been consistent with our historical levels of morethan 40%.

*Selling,General and Administrative Expenses. *Selling,**general and administrative expenses consist principally ofsalary and benefit costs for executive, sales and administrative personnel,stock-based compensation expense, professional services and other generalcorporate activities. * *As a result of adopting Statement123(R) we recorded stock-based compensation expense of $313,000 during thethree months ended September 30, 2006. No stock compensation expense was

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recorded for the threemonths ended September 30, 2005. Excluding stock-based compensation expense, selling, general andadministrative expenses increased $1.2 million or 27% during the three monthsended September 30, 2006 compared to the same period of the prior year.  With the creation of Practice Leaderfunctions in late calendar year 2005, which have the responsibility to createnew service solutions and enhance our overall service offerings, we incurredplanned expenses of approximately $600,000 during the three months endedSeptember 30, 2006.  No similar functionexisted during the three months ended September 30, 2005.  Our sales and marketing expenses increased by$260,000 due to increased travel and sales support expenses.  Our general operating expenses increased byapproximately $360,000 including $92,000 in depreciation expense andapproximately $160,000 in non-routine expenses related to the post implementationcosts of our new ERP system which went live in June 2006.  The post implementation professional servicesexpenses ceased as of September 30, 2006.

*OperatingIncome*.  Operatingincome decreased $3.3 million, or 87%, to $521,000 for the three months endedSeptember 30, 2006 compared to $3.8 million for the same period of the prioryear.  The decrease in operating incomewas due to decrease in sales, gross margin, and increased selling, general andadministrative expenses discussed above. As a percentage of revenue, operating income decreased to 3% for thethree months ended September 30, 2006, as compared to 19% for the same periodof the prior year.

*Income Tax Expense*.  Oureffective income tax rates for the three months ended September 30, 2006 and2005 were 39% and 35%, respectively.

13

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**Resultsof Operations**

The following table sets forth certain historical operatingresults (in millions):
| ** **                                    | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                                | ** ** | **2005** | ** ** | **Change** | ** ** |
| ** **                                    | ** ** | **$**                                                   | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| Revenue                                       |       | $                                                       | 53.0       |   | 100.0 |   | $ | 60.2 |   | 100.0 |   | ($7.2 | ) | (12.0 | ) |
| Cost of revenue                               |       | 31.5                                                    |       | 59.4 |   | 34.6 |   | 57.5 |   | (3.1 | ) | (9.0 | ) |
| Gross margin                                  |       | 21.5                                                    |       | 40.6 |   | 25.6 |   | 42.5 |   | (4.1 | ) | (16.0 | ) |
| Selling, general  and administrative expenses |       | 17.3                                                    |       | 32.6 |   | 16.2 |   | 26.9 |   | 1.1 |   | 6.8 |   |
| Operating income                              |       | 4.2                                                     |       | 7.9 |   | 9.4 |   | 15.6 |   | (5.2 | ) | (55.3 | ) |
| Interest income,  net                         |       | 0.6                                                     |       | 1.1 |   | 0.3 |   | 0.5 |   | 0.3 |   | 100.0 |   |
| Income tax  expense                           |       | 2.0                                                     |       | 3.8 |   | 3.4 |   | 5.6 |   | (1.4 | ) | (41.2 | ) |
| Net income                                    |       | $                                                       | 2.8        |   | 5.3 |   | $ | 6.3 |   | 10.5 |   | ($3.5 | ) | (55.6 | ) |

 

## **Nine Months Ended September 30,2006 Compared to Nine Months Ended September 30, 2005**

*Revenue.*  Revenue decreased $7.2 million, or 12%, to$53.0 million for the nine months ended September 30, 2006 compared to $60.2million for the same period of the prior year. Total aerospace and defense revenue declined by $4.8 million or 11% to$39.0 million compared to $43.8 million during the nine months ended September30, 2006 and 2005, respectively.  Thisdecline was due primarily to a client who is experiencing budget pressure onone of their programs.  This programcontributed $2.2 million and $9.3 million or 4% and 15% of total revenue forthe nine months ended September 30, 2006 and 2005, respectively.  Our non-aerospace and defense revenuedeclined by $2.4 million, or 15%, to $14.0 million for the nine months endedSeptember 30, 2006 compared to $16.4 million during the same period of theprior year.  The decrease was dueprimarily to one client who temporarily reduced our service levels due to theirinternal budget pressures.  Thisreduction accounted for a decrease of $2.8 million compared to the same periodof the prior year.  We have increased ourservice levels with this client at the end of this quarter as the customerentered their new fiscal year.

The percentage ofrevenues from competition management and program services was 62% and 38% forthe nine months ended September 30, 2006, respectively, compared to 56% and 44%for the same period of the prior year. The percentage of revenue coming from our aerospace and defense clientswas 74% and 73% for the nine months ended September 30, 2006 and 2005,respectively.  During the nine monthsended September 30, 2006, we were engaged by 18 new customers who accounted for5% of our total revenue.  This comparesto 20 new customers which accounted for 7% of our total revenue during the sameperiod of the prior year.

*GrossMargin.* Gross margin decreased $4.1 million, or 16%, to $21.5million for the nine months ended September 30, 2006 compared to $25.6 millionfor the same period of the prior year. The decrease in gross margin dollars is due to the decrease in sales asdiscussed above and the decrease in gross margin as a percentage ofrevenue.  As a percentage of revenue,gross margin decreased to 41% for the nine months ended September 30, 2006compared to 43% for the same period of the prior year.  The decline was due to increased wages,benefit, commission and travel expenses offset by an increase in the level ofsuccess fees earned. We recorded success fees of $910,000 and $734,000 for the ninemonths ended September 30, 2006 and 2005, respectively.  We expect the gross margins to beapproximately 40% for fiscal year 2006.

*Selling,General and Administrative Expenses. *Selling,**general and administrative expenses consist principally ofsalary and benefit costs for executive, sales and administrative personnel,stock-based compensation expense, professional services and other generalcorporate activities. * *As a result of adopting Statement123(R) and the recording of stock-based compensation expense related to therestatement discussed in footnote 2, we recorded stock-based compensationexpense of $942,000 and $2.2 million during the nine months ended September 30,2006 and 2005, respectively.  Excludingstock-based compensation expense, selling, general and administrative expensesincreased $2.4 million or 17% during the nine months ended September 30, 2006compared to the same period of the prior year. With the creation of Practice Leader functions in late calendar year2005, which have the responsibility to create new service solutions thatenhance our overall service offerings, we incurred planned expenses ofapproximately $1.3 million during the nine months ended September 30,2006.  No similar function existed duringthe nine months ended September 30, 2005.

14

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Our general operatingexpenses increased by approximately $1.1 million including $190,000 indepreciation expense and $585,000 in non-routine expenses including $225,000related to the restatement discussed in footnote 2, and approximately $360,000related to the post implementation costs of our new ERP system which went livein June 2006.  The post implementationprofessional services expenses ceased as of September 30, 2006.   The remaining increase in general operatingexpenses of approximately $330,000 was due to increased travel, employeebenefits, director compensation offset by a decrease in royalties that expiredin calendar year 2005

*OperatingIncome*.  Operatingincome decreased $5.2 million, or 55% to $4.2 million for the nine months endedSeptember 30, 2006, compared to $9.4 million for the same period of the prioryear.  As a percentage of revenue,operating income decreased to 8% for the nine months ended September 30, 2006,as compared to 16% for the same period of the prior year.  Operating income primarily decreased due tothe increase in sales and gross profit offset by the planned increase inselling, general and administrative expenses, as discussed above.

*Income Tax Expense*.  Oureffective income tax rates for the nine months ended September 30, 2006 and 2005were 41% and 35%, respectively.  During2005, the Company recorded a reduction of income tax expense of approximately$160,000, which related to the reduction of a federal income tax liability thatwas reversed due to the expiration of a statute of limitations.

15

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**CapitalResources and Liquidity**

Our workingcapital decreased to $28.9 million at September 30, 2006 from $32.8 million atDecember 31, 2005.  In addition, our cashand cash equivalents plus investments decreased to $15.2 million at September30, 2006, from $24.1 million at December 31, 2005.  The decrease in cash and cash equivalentsplus investments was due to the share buyback activity in which the Companyrepurchased $7.3 million of common shares during the nine months endedSeptember 30, 2006.  The reduction wasalso due to the increase in the number of days sales outstanding discussedbelow.  Cash flows from operatingactivities of continuing operations used $498,000 during the nine months endedSeptember 30, 2006, compared to the $9.4 million provided for the same periodduring the prior year.  The decrease inour cash flows from operating activities is due primarily to the increase inour day’s sales outstanding, the timing of our payroll cycles, and thedifference in tax benefits from stock-based compensation.

The change inaccounts receivable was due primarily to the timing of cash receipts related toone of our largest customers.  Assignificant portion of the past due balance as of September 30, 2006 wascollected in October 2006.  At September30, 2006, our day’s sales outstanding (DSO) is consistent with our historicalaverage of 68 days.

For the remainingfiscal year 2006, we plan to use approximately $500,000 of cash on hand toimplement two additional modules to our existing Enterprise Resource PlanningSoftware.  We expect the implementationof the Enterprise Resource Planning Software to conclude at the end of thisfiscal year.

In May 2004, theCompany’s Board of Directors authorized a plan to repurchase up to $7.0 millionof the Company’s common stock.  In Apriland October 2005, the Company’s Board of Directors authorized an increase of anadditional $5.0 million and $8.0 million, respectively, increasing the totalauthorization to repurchase the Company’s common stock to $20.0 million.  In January 2006, the Company’s Board ofDirectors authorized an increase of an additional $10.0 million increasing thetotal authorization to repurchase the Company’s common stock to $30.0million.  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 are cancelled.  For the nine months ended September 30, 2006and 2005, the Company repurchased 1,153,900 shares at a total cost of $7.3million and 446,995 sharesat a total cost of $3.7 million, respectively.  Since the inception of the share repurchaseplan, the Company has repurchased 2,967,066 shares at a total cost of $21.9million.  Share repurchases are beingcompleted with cash on hand.  The Companycurrently has approximately $8.1 million remaining in share repurchaseauthorization.

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 capitalexpenditures in excess of $3.0 million without the prior written approval ofthe lender.  At September 30, 2006, theCompany was in compliance with its covenants and had no outstanding borrowingsunder the line of credit, the bank had issued a letter of credit for $64,000 and$9.9 million was available.

We believe we havesufficient working capital available under the line of credit and cashgenerated by continuing operations will be sufficient to fund operations for atleast the next twelve months.

16

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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.        Controlsand Procedures**

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

Our management,with the participation of our principal executive officer and principal financialofficer, has evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)under the Securities Exchange Act of 1934, as amended) as of the end of theperiod 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.

While the Company’sdisclosure controls and procedures provide reasonable assurance that theappropriate information will be available on a timely basis, this assurance issubject to limitations inherent in any control system, no matter how welldesigned and administered.

***Changes in Internal Controls***

There was nochange in our internal control over financial reporting (as defined in Rules13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended)identified in connection with the evaluation of our internal control performedduring our last fiscal quarter that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

17

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**PART II — OTHER INFORMATION**

**Item 1.        LegalProceedings**

We are involved inroutine litigation incidental to the conduct of our business.  There are currently no material pendinglitigation proceedings to which we are a party or to which any of our property issubject.

**Item 1A.     RiskFactors**

**ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS**

*Inaddition to the other information in this Quarterly Report on Form 10-Q, thefollowing factors should be considered carefully in evaluating our business andprospects.*

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

Our competition management and program servicesbusiness depends substantially on U.S. Government expenditures for defenseproducts.  Any decline in the futuredefense, information technology or homeland security procurement expenditurescould affect 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 evolving away from globalconflicts to regional conflicts;

·                  Spendingfor ongoing operations, such as the war on terrorism, the occupation of Iraq,downward pressure on spending for procurement of new systems and research anddevelopment spending; and

·                  Cancellationof programs or emphasis on government shifting programs.

In the event expenditures for products of the typemanufactured by our clients are reduced and not offset by other new programs orproducts, there will be a reduction in the volume of contracts or subcontractsto be bid upon by our clients and, as a result, a reduction in the volume ofproposals we manage.  Unless offset, suchreductions could materially and adversely affect our business, operating resultsand financial condition.

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

We derive a significant portion of revenue fromcontinuing operations from a relatively limited number of clients.  Our seven largest customers accounted for 80%and 84% of our revenue for 2005 and 2004, respectively.  Clients typically retain our services asneeded on an engagement basis rather than pursuant to long-term contracts, anda client can usually terminate the engagement at any time without a significantpenalty.  Moreover, there can be noassurance that existing clients will continue to engage us for additionalassignments or do so at the same revenue levels.  The loss of any significant client couldmaterially and adversely affect our business, financial condition and resultsof operations.  In addition, the level ofservices required by an individual client may diminish over the life of therelationship, and there can be no assurance we will be successful inestablishing relationships with new clients as this occurs.

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

Themarket for competition management services in the procurement of government andcommercial contracts for aerospace and defense work is a niche market with anumber of competitors.  We are thelargest provider of such services and principally compete with the in-housecapability of our clients.  In addition,numerous smaller proposal management companies compete in this highlyspecialized industry.  With sufficientresources in the form of money and excellent talent with current securityclearances, our competitors could erode our current market share and such areduction could materially and adversely affect our business, operating resultsand financial condition.

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

Oursuccess is highly dependent upon the efforts, abilities, and businessgeneration capabilities and project execution of our strategic account managersand account executives.  The loss of theservices on these individuals, for any

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reason,could materially and adversely affect our business, operating results andfinancial condition.

Our businessinvolves the delivery of professional services and is highlylabor-intensive.  Our success dependslargely on our general ability to attract, develop, motivate and retain highlyskilled professionals.  The loss of someor a significant number of our professionals or the inability to attract, hire,develop, train and retain additional skilled personnel could have a seriousnegative effect on us, including our ability to obtain and successfullycomplete important engagements and thus maintain or increase our revenue.

***Quarterlyresults may fluctuate.***

We may experience fluctuations in future quarterlyoperating results due to a number of factors, including the size, timing andduration of client engagements.

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

Our common stock was first publicly traded on January29, 1998 after our initial public offering at $12.00 per share. Between January29, 1998 and September 30, 2006, the closing sale price has ranged from a highof $31.13 per share to a low of $0.75 per share. The market price of our commonstock could continue to fluctuate 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

·                  Therepurchase of common shares under the share repurchase plan.

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

**If appropriate opportunities present themselves, wemay consider acquiring, merging with or making investments in companies orassets that we believe will complement, enhance or expand our current businessor otherwise offer us growth opportunities. We will likely compete for such opportunities with companies withgreater 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 ourmanagement’s attention from our existing business while evaluatingacquisitions, investments and other prospective business combinations andthereafter while assimilating the 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;

**·**                  unforeseen operatingdifficulties and expenditures;

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

**·**                  potential dilution to ourshareholders 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 an acquisition;

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**·**                  difficulties inherent inthe implementation and application of the provisions of the Sarbanes-Oxley Actof 2002 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 to successfully integrate oroperate profitably any new business we acquire and we cannot assure you thatany other investments we make, or strategic alliances we enter into, will besuccessful.**

***Principal shareholder has significantcontrol.***

At September 30, 2006,Steven S. Myers, Chief Executive Officer and Chairman of the Board,beneficially owned or controlled approximately 17% of our outstanding commonstock and will have the ability to control or significantly influence theelection of directors and the results of other matters submitted to a vote ofshareholders.  This concentration ofownership may have the effect of delaying or preventing a change in control andmay adversely affect the ability of other holders of our common stock to passshareholder resolutions and control our actions.  Our board of directors is currently comprisedentirely of individuals nominated with the approval of Mr. Myers.

**Item 2.        Changesin Securities, 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 8 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**                   | ** ** | **1,813,166**                                    | ** ** | **$**                                        | **8.10**   | ** **                                                                                               | **1,813,166** | ** **                                                                                                              | **$**      | **5,317,099** | ** ** |
| January 1, 2006  to January 31, 2006     |       | —                                           |       | —                                       |       | —                                                                                                   |          | 15,317,099                                                                                                              |       |
| February 1, 2006  to February 28, 2006   |       | 1,700                                            |       | 6.93                                         |       | 1,814,866                                                                                                |          | 15,305,320                                                                                                              |       |
| March 1, 2006 to  March 31, 2006         |       | 204,100                                          |       | 6.67                                         |       | 2,018,966                                                                                                |          | 13,944,395                                                                                                              |       |
| April 1, 2006 to  April 30, 2006         |       | 199,800                                          |       | 6.41                                         |       | 2,218,766                                                                                                |          | 12,663,859                                                                                                              |       |
| May 1, 2006 to  May 31, 2006             |       | 575,600                                          |       | 6.21                                         |       | 2,794,366                                                                                                |          | 9,092,096                                                                                                               |       |
| June 1, 2006 to  June 30, 2006           |       | 172,700                                          |       | 6.00                                         |       | 2,967,066                                                                                                |          | 8,056,006                                                                                                               |       |
| July 1, 2006 to  July 31, 2006           |       | —                                           |       | —                                       |       | —                                                                                                   |          | 8,056,006                                                                                                               |       |
| August 1, 2006  to August 31, 2006       |       | —                                           |       | —                                       |       | —                                                                                                   |          | 8,056,006                                                                                                               |       |
| September 1,  2006 to September 30, 2006 |       | —                                           |       | —                                       |       | —                                                                                                   |          | 8,056,006                                                                                                               |       |
| **Total**                                | ** ** | **2,967,066**                                    | ** ** | **$**                                        | **7.40**   | ** **                                                                                               | **2,967,066** | ** **                                                                                                              | **$**      | **8,056,006** | ** ** |

 

**Item 3.            Defaults Upon Senior Securities**

**NotApplicable.**

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

As of September 30, 2006, the Company is in theprocess of reincorporating in Delaware under the name “SM&A.”  The Company will continue to do business asSM&A.

**Item 5.        OtherInformation**

The Company periodically leases aircraft fromSummitJets, Inc., which is owned by the Company’s Chairman and Chief ExecutiveOfficer.  The lease rate was determinedthrough a review of prevailing market rates for such services.  During the three and nine months ended September30, 2006 and 2005, the Company recorded an expense of $60,000, $48,000,$149,000 and $124,000 respectively.  Theexpense is included in selling, general and administrative expenses.

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**Item 6.    Exhibits**

**INDEX TO EXHIBITS**

***(Numbered in accordance with item 601 of Regulation S-K)***

2.1                                 Stock Purchase and SaleAgreement, by and among the Registrant, Steven Myers Holding Inc. and L-3Communications Corporation. (1)

2.2                                 Amendment No.1 to StockPurchase and Sale Agreement, by and among the Registrant, Steven Myers HoldingInc. and L-3 Communications Corporation. (2)

3.1                                 Amended and RestatedArticles of Incorporation. (3)

3.2                                 Amended and Restated Bylawsof the Registrant. (4)

10.1                           Amended and Restated 1997Stock Option Plan and related form of Stock Option Agreement. (5)

10.2                           Second Amended and RestatedEquity Incentive Plan. (6)

10.3                           Amended and RestatedEmployee Stock Purchase Plan. (7)

10.4                           Office Facility Lease. (8)

10.5                           Amendment No. 1 to OfficeFacility Lease. (9)

10.6                           Employment Agreement ofSteven S. Myers. (10)

10.7                           Amendment No. 1 toEmployment Agreement of Steven S. Myers. (11)

10.8                           Amendment No. 2 toEmployment Agreement of Steven S. Myers. (12)

10.9                           Amendment No. 3 toEmployment Agreement of Steven S. Myers. (13)

10.10                     Amendment No. 4 toEmployment Agreement of Steven S. Myers. (14)

10.11                     Amendment No. 5 toEmployment Agreement of Steven S. Myers. (15)

10.12                     Amendment No. 6 toEmployment Agreement of Steven S. Myers. (16)

10.13                     Employment Agreement ofCathy L. Wood. (17)

10.14                     Amendment No. 1 toEmployment Agreement of Cathy L. Wood. (18)

10.15                     Amendment No. 2 toEmployment Agreement of Cathy L. Wood. (19)

10.16                     Amendment No. 3 toEmployment Agreement of Cathy L. Wood. (20)

10.17                     Amendment No. 4 toEmployment Agreement of Cathy L. Wood. (21)

10.18                     Amendment No. 5 toEmployment Agreement of Cathy L. McCarthy (formerly Wood). (22)

10.19                     Amendment No. 6 toEmployment Agreement of Cathy L. McCarthy. (23)

10.20                     Employment Agreement ofBennett C. Beaudry. (24)

10.21                     Amendment No. 1 toEmployment Agreement of Bennett C. Beaudry. (25)

10.22                     Amendment No. 2 to EmploymentAgreement of Bennett C. Beaudry. (26)

10.23                     Amendment No. 3 toEmployment Agreement of Bennett C. Beaudry. (27)

10.24                     Accounts Receivable LoanAgreement dated January 10, 2002, by and between the Registrant and CityNational Bank, a national banking association. (28)

10.25                     Commercial Guaranty datedJanuary 10, 2002, executed by Steven Myers & Associates, Inc. in favor ofCity National Bank, a national banking association. (29)

10.26                     Revolving Loan Agreementdated October 14, 2003, by and between the registrant and City National Bank, anational association. (30)

10.27                     Revolving Note dated April10, 2003, executed by SM&A, in favor of City National Bank. (31)

10.28                     Renewal of Revolving Notedated April 27, 2004, executed by SM&A, in favor of City National Bank.(32)

10.29                     Renewal of Revolving Notedated April 29, 2005, executed by SM&A, in favor of City National Bank.(33)

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10.30                     Renewal of Revolving Notedated April 24, 2006, executed by SM&A, in favor of City National Bank.(34)

10.31                     Consultant Agreement ofBowes Enterprises. (35)

10.32                     Consultant Agreement ofJoseph B. Reagan. (36)

21.1                           Subsidiaries of theRegistrant. (37)

31.1                           Certificate of ChiefExecutive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(38)

31.2                           Certificate of ChiefFinancial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(39)

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.(40)

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(1)             Filed on November 27, 2001asExhibit 10.1 to the registrant’s Current Report on Form 8-K and incorporatedherein by reference.

(2)             Filed on December 14, 2001as Exhibit 10.1 to the registrant’s Current Report on Form 8-K and incorporatedherein by reference.

(3)             Filed on March 15, 2002 asExhibit 3.1 to the registrant’s Annual Report on Form 10-K and incorporatedherein by reference.

(4)             Filed on May 3, 2002 asExhibit 3.2 to the registrant’s Quarterly Report on Form 10-Q and incorporatedherein by reference.

(5)             Filed on April 17, 2001 asExhibit 10.1 to the registrant’s Annual Report on Form 10-K and incorporatedherein by reference.

(6)             Filed on February 24, 2006,as Exhibit 10.2 to the registrant’s Annual Report on Form 10-K and incorporatedherein by reference.

(7)             Filed on April 29, 2002 asExhibit C to the registrant’s Annual Proxy Statement on Form 14A andincorporated herein by reference.

(8)             Filed on November 21, 1997as Exhibit 10.3 to the registrant’s Registration Statement 333-4075 on Form S-1(Registration No. 333-4075) and incorporated herein by reference.

(9)             Filed on October 22, 2004 asExhibit 10.25 to the registrant’s Quarterly Report on Form 10-Q andincorporated herein by reference.

(10)       Filed on April 17, 2001 as Exhibit 10.17 to the registrant’sAnnual Report on Form 10-K and incorporated herein by reference.

(11)       Filed on March 15, 2002 as Exhibit 10.7 to the registrant’sAnnual Report on Form 10-K and incorporated herein by reference.

(12)       Filed on May 3, 2002 as Exhibit 10.8 to the registrant’sQuarterly Report on Form 10-Q and incorporated herein by reference.

(13)       Filed on March 11, 2003 as Exhibit10.7 to the registrant’sAnnual Report on Form 10-K and incorporated herein by reference.

(14)       Filed on February 6, 2004 as Exhibit 10.8 to the registrant’sAnnual Report on Form 10-K and incorporated herein by reference.

(15)       Filed on October 22, 2004 as Exhibit 10.21 to theregistrant’s Quarterly Report on Form 10-Q and incorporated herein byreference.

(16)       Filed on April 21, 2006 as Exhibit 99.1 to the registrant’sCurrent Report on Form 8-K and incorporated herein by reference.

(17)       Filed on March 15, 2002 as Exhibit 10.8 to the registrant’sAnnual Report on Form 10-K and incorporated herein by reference.

(18)       Filed on November 4, 2002 as Exhibit 10.10 to theregistrant’s Quarterly Report on Form 10-Q and incorporated herein byreference.

(19)       Filed on March 11, 2003 as Exhibit 10.10 to the registrant’sAnnual Report on Form 10-K and incorporated herein by reference.

(20)       Filed on February 6, 2004 as Exhibit 10.12 to theregistrant’s Annual Report on Form 10-K and incorporated herein by reference.

(21)       Filed on October 22, 2004 as Exhibit 10.22 to theregistrant’s Quarterly Report on Form 10-Q and incorporated herein by reference.

(22)       Filed on April 21, 2006 as Exhibit 99.1 to the registrant’sCurrent Report on Form 8-K and incorporated herein by reference.

(23)       Filed on August 23, 2006 as Exhibit 99.1 to the registrant’sCurrent Report on Form 8-K and incorporated herein by reference.

(24)       Filed on November 4, 2002 as Exhibit 10.11 to theregistrant’s Quarterly Report on Form 10-Q and incorporated herein by reference

(25)       Filed on March 11, 2003 as Exhibit 10.12 to the registrant’sAnnual Report on Form 10-K and incorporated herein by reference.

(26)       Filed on February 6, 2004 as Exhibit 10.15 to theregistrant’s Annual Report on Form 10-K and incorporated herein by reference.

(27)       Filed on October 8, 2004 as Exhibit 99.1 to the registrant’scurrent Report on Form 8-K and incorporated herein by reference.

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

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

(30)       Filed on February 6, 2004 as Exhibit 10.18 to theregistrant’s Annual Report on Form 10-K and incorporated herein by reference.

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

(32)       Filed on July 21, 2004 as Exhibit 10.20 to the registrant’sQuarterly Report on Form 10-Q and incorporated herein by reference.

(33)       Filed on July 14, 2005 as Exhibit 10.25 to the registrant’sQuarterly Report on Form 10-Q and incorporated herein by reference.

(34)       Filed on May 15, 2006 as Exhibit 10.29 to the registrant’sQuarterly Report on Form 10-Q and incorporated herein by reference.

(35)       Filed on October 22, 2004 as Exhibit 10.23 to the registrant’sQuarterly Report on Form 10-Q and incorporated herein by reference.

(36)       Filed on October 22, 2004 as Exhibit 10.24 to theregistrant’s Quarterly Report on Form 10-Q and incorporated herein byreference.

(37)       Filed on March 11, 2003 as Exhibit 21.1 to the registrant’sAnnual Report on Form 10-K and incorporated herein by reference.

(38)       Filed herewith.

(39)       Filed herewith.

(40)       Filed herewith.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.
|                     | SM&A                                                                       |
|--------------------------|--------------------------------------------------------------------------------|
|                     | (Registrant)

 

                                                    |
| Dated: November 7,  2006 | /s/ STEVE D. HANDY                                                             |   |
|                     | Steve D. Handy                                                                 |
|                     | Senior Vice  President, Chief Financial Officer  and Secretary

 

  |
| Dated: November 7, 2006  | /s/ STEVEN S. MYERS                                                            |   |
|                     | Steven S. Myers                                                                |
|                     | Chairman and  Chief Executive Officer                                          |

 

 

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