** **

**SECURITIES ANDEXCHANGE COMMISSION**

### **Washington, D.C. 20549**

### ** **

**FORM 10-Q**

 

**(Mark One)**

 

**ý****                                ****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

###### **For the Quarter endedJune 30, 2005**

###### ** **

### **OR**

### ** **

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

 

**Commission file number 0-23585**

 

 

**SM&A**

(Exactname of registrant 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, 8th Floor, Newport Beach,California 92660**

(Address of principal executiveoffices, including zip code)

 

**(949) 975-1550**

(Registrant’stelephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý    No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b of the Act). Yes  ý  No o

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 
| **Class**                  | ** ** | **Outstanding at June 30, 2005** |
|----------------------------|------------|----------------------------------|
| Common stock, no par value |       | 20,402,687 shares                |

 

 

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**SM&A**

 

**INDEX**

 

**PARTI.  FINANCIAL INFORMATION**

 
|           | Cautionary  Statement Related to Forward Looking Statements                                               |   |
|----------------|-----------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                      |   |
|           | How to Obtain SM&A SEC  Filings                                                                       |   |
|           |                                                                                                      |   |
| Item 1.        | Financial Statements:                                                                                     |   |
|           | Consolidated Balance  Sheets as of June 30, 2005 (unaudited) and December 31, 2004                        |   |
|           | Consolidated  Statements of Income for the three and six months ended June 30, 2005 and  2004 (unaudited) |   |
|           | Consolidated  Statements of Cash Flows for the six months ended June 30, 2005 and 2004  (unaudited)       |   |
|           | Notes to 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 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 TOFORWARD LOOKING STATEMENTS**

 

*ThisQuarterly Report on Form 10-Q includes certain forward-looking statements asdefined within Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended, relating torevenue, revenue composition, earnings, projected plans, performance, contractprocurement, demand trends, future expense levels, trends in average headcountand gross margins, and the level of expected capital expenditures. Suchforward-looking statements are based on the beliefs of, estimates made by, andinformation currently available to SM&A management and are subject tocertain risks, uncertainties and assumptions. Any statements contained herein(including without limitation statements to the effect that the Company ormanagement “estimates,” “expects,” “anticipates,” “plans,” “believes,” “projects,”“continues,” “may,” “will,” “could,” or “would” or statements concerning “potential”or “opportunity” or variations thereof or comparable terminology or thenegative thereof) that are not statements of historical fact should beconstrued as forward-looking statements. The actual results of SM&A mayvary materially from those expected or anticipated in these forward-lookingstatements. The realization of such forward-looking statements may be impactedby certain important unanticipated factors including those discussed in “RiskFactors” under Item 2, and “Management’s Discussion and Analysis of FinancialCondition and Results of Operations,” at pages 11-17. Because of these andother factors that may effect SM&A’s operating results, past performanceshould not be considered as an indicator of future performance, and investorsshould not use historical results to anticipate results or trends in futureperiods. The Company undertakes no obligation to publicly release the resultsof any revisions to these forward-looking statements that may be made toreflect events or circumstances after the date hereof or to reflect theoccurrence 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 SECFILINGS**

 

*Allreports filed by SM&A with the SEC are available free of charge via EDGARthrough the SEC website at www.sec.gov. In addition, the public may read andcopy materials filed by the Company with the SEC at the SEC’s public referenceroom located at 450 Fifth St., N.W., Washington, D.C. 20549. SM&A alsoprovides copies of its Forms 8-K, 10-K, 10-Q, Proxy and Annual Report at nocharge to investors upon request and makes electronic copies of its mostrecently filed reports available through its website at www.smawins.com as soonas reasonably practicable after filing such material with the SEC.*

 

3

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**SM&A**

**CONSOLIDATED BALANCE SHEETS**

**(in thousands)**

** **
| ** **                                     | ** ** | **June 30  2005** | ** ** | **December 31  2004** | ** ** |
|------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                     |       |              |       |                  |       |
| Current assets:                                |       |              |       |                  |       |
| Cash and cash equivalents                      |       | $                 | 24,301     |                  | $          | 22,148 |   |
| Accounts receivable, net                       |       | 15,680            |       | 13,198                |       |
| Prepaid income taxes                           |       | 732               |       | —                |       |
| Prepaid expenses and other current assets      |       | 343               |       | 252                   |       |
| Deferred income taxes                          |       | 364               |       | 539                   |       |
| Total current assets                           |       | 41,420            |       | 36,137                |       |
|                                           |       |              |       |                  |       |
| Fixed assets, net                              |       | 1,880             |       | 1,037                 |       |
| Other assets                                   |       | 216               |       | 209                   |       |
|                                           |       |              |       |                  |       |
|                                           |       | $                 | 43,516     |                  | $          | 37,383 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY** | ** ** | ** **        | ** ** | ** **            | ** ** |
|                                           | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current liabilities:                           |       |              |       |                  |       |
| Accounts payable                               |       | $                 | 551        |                  | $          | 1,192 |   |
| Accrued compensation and related benefits      |       | 4,602             |       | 1,793                 |       |
| Income taxes payable                           |       | —            |       | 565                   |       |
| Net liabilities of discontinued operations     |       | 456               |       | 727                   |       |
| Total current liabilities                      |       | 5,609             |       | 4,277                 |       |
|                                           |       |              |       |                  |       |
| Deferred income taxes                          |       | 311               |       | 242                   |       |
| Other liabilities                              |       | 297               |       | 173                   |       |
| Total liabilities                              |       | 6,217             |       | 4,692                 |       |
|                                           |       |              |       |                  |       |
| Commitments and contingencies                  |       | —            |       | —                |       |
|                                           |       |              |       |                  |       |
| Shareholders’ equity:                     |       |              |       |                  |       |
| Preferred stock                                |       | —            |       | —                |       |
| Common stock                                   |       | 50,316            |       | 50,781                |       |
| Accumulated deficit                            |       | (13,017           | )          | (18,090               | )          |
| Total shareholders’ equity                |       | 37,299            |       | 32,691                |       |
|                                           |       | $                 | 43,516     |                  | $          | 37,383 |   |

 

See accompanying notes to consolidated financialstatements

 

4

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**SM&A**

**CONSOLIDATED STATEMENTS OF INCOME**

**(in thousands, except per share data)**

 
| ** **                                        | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                        | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                        | ** ** | **(Unaudited)**                  | ** ** | **(Unaudited)**                | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
| ** **                                        | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                           |       | $                                | 20,261     |                           | $          | 16,159 |   | $ | 40,506 |   | $ | 34,646 |   |
| Cost of revenue                                   |       | 11,583                           |       | 8,670                          |       | 23,106 |   | 18,814 |   |
| Gross margin                                      |       | 8,678                            |       | 7,489                          |       | 17,400 |   | 15,832 |   |
|                                              |       |                             |       |                           |       |   |   |   |   |
| Selling, general and administrative  expenses     |       | 4,657                            |       | 4,188                          |       | 9,579 |   | 7,578 |   |
| Operating income                                  |       | 4,021                            |       | 3,301                          |       | 7,821 |   | 8,254 |   |
|                                              |       |                             |       |                           |       |   |   |   |   |
| Interest income, net                              |       | 118                              |       | 48                             |       | 203 |   | 78 |   |
| Income before income taxes                        |       | 4,139                            |       | 3,349                          |       | 8,024 |   | 8,332 |   |
|                                              |       |                             |       |                           |       |   |   |   |   |
| Income tax expense                                |       | 1,662                            |       | 1,066                          |       | 2,951 |   | 3,109 |   |
|                                              |       |                             |       |                           |       |   |   |   |   |
| Net income                                        |       | $                                | 2,477      |                           | $          | 2,283 |   | $ | 5,073 |   | $ | 5,223 |   |
|                                              |       |                             |       |                           |       |   |   |   |   |
| Net income per share:                             |       |                             |       |                           |       |   |   |   |   |
| Basic                                             |       | $                                | 0.12       |                           | $          | 0.11 |   | $ | 0.25 |   | $ | 0.26 |   |
| Diluted                                           |       | $                                | 0.12       |                           | $          | 0.11 |   | $ | 0.24 |   | $ | 0.24 |   |
|                                              |       |                             |       |                           |       |   |   |   |   |
| Shares used in calculating net income per  share: |       |                             |       |                           |       |   |   |   |   |
| Basic                                             |       | 20,370                           |       | 20,541                         |       | 20,317 |   | 20,470 |   |
| Diluted                                           |       | 20,879                           |       | 21,661                         |       | 20,980 |   | 21,701 |   |

 

See accompanying notes to consolidated financialstatements.

 

5

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**SM&A**

## **CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

** **
| ** **                                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                       | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**                | ** ** | **(unaudited)** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                              | 5,073      |   | $ | 5,223 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                           |       |   |   |
| Depreciation                                                                       |       | 278                            |       | 169 |   |
| Deferred income taxes                                                              |       | 244                            |       | — |   |
| Income tax effect from exercise of stock  options                                  |       | 1,603                          |       | 73 |   |
| Changes in operating assets and  liabilities:                                      |       |                           |       |   |   |
| Accounts receivable                                                                |       | (2,482                         | )          | (1,728 | ) |
| Prepaid expense and other assets                                                   |       | (98                            | )          | 34 |   |
| Prepaid income taxes                                                               |       | (732                           | )          | — |   |
| Accounts payable                                                                   |       | (641                           | )          | (172 | ) |
| Accrued compensation and related benefits                                          |       | 2,809                          |       | 173 |   |
| Income taxes payable                                                               |       | (565                           | )          | (351 | ) |
| Other liabilities                                                                  |       | 124                            |       | (11 | ) |
| Net cash provided by operating activities                                          |       | 5,613                          |       | 3,410 |   |
|                                                                               |       |                           |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Purchases of fixed assets                                                          |       | (1,121                         | )          | (186 | ) |
| Net cash used in investing activities                                              |       | (1,121                         | )          | (186 | ) |
|                                                                               |       |                           |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Repurchase of common stock                                                         |       | (3,481                         | )          | (274 | ) |
| Proceeds from issuance of common stock                                             |       | 1,413                          |       | 1,104 |   |
| Net cash (used in) provided by financing  activities                               |       | (2,068                         | )          | 830 |   |
|                                                                               |       |                           |       |   |   |
| Net increase in cash from continuing  operations                                   |       | 2,424                          |       | 4,054 |   |
| Net cash used in discontinued operations                                           |       | (271                           | )          | (336 | ) |
| Net increase in cash                                                               |       | 2,153                          |       | 3,718 |   |
| Cash at beginning of period                                                        |       | 22,148                         |       | 17,712 |   |
| Cash at end of period                                                              |       | $                              | 24,301     |   | $ | 21,430 |   |

 

See accompanying notes to consolidated financialstatements

 

6

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## **SM&A**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**For the Three and Six Months Ended June 30,2005 and 2004**

**(unaudited)**

 

#### **Note 1.   Basisof Presentation and Significant Accounting Policies**

#### ** **

The consolidated financial statements includedherein are unaudited; however, they contain all normal recurring accruals andadjustments that, in the opinion of management, are necessary to present fairlythe consolidated financial position of SM&A at June 30, 2005, theconsolidated results of operations for the three and six months ended June 30,2005 and 2004, and cash flows for the six months ended June 30, 2005 and2004.  Comprehensive income is equivalentto net income for the three and six month periods ended June 30, 2005 and 2004,respectively.

 

It should be understood that accountingmeasurements at interim dates inherently involve greater reliance on estimatesthan at year-end.  The results ofoperations for the three and six months ended June 30, 2005 are not necessarilyindicative of the results to be expected for the full fiscal year.

 

The accompanying unaudited consolidatedfinancial statements do not include footnotes and certain financialpresentations normally required under generally accepted accounting principles.Therefore, these financial statements should be read in conjunction with ouraudited consolidated financial statements and notes thereto for the year endedDecember 31, 2004, included in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission on March 14, 2005.

 

***Recent Accounting Pronouncements***

 

InDecember 2004, the FASB issued SFAS No. 123 (Revised 2004) “Share Based Payment”(“SFAS 123R”), which is a revision to SFAS 123 and supersedes APB 25 and SFAS148.  This statement requires that thecost resulting from all share-based payment transactions be recognized in thefinancial statements.  This statementestablishes fair value as the measurement objective in accounting forshare-based payment arrangements and requires all entities to apply afair-value based measurement method in accounting for share-based paymenttransactions with employees except for equity instruments held by employeeshare ownership plans. SFAS 123R applies to all awards granted after therequired effective date (the beginning of the first annual reporting periodthat begins after June 15, 2005) and to awards modified, repurchased, orcancelled after that date.  As of therequired effective date, all public entities that used the fair-value-basedmethod for either recognition or disclosure under Statement 123 will apply thisStatement using a modified version of prospective application.  Under that transition method, compensationcost is recognized on or after the required effective date for the portion ofoutstanding awards, for which the requisite service has not yet been rendered,based on the grant-date fair value of those awards calculated under Statement123 for either recognition or pro forma disclosures. For periods before therequired effective date, those entities may elect to apply a modified versionof the retrospective application under which financial statements for priorperiods are adjusted on a basis consistent with the pro forma disclosuresrequired for those periods by Statement 123. As a result, beginning in the first quarter of 2006, the Company willadopt SFAS 123R and begin reflecting the stock option expense determined underfair value based methods in its statement of operations rather than aspro-forma disclosure in the notes to the financial statements.  The Company has not yet determined whetherthe adoption of SFAS 123R will result in amounts that are similar to thecurrent pro forma disclosures under SFAS 123 and it is evaluating therequirements under SFAS 123R.  Suchadoption may have a substantial impact on its consolidated statements of incomeand earnings per share.

 

***Significant Accounting Policies***

 

*Revenue Recognition. *We recognize revenuefrom services 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

 

7

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derived from success fees, offered to clients as a pricing option, andrecorded as revenue only upon attainment of the specified incentivecriteria.  Success fees are not billableand revenue is not recorded until the client wins a contract.

 

*Cash and Cash Equivalents. *The Company considers allhighly liquid investments with an original maturity of three months or less tobe cash equivalents.

 

#### **Note 2.**                                  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  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                     | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Denominator for basic income per share:  weighted average shares outstanding during the period |       | 20,370                           |       | 20,541                         |       | 20,317 |   | 20,470 |   |
| Incremental shares attributable to dilutive  outstanding stock options                         |       | 509                              |       | 1,120                          |       | 663 |   | 1,231 |   |
| Denominator for diluted income per share:                                                      |       | 20,879                           |       | 21,661                         |       | 20,980 |   | 21,701 |   |

 

#### **Note 3.**                                  Stock-BasedCompensation

 

The Company has elected to follow APB Opinion No. 25, “Accounting forStock Issued to Employees,” to account for options to purchase common stock ofthe Company issued pursuant to the Company’s stock-based compensationplans.  Under APB Opinion No. 25, nocompensation cost is recognized because the exercise price of options grantedunder the Company’s stock-based compensation plans is at least equal to atleast the market price of the underlying stock on the date of grant.  Had compensation costs for these plans beendetermined at the grant dates for awards under the alternative accountingmethod provided for in SFAS No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure-an Amendment to FASB Statement No. 123,”net income and earnings per share, on a pro forma basis, would have been (inthousands except for per share information):

 
| ** **                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                              | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income — as reported                           |       | $                                | 2,477      |                           | $          | 2,283 |   | $ | 5,073 |   | $ | 5,223 |   |
| Less: stock compensation expense – net of tax      |       | (1,023                           | )          | (360                           | )          | (1,484 | ) | (582 | ) |
| Net income — SFAS No. 123 pro forma                |       | $                                | 1,454      |                           | $          | 1,923 |   | $ | 3,589 |   | $ | 4,641 |   |
|                                                    |       |                             |       |                           |       |   |   |   |   |
| Basic income per share — as reported               |       | $                                | 0.12       |                           | $          | 0.11 |   | $ | 0.25 |   | $ | 0.26 |   |
| Basic income per share — SFAS No. 123 pro  forma   |       | $                                | 0.07       |                           | $          | 0.09 |   | $ | 0.18 |   | $ | 0.23 |   |
|                                                    |       |                             |       |                           |       |   |   |   |   |
| Diluted income per share — as reported             |       | $                                | 0.12       |                           | $          | 0.11 |   | $ | 0.24 |   | $ | 0.24 |   |
| Diluted income per share — SFAS No. 123 pro  forma |       | $                                | 0.07       |                           | $          | 0.09 |   | $ | 0.17 |   | $ | 0.21 |   |
|                                                         |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

On June 8,2005, the Board of Directors (the “Board”) of SM&A (the “Company”), uponrecommendation of the Board’s Audit and Compensation Committees, approved theaccelerated vesting of certain unvested and “out-of-the-money” options held bycurrent employees, officers and directors (the “Acceleration”). The optionsaccelerated were granted under the Company’s Second Amended and Restated EquityIncentive Plan (the “Plan”).

 

8

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As a result ofthe Acceleration, the affected unvested options are those that had exerciseprices of greater than $8.87 per share. The closing sales price of the Company’scommon stock on the NASDAQ National market on June 8, 2005, the effective dateof the Acceleration, was $8.87. Pursuant to the Acceleration, options granted underthe Plan to purchase approximately 403,000 shares of the Company’s common stockthat would otherwise have vested at various times within the next four yearsbecame fully vested. Of the 403,000 options, 200,000 options were granted tocurrent Directors, 100,000 were granted to current Officers, and the remaining103,000 options were granted to current employees. The options have a range ofexercise prices of $9.07 to $12.66. As a result of the Board’s decision toapprove the Acceleration, each agreement for options subject to theAcceleration is deemed to be amended to reflect the Acceleration as of theeffective date, but all other terms and conditions of each such optionagreement remain in full force and effect.

 

The decisionto initiate the Acceleration under the Plan, which the Company believes to bein the best interest of the Company and its shareholders, was made primarily toreduce compensation expense that would be expected to be recorded in futureperiods following the Company’s adoption of Financial Accounting StandardsBoard (“FASB”) Statement no. 123, “Share-Based Payment (revised 2004)” (“SFAS123(R)”). The Company currently accounts for stock-based compensation using theprovisions of Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees”. The SFAS 123(R) will require the Company to recordcompensation expense equal to the fair value of all equity-based compensationover the vesting period of each such award. As a result of the Accelerationunder the Plan, the Company expects to reduce its aggregate compensationexpense related to the accelerated options by a total of approximately $1.8million before taxes over the next four years (the remaining vesting period forthe accelerated options). This estimate is subject to change, but is based onapproximated value calculations using the Black-Scholes methodology. TheCompany will disclose the pro forma effect of this compensation expense in thepro forma footnote disclosure in its fiscal year 2005 annual report, as permittedunder the transition guidance provided by the FASB.

 

#### **Note 4.   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 credit agreement are unsecured.  The agreement requires the Company to complywith certain financial covenants pertaining to its tangible net worth, ratio oftotal liabilities to tangible net worth, and ratio of current assets to currentliabilities (as defined in the agreement). The agreement also contains certain negative covenants which, amongother things, restricts the Company’s ability to incur additional indebtednessof more than $1.0 million in excess of the $10.0 million limit set forth in thecredit agreement and make capital expenditures in excess of $2.0 millionwithout the prior written approval of the lender.  At June 30, 2005, the Company had nooutstanding borrowings under the line of credit, the bank had issued a letterof credit for $64,000 and we had $9.9 million in availability.

 

#### **Note 5.   IncomeTaxes**

#### ** **

The Company’s effective income tax rates for the three andsix months ended June 30, 2005 and 2004 were 40.2%, 36.8%, 31.8% and 37.3%,respectively.  In the first quarter endedMarch 31, 2005, the Company completed and filed its federal and state incometax returns for the calendar year ended December 31, 2004.  Based on theincome tax returns filed, the Company recorded an adjustment to its effectivetax rate in the first quarter of 2005 resulting in a reduction of income taxexpense of approximately $208,000, or $0.01 per diluted share.

 

Inthe second quarter ended June 30, 2004, the Company completed and filed its federaland state income tax returns for the calendar year ended December 31, 2003. Based on the income tax returns filed, the Company recorded an adjustmentto its state effective tax rate in the second quarter resulting in a reductionof income tax expense of $182,000.  Thisreduction of $182,000, coupled with a current year state tax provision rateadjustment of $125,000, resulted in a reduction of income tax expense ofapproximately $307,000, or $0.02 per diluted share.

 

9

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#### **Note 6.   Stockholders’Equity**

#### ** **

InMay 2004, the Company’s Board of Directors authorized a plan to repurchase up to $7.0million of the Company’s common stock. In April 2005, theCompany’s Board of Directors authorizedan increase of an additional $5.0 million, increasing the total authorizationto repurchase the Company’s common stock to $12.0 million.  The Company intends to repurchase shares fromtime to time, at prevailing prices, in the open market. The timing and amountof the share repurchases will be at the discretion of management and will bebased on such factors as the stock price, general economic and marketconditions, and other factors. The share repurchase plan may be suspended ordiscontinued at any time.  Sharesrepurchased under the plan are cancelled.  For the three months ended June 30, 2005, the Company repurchased351,825 shares at a total cost of $2.9 million. For the six months ended June 30, 2005, the Company repurchased 424,995shares at a total cost of $3.4 million. Since the inception of the share repurchase plan, the Company has repurchased 1,050,495 sharesat a total cost of $8.1 million.

 

### **Note 7.   Related Parties**

### ** **

The Companyperiodically leases aircraft from SummitJets, Inc., which is owned by theCompany’s Chairman and Chief Executive Officer. The lease rate was determined through a review of prevailing marketrates for such services.  During thethree and six months ended June 30, 2005 and 2004, the Company recorded anexpense of $15,000, $35,000, $8,000 and $16,000 respectively.  The expense is included in selling, generaland administrative expenses.

 

In March 2005,the Company facilitated the exercising of stock options upon the retirement ofour former member of the Board of Directors, Jack Woodhull.  Upon the exercising of the options, theCompany repurchased 15,000 shares for a total discounted cost of $117,000.  The Company purchased the shares at a 3.6%discount.

 

In April 2005,the Company facilitated the exercising of stock options upon the retirement ofour former member of the Board of Directors, Albert Nagy.  Upon the exercising of the options, theCompany repurchased 200,000 shares for a total discounted cost of $1.7million.  The Company purchased theshares at a 3.6% discount.

 

In April 2005,the Company facilitated the exercising of stock options upon the resignation ofour former President and Chief Operating Officer, Bennett Beaudry.  Upon the exercising of the options, theCompany repurchased 150,625 shares for a total discounted cost of $1.2million.  The Company purchased theshares at a 3.6% discount.

 

**Note 8.    DiscontinuedOperations**

 

Prior to fiscal year 2003, the Company sold and dissolved two of itsbusiness segments.  The balance owed atJune 30, 2005 of $456,000 represents the remaining office lease commitments,net of subleases, over the remaining terms of the leases.  During the six months ended June 30, 2005,the Company paid $271,000 net of sublease receipts, related to the leasedproperty.

 

10

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

 

SM&A is a consultingfirm which is the world’s leading provider of competition management services,and a leading provider of high-value performance assurance services.  Under these two service lines, ourapproximately 300 employees and consultants provide strategy, proposalmanagement, program management, systems engineering, expert support, programplanning, and other high-value technical support to major industrial customersin the defense, homeland security, aerospace, information technology, architectand engineering sectors.  Since 1982, wehave managed more than 900 proposals worth more than $300 billion for ourclients and have achieved an 85% win rate on awarded contracts.

 

**RESULTS OF OPERATIONS**

 

The following table sets forth certain historical operatingresults (in thousands):

 
| ** **                                    | ** ** | **For the three months ended June 30,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                | ** ** | **2004** | ** ** | **Change** | ** ** | **Change  %** | ** ** |
| Revenue                                       |       | $                                       | 20,261     |   | $ | 16,159 |   | $ | 4,102 |   | 25.4 |   |
| Cost of revenue                               |       | 11,583                                  |       | 8,670 |   | 2,913 |   | 33.6 |   |
| Gross margin                                  |       | 8,678                                   |       | 7,489 |   | 1,189 |   | 15.9 |   |
| Selling, general and administrative  expenses |       | 4,657                                   |       | 4,188 |   | 469 |   | 11.2 |   |
| Operating income                              |       | 4,021                                   |       | 3,301 |   | 720 |   | 21.8 |   |
| Income tax expense                            |       | 1,662                                   |       | 1,066 |   | 596 |   | 55.9 |   |
| Net income                                    |       | $                                       | 2,477      |   | $ | 2,283 |   | $ | 194 |   | 8.5 |   |

 

## **Three Months EndedJune 30, 2005 Compared to Three Months Ended June 30, 2004**

## ** **

*Revenue.*  Revenue increased $4.1 million, or 25.4%, to$20.3 million for the three months ended June 30, 2005 compared to $16.2million for the same period of the prior year. The increase in our revenue was due to revenue growth in both ourcompetition management and performance assurance service lines.  Through our sales and marketing efforts, wehave made substantial headway in the number of active projects with which weare providing our services.  We have alsonot experienced any notable delays in the release of request for proposals orprogram starts.

 

The percentage of revenues from competition management services andperformance assurance services was 53.7% and 46.3% for the three months endedJune 30, 2005, respectively, compared to 55.0% and 45.0% for the same period ofthe prior year.  The percentage ofrevenue coming from our aerospace and defense clients was 72.3% and 71.0% forthe three months ended June 30, 2005 and 2004 respectively.  During the three months ended June 30, 2005,nine new customers, who accounted for 4.5% of our total revenue, engagedus.  This compares to nine new customers,which accounted for 9.2% of our total revenue during the same period of theprior year.

 

*Gross Margin.* Gross margin increased $1.2 million, or15.9%, to $8.7 million for the three months ended June 30, 2005 compared to$7.5 million for the same period of the prior year.  The increase in gross margin dollars is dueto the increase in sales as discussed above. As a percentage of revenue, gross margin decreased to 42.8% for thethree months ended June 30, 2005 compared to 46.3% for the same period of theprior year.   During the second quarter,our success fees, which are dependent upon the timing of awards for ourclients, totaled $228,000 compared with $642,000 for the same period of theprior year.  Also affecting the declinein our gross margin is the contract mix within our performance assurancerevenues.  During 2005, the majority of ourgrowth in performance assurance has been with a couple of customers who enteredinto multi year agreements several years ago. These customers are utilizing these older agreements, which have lowerbilling rates, which are putting some downward pressure on our overall grossmargin.

 

11

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*Selling, General and AdministrativeExpenses. *Selling,**general and administrative expenses consist principally ofsalary and benefit costs for executive, sales and administrative personnel,training, recruiting, professional services and other general corporateactivities. * *Selling,general and administrative expenses increased $469,000, or 11.2%, to $4.7million for the three months ended June 30, 2005, as compared to $4.2 millionfor the same period of the prior year. As a percentage of revenue, selling, general and administrative expensesdecreased to 23.0% for the three months ended June 30, 2005, as compared to25.9% for the same period of the prior year. The increase in expenses is attributable to the increase in the numberof account executives and staff to support and service our new and existingclient base.

 

*Operating Income.*Operating income increased $720,000, or 21.8% to $4.0 million for the threemonths ended June 30, 2005, compared to $3.3 million for the same period of theprior year.  As a percentage of revenue,operating income decreased to 19.8% for the three months ended June 30, 2005,as compared to 20.4% for the same period of the prior year.  Operating income increased due to theincrease in sales and gross profit offset by the planned increase in selling,general and administrative expenses, as discussed above.

 

*Income Tax Expense*.  TheCompany’s****effective income tax rates for the three months ended June 30, 2005 and2004 were 40.2% and 31.8%, respectively. In the second quarter ended June 30, 2004, the Company completed and filedits federal and state income tax returns for the calendar year ended December31, 2003.  Based on the income tax returns filed, the Company recorded anadjustment to its state effective tax rate in the second quarter resulting in areduction of income tax expense of $182,000.  This reduction of $182,000, coupled with acurrent year state tax provision rate adjustment of $125,000, resulted in areduction of income tax expense of approximately $307,000, or $0.02 per dilutedshare.  No similar adjustment wasrecorded during the three months ended June 30, 2005.

 

12

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**RESULTS OF OPERATIONS**

 

The following table sets forth certain historical operatingresults (in thousands):

 
| ** **                                    | ** ** | **For the Six Months Ended June 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                    | ** ** | **2005**                              | ** ** | **2004** | ** ** | **Change** | ** ** | **Change  %** | ** ** |
| Revenue                                       |       | $                                     | 40,506     |   | $ | 34,646 |   | $ | 5,860 |   | 16.9 |   |
| Cost of revenue                               |       | 23,106                                |       | 18,814 |   | 4,292 |   | 22.8 |   |
| Gross margin                                  |       | 17,400                                |       | 15,832 |   | 1,568 |   | 9.9 |   |
| Selling, general and administrative  expenses |       | 9,579                                 |       | 7,578 |   | 2,001 |   | 26.4 |   |
| Operating income                              |       | 7,821                                 |       | 8,254 |   | (433 | ) | (5.2 | ) |
| Income tax expense                            |       | 2,951                                 |       | 3,109 |   | (158 | ) | (5.1 | ) |
| Net income                                    |       | $                                     | 5,073      |   | $ | 5,223 |   | $ | (150 | ) | (2.9 | ) |

 

## **Six Months Ended June30, 2005 Compared to Six Months Ended June 30, 2004**

## ** **

*Revenue.*  Revenue increased $5.9 million, or 16.9%, to$40.5 million for the six months ended June 30, 2005 compared to $34.6 millionfor the same period of the prior year. The increase in our revenue was due primarily to revenue growth in bothour competition management and performance assurance service lines.   Through our sales and marketing efforts, wehave made substantial headway in the number of active projects with which weare providing our services.  In addition,we have not experienced any notable delays in the release of request forproposals or program starts.

 

The percentage of revenues from competition management services andperformance assurance services was 57.6% and 42.4% for the six months endedJune 30, 2005, respectively, compared to 59.0% and 41.0% for the same period ofthe prior year.  The percentage ofrevenue coming from our aerospace and defense clients was 75.6% and 74.4% forthe six months ended June 30, 2005 and 2004 respectively.  During the six months ended June 30, 2005,fifteen new customers, who accounted for 3.0% of our total revenue, engagedus.  This compares to twenty-one newcustomers, which accounted for 7.8% of our total revenue during the same periodof the prior year.

 

*GrossMargin.* Gross margin increased $1.6 million, or 9.9%,to $17.4 million for the six months ended June 30, 2005 compared to $15.8million for the same period of the prior year. The increase in gross margin dollars is due to the increase in sales asdiscussed above.  As a percentage ofrevenue, gross margin decreased to 43.0% for the six months ended June 30, 2005compared to 45.7% for the same period of the prior year.  Duringthe six months ended June 30, 2005, our success fees, which are dependent uponthe timing of awards for our clients, totaled $565,000 compared with $751,000for the same period of the prior year. Also affecting the decline in our gross margin is the contract mixwithin our performance assurance revenues. During 2005, the majority of our growth in performance assurance revenuehas been with a couple of customers who entered into multi-year agreementsseveral years ago.  These customers areutilizing these older agreements, which have lower billing rates, which are puttingsome downward pressure on our gross margin.

 

*Selling, General and AdministrativeExpenses. *Selling,**general andadministrative expenses consist principally of salary and benefit costs forexecutive, sales and administrative personnel, training, recruiting,professional services and other general corporate activities. * *Selling, general andadministrative expenses increased $2.0 million, or 26.4%, to $9.6 million forthe six months ended June 30, 2005, as compared to $7.6 million for the sameperiod of the prior year.  As a percentageof revenue, selling, general and administrative expenses increased to 23.6% forthe six months ended June 30, 2005, as compared to 21.9% for the same period ofthe prior year.  Our sales and marketingexpenses increased $973,000 due to the increase in the number of accountexecutives, marketing professionals and support staff to support and serviceour planned revenue growth.  Our trainingexpenses increased $431,000 due to planned increased and improved internaltraining programs.  Our facility leaseexpense increased $244,000 due to our completed expansion into an additional11,000 square feet of office space at our

 

13

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NewportBeach, California headquarters.  Lastly,as announced in March 2005, we incurred $330,000 in severance costs related tothe resignation of our President and Chief Operating Officer.

 

*Operating Income.*Operating income decreased $433,000, or 5.2% to $7.8 million for the six monthsended June 30, 2005, compared to $8.3 million for the same period of the prioryear.  As a percentage of revenue,operating income decreased to 19.3% for the six months ended June 30, 2005, ascompared to 23.8% for the same period of the prior year.  Operating income decreased due to theincrease in sales and gross profit offset by the planned increase in selling,general and administrative expenses, as discussed above.

 

*Income Tax Expense*.  Oureffective income tax rates for six months ended June 30, 2005 and 2004 were36.8% and 37.3%, respectively.  In the first quarter ended March 31, 2005,we completed and filed our federal and state income tax returns for thecalendar year ended December 31, 2004.  Based on the income tax returnsfiled, we recorded an adjustment to our effective tax rate in the first quarterof 2005 resulting in a reduction of income tax expense of approximately $208,000,or $0.01 per diluted share.

 

Inthe second quarter ended June 30, 2004, the Company completed and filed its federaland state income tax returns for the calendar year ended December 31, 2003. Based on the income tax returns filed, the Company recorded an adjustmentto its state effective tax rate in the second quarter resulting in a reductionof income tax expense of $182,000.  Thisreduction of $182,000, coupled with a current year state tax provision rateadjustment of $125,000, resulted in a reduction of income tax expense ofapproximately $307,000, or $0.02 per diluted share.

 

14

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**Capital Resources and Liquidity**

 

Ourworking capital increased to $35.8 million at June 30, 2005 from $31.9 millionat December 31, 2004.  In addition, ourcash and cash equivalents increased to $24.3 million at June 30, 2005, from$22.1 million at December 31, 2004.  Cashflows from operating activities provided $5.6 million during the six monthsended June 30, 2005, compared to $3.4 million for the same period during theprior year.  The increase in our cashflows from operating activities is due primarily to the timing of our payrollcycles and the recording of the income tax effect from the exercise of stockoptions.

 

Thechange in accounts receivable was due primarily to the increase in our salesfor the six months ended June 30, 2005 compared to the same period of the prioryear.  Our days sales outstanding (DSO)was 65 days, which is consistent with our historical average of between 65 to67 days.

 

Weexpanded our office space by an additional 11,000 square feet in December2004.  In addition, we entered into anagreement with a software vendor in March 2005 to implement an EnterpriseResource Planning software program.  Ofthe purchases of fixed assets of $1.1 million during the six months ended June30, 2005, we spent $900,000 relating to these two activities and we expect tospend an additional $500,000 relating to these two activities during theremainder of this year.

 

In May 2004, the Company’s Board of Directors authorizeda plan to repurchase up to $7.0 million of the Company’s common stock.  In April 2005, the Company’sBoard of Directors authorized anincrease of an additional $5.0 million, increasing the total authorization torepurchase the Company’s common stock to $12.0 million.  The Company intends to repurchase shares fromtime to time, at prevailing prices, in the open market. The timing and amountof the share repurchases will be at the discretion of management and will bebased on such factors as the stock price, general economic and marketconditions, and other factors. The share repurchase plan may be suspended ordiscontinued at any time.  Sharesrepurchased under the plan are cancelled. As of June 30, 2005, the Company has repurchased 1,050,195shares at a total cost of $8.1 million.

 

The Company has a revolving credit agreementwhich allows for borrowings up to $10.0 million at the prime rate minus onehalf of one percent (-0.50%) per annum or LIBOR plus two and one quarterpercent (2.25%) per annum.  The revolvingcredit agreement is renewable annually on April 30th of eachyear.  Borrowings under the revolvingcredit agreement are unsecured.  Theagreement requires the Company to comply with certain financial covenantspertaining to its tangible net worth, ratio of total liabilities to tangiblenet worth, and ratio of current assets to current liabilities (as defined inthe agreement).  The agreement alsocontains certain negative covenants which, among other things, restricts theCompany’s ability to incur additional indebtedness of more than $1.0 million inexcess of the $10.0 million limit set forth in the credit agreement and makecapital expenditures in excess of $2.0 million without the prior writtenapproval of the lender.  At June 30,2005, we had no outstanding borrowings under the line of credit, the bank hadissued a letter of credit for $64,000 and we had $9.9 million in availability.

 

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.

 

15

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## **RISK FACTORS**

 

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

 

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

## ** **

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

 

•                  Loss of political support for current orincreased levels of spending;

•                  Changes of presidential administration,particularly changes from one political party to another, that typically resultin a mass reordering of priorities that reduce new proposal activity for up toa year;

•                  Threat scenarios evolving away from globalconflicts to regional conflicts;

•                  Spending for ongoing operations, such as thewar on terrorism, the occupation of Iraq, downward pressure on spending forprocurement of new systems and research and development spending; and

•                  Cancellation of programs or emphasis on governmentshifting programs.

 

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

 

## ***We rely on a relatively limited number of clients.***

## ** **

We derive a significantportion of revenue from continuing operations from a relatively limited numberof clients.  Our seven largest customersaccounted for 83.5% and 91.8% of our revenue for 2004 and 2003, respectively.  Clientstypically retain our services as needed on an engagement basis rather thanpursuant to long-term contracts, and a client can usually terminate theengagement at any time without a significant penalty. 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 significantclient could materially and adversely affect our business, financial conditionand results of operations. In addition, the level of services required by anindividual client may diminish over the life of the relationship, and there canbe no assurance we will be successful in establishing relationships with newclients as this occurs.

 

***The markets in which we operate are highlycompetitive.***

 

The market for competition managementservices in the procurement of government and commercial contracts foraerospace and defense work is a niche market with a number of competitors. Weare the largest provider of such services and principally compete with thein-house capability of our clients.  Inaddition, numerous smaller proposal management companies compete in this highlyspecialized industry. With sufficient resources in the form of money andexcellent talent with current security clearances, our competitors could erodeour current market share and such a reduction could materially and adverselyaffect our business, operating results and financial condition.

 

***We rely heavily upon our key seniormanagement personnel and our ability to recruit and maintain skilled professionals.***

 

Our success is dependentupon the efforts, abilities, and business generation capabilities and projectexecution of our strategic account managers and account executives.  In addition, Steven S. Myers, our Chief ExecutiveOfficer and Chairman of the Board, has a significant role in our success.  The loss of the services of theseindividuals, for any reason, could materially and adversely affect ourbusiness, operating results and financial condition.

 

16

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Our business involves thedelivery of professional services and is highly labor-intensive.  Our success depends largely on our generalability to attract, develop, motivate and retain highly skilledprofessionals.  The loss of some or asignificant 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.

 

***Quarterly results may fluctuate.***

 

We may experiencefluctuations in future quarterly operating results due to a number of factors,including the size, timing and duration of client engagements.

 

***Our stock price is subject to significantvolatility.***

 

Ourcommon stock was first publicly traded on January 29, 1998 after our initialpublic offering at $12.00 per share. Between January 29, 1998 and June 30,2005, the closing sale price has ranged from a high of $31.13 per share to alow of $0.75 per share. The market price of our common stock could continue tofluctuate substantially due to a variety of factors, including:

 

•                  Quarterlyfluctuations in results of operations;

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

•                  Announcements ofnew services by competitors;

•                  Announcements ofpoor operating results by us or our competitors;

•                  Loss of keyemployees;

•                  Changes in theregulatory environment or market conditions affecting the defense and aerospaceindustry;

•                  Changes inearnings estimates and ratings by analysts;

•                  Lack of marketliquidity resulting from a relatively small amount of public stock float;

•                  Changes ingenerally accepted accounting principles;

•                  Sales of common stockby existing holders; and

•                  The announcementof proposed acquisitions and dispositions.

 

***Principal shareholder hassignificant control.***

** **

At June 30, 2005, StevenS. Myers, Chief Executive Officer and Chairman of the Board, beneficially ownedor controlled approximately 24.0% of our outstanding common stock and will havethe ability to control or significantly influence the election of directors andthe results of other matters submitted to a vote of shareholders. Thisconcentration of ownership may have the effect of delaying or preventing achange in control and may adversely affect the ability of other holders of ourcommon stock to pass shareholder resolutions and control our actions.

 

17

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

 

The Company currently has no instruments thatare sensitive to market risk.

 

**Item 4.****                          Controlsand Procedures**

 

***Evaluation of Disclosure Controlsand Procedures***

 

Our management, with theparticipation 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 no change in ourinternal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934, as amended) identified inconnection with the evaluation of our internal control performed during ourlast fiscal quarter that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

18

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## **PART II – OTHER INFORMATION**

## ** **

**Item1.**                                   LegalProceedings

** **

**We areinvolved in routine 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 propertyis subject.**

** **

**Item2.**                                   Changesin Securities and Use of Proceeds and Issuer Purchase of Equity Securities

** **

**Issuer Purchases of Equity Securities**

 
| **Period**                            | ** ** | **Total**

**Number  of Shares  Purchased** | ** ** | **Average  Price  Paid per  Share** | ** ** | **Total  Number of  Shares  Purchased  as Part of a  Publicly  Announced  Plan** | ** ** | **Approximate  $ Value of  Shares That  May Yet Be  Purchased  Under the  Plan** | ** ** |
|---------------------------------------|------------|---------------------------------------------|------------|-------------------------------------|------------|----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| **Beginning balance**                 |       | 625,500                                     |       | $                                   | 7.39       |                                                                             | 625,500    |                                                                                  | $          | 2,377,000 |   |
| January 1, 2005 to January 31, 2005   |       | —                                      |       | —                              |       | —                                                                           |       | 2,377,000                                                                             |       |
| February 1, 2005 to February 28, 2005 |       | 45,180                                      |       | 8.03                                |       | 670,680                                                                          |       | 2,014,000                                                                             |       |
| March 1, 2005 to March 31, 2005       |       | 27,990                                      |       | 7.88                                |       | 698,670                                                                          |       | 1,794,000                                                                             |       |
| April 1, 2005 to April 30, 2005       |       | 351,825                                     |       | 8.24                                |       | 1,050,495                                                                        |       | 3,896,000                                                                             |       |
| May 1, 2005 to May 31, 2005           |       | —                                      |       | —                              |       | —                                                                           |       | 3,896,000                                                                             |       |
| June 1, 2005 to June 30, 2005         |       | —                                      |       | —                              |       | —                                                                           |       | 3,896,000                                                                             |       |
| Total                                 |       | 1,050,495                                   |       | $                                   | 7.71       |                                                                             | 1,050,495  |                                                                                  |       |   |
|                                       |            |                                             |            |                                     |            |                                                                                  |            |                                                                                       |            |  |  |

 

In May 2004, the Company’s Board of Directors authorizeda plan to repurchase up to $7.0 million of the Company’s common stock.  In April 2005, the Company’sBoard of Directors authorized anincrease of an additional $5.0 million, increasing the total authorization torepurchase the Company’s common stock to $12.0 million.  The Company intends to repurchase shares fromtime to time, at prevailing prices, in the open market. The timing and amountof the share repurchases will be at the discretion of management and will bebased on such factors as the stock price, general economic and marketconditions, and other factors. The share repurchase plan may be suspended ordiscontinued at any time.  Shares repurchasedunder the plan are cancelled.  As of June30, 2005, the Company has repurchased 1,050,495 shares at a total cost of $8.1million.

 

**Item3.**                                   DefaultsUpon Senior Securities

** **

**NotApplicable.**

 

19

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**Item4.**                                   Submissionof Matters to a Vote of Security Holders

** **

**(a)**           The Annual Meeting ofShareholders was held on June 8, 2005.

** **

**(b)**           Elected Directors:

**William C. Bowes, J. Christopher Lewis, Dwight L. Hanger,Steven S. Myers, Joseph B. Reagan, Robert Rodin, John P. Stenbit and Robert J.Untracht.**

** **

**(c)(i)      Election of eightdirectors as follows:**

** **
| ** **           | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|----------------------|------------|------------|------------|--------------|------------|
| William C. Bowes     |       | 16,752,099 |       | 1,821,796    |       |
| J. Christopher Lewis |       | 17,726,742 |       | 847,153      |       |
| Dwight L. Hanger     |       | 18,031,530 |       | 542,365      |       |
| Steven S. Myers      |       | 17,996,314 |       | 577,581      |       |
| Joseph B. Reagan     |       | 16,053,959 |       | 2,519,936    |       |
| Robert Rodin         |       | 18,047,954 |       | 525,941      |       |
| John P. Stenbit      |       | 18,048,914 |       | 524,981      |       |
| Robert J. Untracht   |       | 18,049,714 |       | 524,181      |       |

** **

**(c)(ii)     To approve the amendment tothe Amended & Restated Employee Stock Purchase Plan.**

** **
| **For:  15,592,445**            | ** ** | **Against:  287,085** | ** ** | **Abstain:  22,790** |
|---------------------------------|------------|-----------------------|------------|----------------------|
| **Broker  Non-Vote: 2,671,575** | ** ** | ** **            | ** ** | ** **           |
| ** **                      | ** ** | ** **            | ** ** | ** **           |

**(c)(iii)   To approve the amendment and restatement of the Amended & Restated 1997Stock Option Plan.**

** **
| **For:  11,344,135**            | ** ** | **Against:  4,534,246** | ** ** | **Abstain:  23,939** |
|--------------------------------------|------------|------------------------------|------------|---------------------------|
| **Broker Non-Vote:  2,671,575** | ** ** | ** **                   | ** ** | ** **                |
| ** **                           | ** ** | ** **                   | ** ** | ** **                |

** **

(c)(iv)    To ratify andapprove the appointment of Ernst & Young LLP as independent auditors ofSM&A for the year ending December 31, 2005.

 
| **For:  18,529,652** | ** ** | **Against:  25,263** | ** ** | **Abstain:  18,980** |
|---------------------------|------------|---------------------------|------------|---------------------------|

** **

**Not Applicable.**

** **

**Item5.**                                   OtherInformation

** **

The Companyperiodically leases aircraft from SummitJets, Inc., which is owned by theCompany’s Chairman and Chief Executive Officer. The lease rate was determined through a review of prevailing market ratesfor such services.  During the three andsix months ended June 30, 2005 and 2004, the Company recorded an expense of$15,000, $35,000, $8,000 and $16,000 respectively.  The expense is included in selling, generaland administrative expenses.

 

In March 2005,the Company facilitated the exercising of stock options upon the retirement ofour former member of the Board of Directors, Jack Woodhull.  Upon the exercising of the options, theCompany repurchased 15,000 shares for a total discounted cost of $117,000.    The Company purchased the shares at a 3.6%discount.

 

In April 2005,the Company facilitated the exercising of stock options upon the retirement ofour former member of the Board of Directors, Albert Nagy.  Upon the exercising of the options, the Companyrepurchased 200,000 shares for a total discounted cost of $1.7 million.    The Company purchased the shares at a 3.6%discount.

 

In April 2005,the Company facilitated the exercising of stock options upon the resignation ofour former President and Chief Operating Officer, Bennett Beaudry.  Upon the exercising of the options, theCompany repurchased 150,625 shares for a total discounted cost of $1.2million.  The Company purchased theshares at a 3.6% discount.

 

20

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On June 8,2005, the Board of Directors (the “Board”) of SM&A (the “Company”), uponrecommendation of the Board’s Audit and Compensation Committees, approved theaccelerated vesting of certain unvested and “out-of-the-money” options held bycurrent employees, officers and directors (the “Acceleration”). The optionsaccelerated were granted under the Company’s Second Amended and Restated EquityIncentive Plan (the “Plan”).

 

As a result ofthe Acceleration, the affected unvested options are those which had exerciseprices of greater than $8.87 per share. The closing sales price of the Company’scommon stock on the NASDAQ National market on June 8, 2005, the effective date ofthe Acceleration, was $8.87. Pursuant to the Acceleration, options grantedunder the Plan to purchase approximately 403,000 shares of the Company’s commonstock that would otherwise have vested at various times within the next fouryears became fully vested. Of the 403,000 options, 200,000 options were grantedto current Directors, 100,000 were granted to current Officers, and theremaining 103,000 options were granted to current employees. The options have arange of exercise prices of $9.07 to $12.66. As a result of the Board’sdecision to approve the Acceleration, each agreement for options subject to theAcceleration is deemed to be amended to reflect the Acceleration as of theeffective date, but all other terms and conditions of each such optionagreement remain in full force and effect.

 

The decisionto initiate the Acceleration under the Plan, which the Company believes to bein the best interest of the Company and its shareholders, was made primarily toreduce compensation expense that would be expected to be recorded in futureperiods following the Company’s adoption of Financial Accounting StandardsBoard (“FASB”) Statement no. 123, “Share-Based Payment (revised 2004)” (“SFAS123(R)”). The Company currently accounts for stock-based compensation using theprovisions of Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees”. The SFAS 123(R) will require the Company to recordcompensation expense equal to the fair value of all equity-based compensationover the vesting period of each such award. As a result of the Accelerationunder the Plan, the Company expects to reduce its aggregate compensationexpense related to the accelerated options by a total of approximately $1.8million before taxes over the next four years (the remaining vesting period forthe accelerated options). This estimate is subject to change, but is based onapproximated value calculations using the Black-Scholes methodology. TheCompany will disclose the pro forma effect of this compensation expense in thepro forma footnote disclosure in its fiscal year 2005 annual report, aspermitted under the transition guidance provided by the FASB.

 

21

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**Item 6.    Exhibits**

 

**INDEX TO EXHIBITS**

 

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

 
| 2.1    | Stock  Purchase and Sale Agreement, by and among the Registrant, Steven Myers  Holding Inc. and L-3 Communications Corporation. (1)                     |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                    |
| 2.2    | Amendment  No.1 to Stock Purchase and Sale Agreement, by and among the Registrant,  Steven Myers Holding Inc. and L-3 Communications Corporation. (2)   |
|   |                                                                                                                                                    |
| 3.1    | Amended  and Restated Articles of Incorporation. (3)                                                                                                    |
|   |                                                                                                                                                    |
| 3.2    | Amended  and Restated Bylaws of the Registrant. (4)                                                                                                     |
|   |                                                                                                                                                    |
| 10.1   | Amended  and Restated 1997 Stock Option Plan and related form of Stock Option  Agreement. (5)                                                           |
|   |                                                                                                                                                    |
| 10.2   | Amended  and Restated Employee Stock Purchase Plan. (6)                                                                                                 |
|   |                                                                                                                                                    |
| 10.3   | Office  Facility Lease. (7)                                                                                                                             |
|   |                                                                                                                                                    |
| 10.4   | Amendment  No. 1 to Office Facility Lease. (8)                                                                                                          |
|   |                                                                                                                                                    |
| 10.5   | Employment  Agreement of Steven S. Myers. (9)                                                                                                           |
|   |                                                                                                                                                    |
| 10.6   | Amendment  No. 1 to Employment Agreement of Steven S. Myers. (10)                                                                                       |
|   |                                                                                                                                                    |
| 10.7   | Amendment  No. 2 to Employment Agreement of Steven S. Myers. (11)                                                                                       |
|   |                                                                                                                                                    |
| 10.8   | Amendment  No. 3 to Employment Agreement of Steven S. Myers. (12)                                                                                       |
|   |                                                                                                                                                    |
| 10.9   | Amendment  No. 4 to Employment Agreement of Steven S. Myers. (13)                                                                                       |
|   |                                                                                                                                                    |
| 10.10  | Amendment  No. 5 to Employment Agreement of Steven S. Myers. (14)                                                                                       |
|   |                                                                                                                                                    |
| 10.11  | Employment  Agreement of Cathy L. Wood. (15)                                                                                                            |
|   |                                                                                                                                                    |
| 10.12  | Amendment  No. 1 to Employment Agreement of Cathy L. Wood “McCarthy”.(16)                                                                     |
|   |                                                                                                                                                    |
| 10.13  | Amendment  No. 2 to Employment Agreement of Cathy L. Wood “McCarthy”. (17)                                                                    |
|   |                                                                                                                                                    |
| 10.14  | Amendment  No. 3 to Employment Agreement of Cathy L. Wood “McCarthy”. (18)                                                                    |
|   |                                                                                                                                                    |
| 10.15  | Amendment  No. 4 to Employment Agreement of Cathy L. Wood “McCarthy”. (19)                                                                    |
|   |                                                                                                                                                    |
| 10.16  | Employment  Agreement of Bennett C. Beaudry. (20)                                                                                                       |
|   |                                                                                                                                                    |
| 10.17  | Amendment  No. 1 to Employment Agreement of Bennett C. Beaudry. (21)                                                                                    |
|   |                                                                                                                                                    |
| 10.18  | Amendment  No. 2 to Employment Agreement of Bennett C. Beaudry. (22)                                                                                    |
|   |                                                                                                                                                    |
| 10.19  | Amendment  No. 3 to Employment Agreement of Bennett C. Beaudry. (23)                                                                                    |
|   |                                                                                                                                                    |
| 10.20  | Accounts  Receivable Loan Agreement dated January 10, 2002, by and between the  Registrant and City National Bank, a national banking association. (24) |

 

22

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| 10.21  | Commercial  Guaranty dated January 10, 2002, executed by Steven Myers & Associates,  Inc. in favor of City National Bank, a national banking association. (25) |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                               |
| 10.22  | Revolving  Loan Agreement dated October 14, 2003, by and between the registrant and City  National Bank, a national association. (26)                              |
|   |                                                                                                                                                               |
| 10.23  | Revolving  Note dated April 10, 2003, executed by SM&A, in favor of City National  Bank. (27)                                                                  |
|   |                                                                                                                                                               |
| 10.24  | Renewal  of Revolving Note dated April 27, 2004, executed by SM&A, in favor of  City National Bank. (28)                                                       |
|   |                                                                                                                                                               |
| 10.25  | Renewal  of Revolving Note dated April 29, 2005, executed by SM&A, in favor of City  National Bank. (29)                                                       |
|   |                                                                                                                                                               |
| 10.26  | Consultant  Agreement of Bowes Enterprises. (30)                                                                                                                   |
|   |                                                                                                                                                               |
| 10.27  | Consultant  Agreement of Joseph B. Reagan. (31)                                                                                                                    |
|   |                                                                                                                                                               |
| 21.1   | Subsidiaries  of the Registrant. (32)                                                                                                                              |
|   |                                                                                                                                                               |
| 31.1   | Certificate  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002. (33)                                                           |
|   |                                                                                                                                                               |
| 31.2   | Certificate  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002. (34)                                                           |
|   |                                                                                                                                                               |
| 32.1   | Certification  of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002. (35)          |
|   |                                                                                                                                                               |
| 32.2   | Certification  of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (36)          |

 

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| **Footnote #** | ** ** | ** **                                                                                                                                                                          |
|----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1)            |       | Filed on November 27, 2001as Exhibit 10.1 to the registrant’s Current  Report on Form 8-K and incorporated herein by reference.                                                |
|           |       |                                                                                                                                                                                |
| (2)            |       | Filed on December 14, 2001 as Exhibit 10.1 to the registrant’s  Current Report on Form 8-K and incorporated herein by reference.                                               |
|           |       |                                                                                                                                                                                |
| (3)            |       | Filed on March 15, 2002 as Exhibit 3.1 to the registrant’s Annual  Report on Form 10-K and incorporated herein by reference.                                                   |
|           |       |                                                                                                                                                                                |
| (4)            |       | Filed on May 3, 2002 as Exhibit 3.2 to the registrant’s Quarterly  Report on Form 10-Q and incorporated herein by reference.                                                   |
|           |       |                                                                                                                                                                                |
| (5)            |       | Filed on April 17, 2001 as Exhibit 10.1 to the registrant’s Annual  Report on Form 10-K and incorporated herein by reference.                                                  |
|           |       |                                                                                                                                                                                |
| (6)            |       | Filed on April 29, 2002 as Exhibit C to the registrant’s Annual Proxy  Statement on Form 14A and incorporated herein by reference.                                             |
|           |       |                                                                                                                                                                                |
| (7)            |       | Filed on November 21, 1997 as Exhibit 10.3 to the registrant’s  Registration Statement 333-4075 on Form S-1 (Registration No. 333-4075) and  incorporated herein by reference. |
|           |       |                                                                                                                                                                                |
| (8)            |       | Filed on October 22, 2004 as Exhibit 10.25 to the registrant’s  Quarterly Report on Form 10-Q and incorporated herein by reference.                                            |
|           |       |                                                                                                                                                                                |
| (9)            |       | Filed on April 17, 2001 as Exhibit 10.17 to the registrant’s Annual  Report on Form 10-K and incorporated herein by reference.                                                 |
|           |       |                                                                                                                                                                                |
| (10)           |       | Filed on March 15, 2002 as Exhibit 10.7 to the registrant’s Annual  Report on Form 10-K and incorporated herein by reference.                                                  |
|           |       |                                                                                                                                                                                |
| (11)           |       | Filed on May 3, 2002 as Exhibit 10.8 to the registrant’s Quarterly  Report on Form 10-Q and incorporated herein by reference.                                                  |
|           |       |                                                                                                                                                                                |
| (11)           |       | Filed on March 11, 2003 as Exhibit10.7 to the registrant’s Annual  Report on Form 10-K and incorporated herein by reference.                                                   |
|           |       |                                                                                                                                                                                |
| (13)           |       | Filed on February 6, 2004 as Exhibit 10.8 to the registrant’s Annual  Report on Form 10-K and incorporated herein by reference.                                                |
|           |       |                                                                                                                                                                                |
| (14)           |       | Filed on October 22, 2004 as Exhibit 10.21 to the registrant’s  Quarterly Report on Form 10-Q and incorporated herein by reference.                                            |
|           |       |                                                                                                                                                                                |
| (15)           |       | Filed on March 15, 2002 as Exhibit 10.8 to the registrant’s Annual  Report on Form 10-K and incorporated herein by reference.                                                  |
|           |       |                                                                                                                                                                                |
| (16)           |       | Filed on November 4, 2002 as Exhibit 10.10 to the registrant’s  Quarterly Report on Form 10-Q and incorporated herein by reference.                                            |

 

23

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| (17)   |   | Filed on March 11, 2003 as Exhibit 10.10 to the registrant’s Annual  Report on Form 10-K and incorporated herein by reference..     |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                     |
| (18)   |   | Filed on February 6, 2004 as Exhibit 10.12 to the registrant’s Annual  Report on Form 10-K and incorporated herein by reference.    |
|   |   |                                                                                                                                     |
| (19)   |   | Filed on October 22, 2004 as Exhibit 10.22 to the registrant’s  Quarterly Report on Form 10-Q and incorporated herein by reference. |
|   |   |                                                                                                                                     |
| (20)   |   | Filed on November 4, 2002 as Exhibit 10.11 to the registrant’s  Quarterly Report on Form 10-Q and incorporated herein by reference. |
|   |   |                                                                                                                                     |
| (21)   |   | Filed on March 11, 2003 as Exhibit 10.12 to the registrant’s Annual  Report on Form 10-K and incorporated herein by reference.      |
|   |   |                                                                                                                                     |
| (22)   |   | Filed on February 6, 2004 as Exhibit 10.15 to the registrant’s Annual  Report on Form 10-K and incorporated herein by reference.    |
|   |   |                                                                                                                                     |
| (23)   |   | Filed on October 8, 2004 as Exhibit 99.1 to the registrant’s current  report on 8-K and incorporated herein by reference.           |
|   |   |                                                                                                                                     |
| (24)   |   | Filed on January 25, 2002 as Exhibit 99.2 to the registrant’s Current  Report on Form 8-K and incorporated herein by reference.     |
|   |   |                                                                                                                                     |
| (25)   |   | Filed on January 25, 2002 as Exhibit 99.3 to the registrant’s Current  Report on Form 8-K and incorporated herein by reference.     |
|   |   |                                                                                                                                     |
| (26)   |   | Filed on February 6, 2004 as Exhibit 10.18 to the registrant’s Annual  Report on Form 10-K and incorporated herein by reference.    |
|   |   |                                                                                                                                     |
| (27)   |   | Filed on July 31, 2003 as Exhibit 10.16 to the registrant’s Quarterly  Report on Form 10-Q and incorporated herein by reference.    |
|   |   |                                                                                                                                     |
| (28)   |   | Filed on July 21, 2004 as Exhibit 10.20 to the registrant’s Quarterly  Report on Form 10-Q and incorporated herein by reference.    |
|   |   |                                                                                                                                     |
| (29)   |   | Filed herewith.                                                                                                                          |
|   |   |                                                                                                                                     |
| (30)   |   | Filed on October 22, 2004 as Exhibit 10.23 to the registrant’s  Quarterly Report on Form 10-Q and incorporated herein by reference. |
|   |   |                                                                                                                                     |
| (31)   |   | Filed on October 22, 2004 as Exhibit 10.24 to the registrant’s  Quarterly Report on Form 10-Q and incorporated herein by reference. |
|   |   |                                                                                                                                     |
| (32)   |   | Filed on March 11, 2003 as Exhibit 21.1 to the registrant’s Annual  Report on Form 10-K and incorporated herein by reference.       |
|   |   |                                                                                                                                     |
| (33)   |   | Filed herewith.                                                                                                                          |
|   |   |                                                                                                                                     |
| (34)   |   | Filed herewith.                                                                                                                          |
|   |   |                                                                                                                                     |
| (35)   |   | Filed herewith.                                                                                                                          |
|   |   |                                                                                                                                     |
| (36)   |   | Filed herewith.                                                                                                                          |

 

24

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## **SIGNATURE**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Company has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

**SM&A**

 
| ** **           | ** ** | ** **                                                      |
|----------------------|------------|-----------------------------------------------------------------|
|                 | By:        |                                                            | /S/ CATHY L. MCCARTHY |   |
| Dated: July 14, 2005 |       | Cathy L. McCarthy                                               |
|                 |       | Executive Vice President, Chief Financial Officer and Secretary |
|                 |       |                                                            |
|                 |       |                                                            |
|                 | By:        |                                                            | /s/ STEVEN S. MYERS |   |
| Dated: July 14, 2005 |       | Steven S. Myers                                                 |
|                 |       | Chairman and Chief Executive Officer                            |

 

25

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