**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

** **

**FORM 10-Q**

** **

| **(Mark One)** |   |                                                                                                                              |
|---------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                              |
| x                   |   | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED September 30, 2006 |
|                |   |                                                                                                                              |
| o                   |   | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934                                         |

 

**Commission File Number**

**000-50080**

** **

** **

**SI International Inc.**

**(Exact name of registrantas specified in its charter)**

** **

** **

| **Delaware**                              |   | **52-2127278**       |
|-------------------------------------------|--------|----------------------|
| (State or other  jurisdiction of          |   | (I.R.S. Employer     |
| incorporation or  organization)           |   | Identification  No.) |
|                                      |   |                 |
| **12012  Sunset Hills Road**              |   | ** **           |
| **Reston.  Virginia**                     |   | **20190-5869**       |
| (Address of  principal executive offices) |   | (Zip Code)           |

 

Registrant’s telephone number, including area code: **(703) 234-7000**

** **

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.    x  Yes    o  No

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

Large acceleratedfiler  o                   Accelerated filer  x                            Non-acceleratedfiler  o

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

As of November 1, 2006, therewere 12,959,159 shares outstanding of the registrant’s common stock.

 

 

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**SI INTERNATIONALINC.FORM 10-QINDEX**
|                   | ** ** | ** **                                                                                  | ** ** | **Page** |
|-------------------|------------|---------------------------------------------------------------------------------------------|------------|----------|
| **PART  I.**      | ** ** | **FINANCIAL  INFORMATION**                                                                  |       |     |
| ITEM  1           |       | Financial  Statements.                                                                      |       | 3        |
|              |       | Consolidated Balance Sheets at September 30, 2006  (unaudited) and December 31, 2005.       |       | 3        |
|              |       | Consolidated  Statements of Operations for the three and nine months ended September 30,    |       |     |
|              |       | 2006  (unaudited) and September 24, 2005 (unaudited)                                        |       | 4        |
|              |       | Consolidated  Statements of Cash Flows for the nine months ended September 30, 2006         |       |     |
|              |       | (unaudited)  and September 24, 2005 (unaudited)                                             |       | 5        |
|              |       | Notes to Consolidated Financial Statements                                                  |       | 6        |
| ITEM 2            |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |       | 16       |
| ITEM 3            |       | Quantitative and Qualitative Disclosures About Market  Risk                                 |       | 24       |
| ITEM 4            |       | Controls and Procedures.                                                                    |       | 24       |
|              |       |                                                                                        |       |     |
| **PART  II.**     | ** ** | **OTHER  INFORMATION**                                                                      |       |     |
| ITEM  1           |       | Legal  Proceedings                                                                          |       | 24       |
| ITEM 1A.          |       | Risk Factors                                                                                |       | 25       |
| ITEM 2            |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                |       | 25       |
| ITEM 3            |       | Defaults Upon Senior Securities.                                                            |       | 25       |
| ITEM 4            |       | Submission of Matters to a Vote of Security Holders.                                        |       | 25       |
| ITEM  5           |       | Other  Information                                                                          |       | 25       |
| ITEM 6            |       | Exhibits.                                                                                   |       | 25       |
| Signatures        |       | 26                                                                                          |
| Index to Exhibits |       | 27                                                                                          |

 

2

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**PART I:  FINANCIAL INFORMATION**

**Item 1.   Financial Statements**

**SIInternational Inc. and SubsidiariesConsolidated Balance Sheets(Amounts in thousands, except share data)**

** **
| ** **                                                                                                                                                                                                        | ** ** | **September 30,  2006** | ** ** | **December 31,   2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                                                                                        | ** ** | **(Unaudited)**              | ** ** | ** **                        | ** ** |
| **Assets**                                                                                                                                                                                                        | ** ** | ** **                   | ** ** | ** **                        | ** ** |
| **Current assets:**                                                                                                                                                                                               | ** ** | ** **                   | ** ** | ** **                        | ** ** |
| Cash and cash  equivalents                                                                                                                                                                                        |       | $                            | 15,632     |                              | $          | 26,160 |   |
| Marketable  securities                                                                                                                                                                                            |       | —                       |       | 7,850                             |       |
| Accounts  receivable, net                                                                                                                                                                                         |       | 93,046                       |       | 93,633                            |       |
| Other current  assets                                                                                                                                                                                             |       | 7,091                        |       | 6,698                             |       |
| Total current assets                                                                                                                                                                                              |       | 115,769                      |       | 134,341                           |       |
| **Property and equipment, net**                                                                                                                                                                                   |       | 11,601                       |       | 5,908                             |       |
| **Intangible assets, net**                                                                                                                                                                                        |       | 21,241                       |       | 16,483                            |       |
| **Other assets**                                                                                                                                                                                                  |       | 6,288                        |       | 5,655                             |       |
| **Goodwill**                                                                                                                                                                                                      |       | 220,772                      |       | 173,308                           |       |
| Total assets                                                                                                                                                                                                      |       | $                            | 375,671    |                              | $          | 335,695 |   |
| **Liabilities and stockholders’  equity**                                                                                                                                                                    | ** ** | ** **                   | ** ** | ** **                        | ** ** |
| **Current liabilities:**                                                                                                                                                                                          | ** ** | ** **                   | ** ** | ** **                        | ** ** |
| Current portion  of long-term debt                                                                                                                                                                                |       | $                            | 839        |                              | $          | 1,000 |   |
| Accounts payable                                                                                                                                                                                                  |       | 18,612                       |       | 25,364                            |       |
| Accrued expenses  and other current liabilities                                                                                                                                                                   |       | 27,053                       |       | 29,674                            |       |
| Note payable —  former owner of acquired business                                                                                                                                                            |       | 5,743                        |       | 2,280                             |       |
| Total current  liabilities                                                                                                                                                                                        |       | 52,247                       |       | 58,318                            |       |
| **Long-term debt, net of current  portion**                                                                                                                                                                       |       | 77,555                       |       | 98,250                            |       |
| **Deferred income tax**                                                                                                                                                                                           |       | 7,388                        |       | 5,221                             |       |
| **Other long-term  liabilities**                                                                                                                                                                                  |       | 6,306                        |       | 6,037                             |       |
| **Stockholders’ equity:**                                                                                                                                                                                    | ** ** | ** **                   | ** ** | ** **                        | ** ** |
| Common  stock—$0.01 par value per share; 50,000,000 shares authorized; 12,914,896 and  11,341,222 shares issued and outstanding as of September 30, 2006 and  December 31, 2005, respectively |       | 129                          |       | 114                               |       |
| Additional paid-in  capital                                                                                                                                                                                       |       | 183,835                      |       | 133,843                           |       |
| Accumulated  other comprehensive income                                                                                                                                                                           |       | 184                          |       | —                            |       |
| Retained  earnings                                                                                                                                                                                                |       | 48,027                       |       | 33,912                            |       |
| Total stockholders’  equity                                                                                                                                                                                  |       | 232,175                      |       | 167,869                           |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                   |       | $                            | 375,671    |                              | $          | 335,695 |   |

 

*Seeaccompanying notes*

3

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**SIInternational Inc. and SubsidiariesConsolidated Statements of Operations(Amounts in thousands, except per share data)Unaudited**

 
| ** **                                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **September 30,  2006**     | ** ** | **September 24,  2005**    | ** ** | **September 30,  2006** | ** ** | **September 24,  2005** | ** ** |
|                                             |       |                             |       |                            |       |   |   |   |   |
| Revenue                                          |       | $                                | 119,869    |                            | $          | 101,775 |   | $ | 346,334 |   | $ | 281,475 |   |
| Operating costs  and expenses:                   |       |                             |       |                            |       |   |   |   |   |
| Cost of services                                 |       | 77,092                           |       | 62,743                          |       | 218,669 |   | 173,944 |   |
| Selling, general and administrative              |       | 30,652                           |       | 28,723                          |       | 93,830 |   | 80,231 |   |
| Depreciation and amortization                    |       | 756                              |       | 504                             |       | 1,977 |   | 1,586 |   |
| Amortization of intangible assets.               |       | 823                              |       | 612                             |       | 2,293 |   | 1,680 |   |
|                                             |       |                             |       |                            |       |   |   |   |   |
| Total operating  costs and expenses              |       | 109,323                          |       | 92,582                          |       | 316,769 |   | 257,441 |   |
|                                             |       |                             |       |                            |       |   |   |   |   |
| Income from  operations                          |       | 10,546                           |       | 9,193                           |       | 29,565 |   | 24,034 |   |
| Other income  (expense)                          |       | 31                               |       | 64                              |       | (40 | ) | (22 | ) |
| Interest expense                                 |       | (1,720                           | )          | (1,690                          | )          | (6,195 | ) | (4,446 | ) |
|                                             |       |                             |       |                            |       |   |   |   |   |
| Income before  provision for income taxes        |       | 8,857                            |       | 7,567                           |       | 23,330 |   | 19,566 |   |
| Provision for  income taxes                      |       | 3,498                            |       | 2,989                           |       | 9,215 |   | 7,729 |   |
|                                             |       |                             |       |                            |       |   |   |   |   |
| Net income                                       |       | $                                | 5,359      |                            | $          | 4,578 |   | $ | 14,115 |   | $ | 11,837 |   |
|                                             |       |                                  |       |                            |       |   |   |   |   |
|                                             |       |                             |       |                            |       |   |   |   |   |
| Earnings per  common share:                      |       |                             |       |                            |       |   |   |   |   |
| Basic                                            |       | $                                | 0.42       |                            | $          | 0.41 |   | $ | 1.14 |   | $ | 1.06 |   |
| Diluted                                          |       | $                                | 0.41       |                            | $          | 0.39 |   | $ | 1.11 |   | $ | 1.02 |   |
|  Basic weighted-average shares  outstanding |       | 12,891                           |       | 11,227                          |       | 12,361 |   | 11,140 |   |
| Diluted weighted-average  shares outstanding     |       | 13,198                           |       | 11,698                          |       | 12,753 |   | 11,595 |   |

 

*Seeaccompanying notes*

4

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**SIInternational Inc. and SubsidiariesConsolidated Statements of Cash Flows(Amounts in thousands)Unaudited**
| ** **                                                                         | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                         | ** ** | **September 30,  2006**    | ** ** | **September 24,  2005** | ** ** |
| **Cash  flows from operating activities:**                                         |       |                            |       |   |   |
| Net income                                                                         |       | $                               | 14,115     |   | $ | 11,837 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                      |       | 1,977                           |       | 1,586 |   |
| Amortization of intangible assets                                                  |       | 2,293                           |       | 1,680 |   |
| Loss on disposal of fixed assets                                                   |       | 10                              |       | — |   |
| Income tax benefit for stock option exercises                                      |       | —                          |       | 1,179 |   |
| Stock-based compensation                                                           |       | 140                             |       | 93 |   |
| Change in fair value of interest rate swap                                         |       | 184                             |       | — |   |
| Amortization of deferred financing costs and debt  discount                        |       | 1,750                           |       | 513 |   |
| Changes in operating assets and liabilities, net of  effect of acquisitions:       |       |                            |       |   |   |
| Accounts receivable, net                                                           |       | 11,307                          |       | (1,865 | ) |
| Other current assets                                                               |       | (264                            | )          | (1,896 | ) |
| Other assets                                                                       |       | (1,591                          | )          | (823 | ) |
| Accounts payable and accrued expenses                                              |       | (13,626                         | )          | 12,499 |   |
| Other long term liabilities                                                        |       | 3,900                           |       | 1,180 |   |
| Net cash  provided by operating activities                                         |       | 20,195                          |       | 25,983 |   |
| **Cash  flows from investing activities:**                                         |       |                            |       |   |   |
| Purchase of property and equipment                                                 |       | (7,006                          | )          | (1,537 | ) |
| Proceeds from sale of marketable securities                                        |       | 27,850                          |       | 13,000 |   |
| Purchase of marketable securities                                                  |       | (20,000                         | )          | (19,000 | ) |
| Former owner payable                                                               |       | (10,322                         | )          | — |   |
| Cash paid for business acquisitions, net of cash  assumed                          |       | (48,107                         | )          | (74,153 | ) |
| Net cash used in  investing activities                                             |       | (57,585                         | )          | (81,690 | ) |
| **Cash  flows from financing activities:**                                         |       |                            |       |   |   |
| Proceeds from exercise of stock options                                            |       | 6,431                           |       | 2,910 |   |
| Proceeds from issuance of common stock                                             |       | 40,255                          |       | — |   |
| Income tax benefit from stock option exercises                                     |       | 1,671                           |       | — |   |
| Repayments under line of credit                                                    |       | —                          |       | (28,954 | ) |
| Proceeds from long-term debt                                                       |       | 30,000                          |       | 100,000 |   |
| Repayments of long-term debt                                                       |       | (50,856                         | )          | (250 | ) |
| Payments of debt issuance costs                                                    |       | (552                            | )          | (3,231 | ) |
| Repayments of capital lease obligations                                            |       | (87                             | )          | (79 | ) |
| Net cash  provided by financing activities                                         |       | 26,862                          |       | 70,396 |   |
| **Net  change in cash and cash equivalents**                                       |       | (10,528                         | )          | 14,689 |   |
| **Cash  and cash equivalents, beginning of period**                                |       | 26,160                          |       | 3,754 |   |
| **Cash  and cash equivalents, end of period**                                      |       | $                               | 15,632     |   | $ | 18,443 |   |
| **Supplemental  disclosures of cash flow information:**                            |       |                            |       |   |   |
| Cash payments for interest                                                         |       | $                               | 5,334      |   | $ | 3,465 |   |
| Cash payments for income taxes                                                     |       | $                               | 6,607      |   | $ | 3,045 |   |
| Purchases of  assets under capital lease                                           |       | $                               | 198        |   | $ | 126 |   |

 

*See accompanying notes*

5

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**SIInternational Inc. and SubsidiariesNotes to consolidated financial statements(Unaudited)**

**1.              Basis of Presentation:**

The accompanying unauditedconsolidated financial statements of SI International Inc. and its subsidiarieshave been prepared in accordance with accounting principles generally acceptedin the United States for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and Notes required byaccounting principles generally accepted in the United States for completefinancial statements. In the opinion of management, all adjustments (consistingof normal recurring accruals) considered necessary for a fair presentation havebeen included. Operating results for the quarter ended September 30, 2006 arenot necessarily indicative of the results that may be expected for the yearending December 30, 2006. For further information, refer to the financialstatements and Notes included in SI International’s Annual Report onForm 10-K/A for the year ended December 31, 2005.  References to the “Company,” “we,” “us” and “our”refer to SI International, Inc. and its subsidiaries.

**2.             Summary of significant accountingpolicies:**

**Principles of consolidation**

The accompanying consolidatedfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries.   All significantintercompany transactions and accounts have been eliminated in consolidation.

**Use of estimates**

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates.

**Reporting periods**

The Company’s fiscal year isbased on the calendar year and ends each year on the Saturday nearest, but notfalling after, December 31 of that year. As a result, our fiscal year may be comprised of 52 or 53 weeks.  Typically, fiscal quarters also end on theSaturday nearest, but not falling after, the end of the calendar quarter.  However, we will end those fiscal quarterspresented in our Forms 10-Q (the first three fiscal quarters) on the Saturdaywhich provides us with a 13 week quarter even if that Saturday falls after theend of the calendar quarter.  As aresult, in the future, if our fiscal year comprises 53 weeks, the first threequarters shall each be comprised of 13 weeks and the fourth quarter shall becomprised of 14 weeks.  Consistent withthis policy, our third quarter ended September 30, 2006 was a 13 week quarter.

**Cash and cash equivalents**

We consider cash on deposit andall highly liquid investments with original maturities of three months or lessto be cash and cash equivalents.

**Revenue Recognition**

Our accounting policy regardingrevenue recognition complies with the following criteria:  (1) a contract has been executed; (2) thecontract price is fixed and determinable; (3) delivery of services or productshas occurred; and (4) collectibility is considered probable and can bereasonably estimated.  Compliance withthese criteria may require us to make significant judgments and estimates.

6

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**Significantcustomers**

Revenue generated from contractswith the Federal Government or prime contractors doing business with theFederal Government accounted for a vast majority of revenues in the fiscalquarters ending September 30, 2006 and September 24, 2005.

 
| ** **                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **September 30,  2006**     | ** ** | **September 24,  2005**    | ** ** | **September 30,  2006** | ** ** | **September 24,  2005** | ** ** |
| Department of  Defense     |       | 46.6                             | %          | 46.8                            | %          | 47.2 | % | 46.6 | % |
| Federal civilian  agencies |       | 52.3                             | %          | 51.5                            | %          | 51.3 | % | 51.6 | % |
| Commercial  entities       |       | 1.1                              | %          | 1.7                             | %          | 1.5 | % | 1.8 | % |
| Total revenue              |       | 100.0                            | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |

 

For the quarters ended September30, 2006 and September 24, 2005, we had one contract that generated in excessof 10% of our revenue.   Our C4I2TSR contract with the U.S. Air ForceSpace Command is an ID/IQ contract which is utilized by different FederalGovernment agencies.  Therefore, we report revenue generated from any taskorder issued under the C4I2TSR contract to the appropriate Company businessunit.  Under this approach, for the three and nine months ended September30, 2006, revenue from the C4I2TSR contract represented approximately 22.1% and21.4% of our revenue, respectively.  For the three and nine months endedSeptember 24, 2005, our C4I2TSR contract represented approximately 20.6% and19.5% of our revenue, respectively.

**Deferredfinancing costs**

Costs incurred in establishingour credit facility are deferred and amortized as interest expense over theterm of the related debt using the effective interest method. These deferredcosts are reflected as a component of other assets in the accompanyingconsolidated balance sheets. The deferred financing costs consist of thefollowing (in thousands):

|                           | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Deferred loan  costs      |       | $                            | 5,527      |                        | $          | 4,975 |   |
| Accumulated  amortization |       | (3,067                       | )          | (1,542                      | )          |
|                      |       | $                            | 2,460      |                        | $          | 3,433 |   |

 

**Intangible assets**

Intangible assets from acquisitions, which consist primarilyof contractual customer relationships, are amortized utilizing an acceleratedmethod over 6 to 14 years, based on their estimated useful lives. Theaccumulated amortization of intangible assets is $5.2 million and $3.0 million,respectively, as of September 30, 2006 and December 31, 2005. Amortizationexpense is estimated to be $3.1 million, $2.8 million, $2.5 million, $2.2million and $2.2 million for the years 2006, 2007, 2008, 2009 and 2010,respectively.

**Fair value of financialinstruments**

The Company’s financialinstruments consist primarily of cash and cash equivalents, accountsreceivable, accounts payable, credit facilities, and notes payable. Inmanagement’s opinion, the carrying amounts of these financial instrumentsapproximate their fair values at September 30, 2006 and December 31, 2005.

7

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**Stock-basedcompensation**

Effective January 1, 2006, theCompany adopted the provisions of Statement of Financial Accounting StandardsNo. 123R (SFAS No. 123R) using the modified prospective transition method.Due to the use of the modified prospective method, prior interim periods andfiscal years will not reflect any restated amounts. As disclosed in the stockincentive plan section of  Note 9, theCompany accelerated the vesting of unvested stock options previously awarded toemployees, officers and directors in December 2005. The Company had no unvestedstock options on January 1, 2006. The Company issued insignificant stockoptions in the quarters ended April 1, 2006 and July 1, 2006, and issued 143,625shares of stock options in the quarter ended September 30, 2006. The totalstock compensation expense recognized during the first three quarters was $0.1million. The total remaining unrecognized compensation expense related to theunvested options was $1.7 million which will be recognized over the weightedaverage period of 3 years.

The company also issued 29,125 shares of restrictedstock awards to directors and employees under its 2002 Amended and RestatedOmnibus Stock Incentive Plan.  The fairvalue of restricted stock awards is determined based on the grant date stockprice. The compensation expense for restricted stock awards is recognized on astraight-line basis over the vesting term which is typically five yearsbeginning on the date of grant. No significant compensation expense wasrecognized during the third quarter. The total remaining unrecognizedcompensation expense related to the unvested restricted stock awards was $0.7million which will be recognized over the weighted average period of 3 years.

Prior to the adoption of SFAS No.123R, the Company accounted for stock-based compensation using the intrinsicvalue method prescribed in APB Opinion No. 25 and related interpretations.  Accordingly, compensation expense for stockoptions was measured as the excess, if any, of the fair market value of theCompany’s stock at the date of the grant over the exercise price of the relatedoption.  The following table illustratesthe effect on net income and earnings per share if the compensationcosts for the Company’s stock options had been determined based on SFASNo. 123.
| ** **                                                                                                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                              | ** ** | **Sept. 30,  2006**         | ** ** | **Sept. 24,  2005**        | ** ** | **Sept. 30,  2006** | ** ** | **Sept. 24,  2005** | ** ** |
| Net income - as  reported                                                                                                               |       | $                                | 5,359      |                            | $          | 4,578 |   | $ | 14,115 |   | $ | 11,837 |   |
| Add: total  stock-based employee compensation expense as reported under intrinsic value  method (APB No. 25) for all awards, net of tax |       | —                           |       | 19                              |       | — |   | 56 |   |
| Deduct: Total  stock-based compensation expense determined under fair value based method  (SFAS No. 123) for all awards, net of tax     |       | —                           |       | (790                            | )          | — |   | (2,166 | ) |
| Net income - pro  forma                                                                                                                 |       | $                                | 5,359      |                            | $          | 3,807 |   | $ | 14,115 |   | $ | 9,727 |   |
|                                                                                                                                    |       |                             |       |                            |       |   |   |   |   |
| Basic earnings  per share - as reported                                                                                                 |       | $                                | 0.42       |                            | $          | 0.41 |   | $ | 1.14 |   | $ | 1.06 |   |
| Diluted earnings  per share - as reported                                                                                               |       | $                                | 0.41       |                            | $          | 0.39 |   | $ | 1.11 |   | $ | 1.02 |   |
| Basic earnings  per share - pro forma                                                                                                   |       | $                                | 0.42       |                            | $          | 0.34 |   | $ | 1.14 |   | $ | 0.87 |   |
| Diluted earnings per  share - pro forma                                                                                                 |       | $                                | 0.41       |                            | $          | 0.33 |   | $ | 1.11 |   | $ | 0.84 |   |

 

The fair value of each option is estimated on the dateof grant using the Black-Scholes option-pricing model with the followingassumptions used for grants during the fiscal periods ended September 30, 2006and September 24, 2005:

8

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|                                  | ** ** | **Three Months Ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|
| ** **                       | ** ** | **Sept. 30, 2006**     | ** ** | **Sept. 24, 2005** | ** ** |
| Risk-free  interest rate         |       | 4.67-4.82                        | %          | 4.00 | % |
| Expected life of  options        |       | 5 years                          |       | 5 years |   |
| Expected stock  price volatility |       | 41.7                             | %          | 45.0 | % |
| Expected dividend yield          |       | 0                                | %          | 0 | % |

 

The risk-free interest is based on U.S. Treasuryyields in effect at the time of grant over the expected term of the option. Theexpected life of options is derived from the Company’s historical optionexercise data. The expected stock price volatility is based on the historicalvolatility of the Company’s common stock.

Prior to the adoption of SFAS No. 123R, the Companypresented all tax benefits related to the exercise of stock options asoperating cash flows in the consolidated statement of cash flows. SFAS No. 123Rrequires the cash flows resulting from the tax benefits generated from taxdeductions in excess of the compensation costs recognized for those options tobe classified as financing cash flows.

**Earnings pershare**

Basic earnings per share iscomputed by dividing reported earnings available to common stockholders by theweighted average number of shares outstanding without consideration of commonstock equivalents or other potentially dilutive securities.  Diluted earnings per share give effect tocommon stock equivalents and other potentially dilutive securities outstandingduring the period.

The following details the computation of net income percommon share (in 000s):
| ** **                                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                          | ** ** | **September 30,  2006**     | ** ** | **September 24,  2005**    | ** ** | **September 30,  2006** | ** ** | **September 24,   2005** | ** ** |
| Net Income —  Basic and Diluted                                |       | $                                | 5,359      |                            | $          | 4,578 |   | $ | 14,115 |   | $ | 11,837 |   |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| **Weighted  average share calculation:**                            | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Basic  weighted-average shares outstanding                          |       | 12,891                           |       | 11,227                          |       | 12,361 |   | 11,140 |   |
| Treasury stock  effect of stock options and restricted stock awards |       | 307                              |       | 471                             |       | 392 |   | 455 |   |
| Diluted weighted-average  shares outstanding                        |       | 13,198                           |       | 11,698                          |       | 12,753 |   | 11,595 |   |
|                                                                     |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

**Reclassifications**

Certain prior year balances havebeen reclassified to conform to the presentation of the current year.

**New accounting pronouncements**

In December 2004, the Financial Accounting StandardsBoard (FASB) issued SFAS No. 123R (revised 2004), *Share Based Payment.* SFAS No. 123R addresses theaccounting for share-based payment transactions in which an enterprise receivesemployee services in exchange for (a) equity instruments of the enterpriseor (b) liabilities that are based on the fair value of the enterprise’sequity instruments or that may be settled by the issuance of such equityinstruments. SFAS No. 123R requires an entity to recognize the grant-datefair-value of stock options and other equity-based compensation issued toemployees in the 

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income statement. Therevised SFAS No. 123R generally requires an entity to account for thosetransactions using the fair-value-based method, and eliminates the intrinsicvalue method of accounting in APB Opinion No. 25, *Accountingfor Stock Issued to Employees*, which was permitted under SFAS No.123R, as originally issued. The revised SFAS No. 123R requires entities todisclose information about the nature of the share-based payment transactionsand the effects of those transactions on the financial statements. SFAS No.123R is effective for the Company as of its fiscal year beginning January1, 2006. All public companies must use either the modified prospective or themodified retrospective transition method.

Effective January 1, 2006, the Company adopted theprovisions of SFAS No. 123R using the modified prospective transition method.Due to the use of the modified prospective method, prior interim periods andfiscal years will not reflect any restated amounts. As disclosed in the stockincentive plan section of Note 9, the Company accelerated the vesting ofunvested stock options previously awarded to employees, officers and directorsin December 2005. The Company had no unvested stock options on January 1, 2006.The Company issued insignificant stock options in the quarters ended April 1,2006 and July 1, 2006, and issued 143,625 shares of stock options and 29,125shares of restricted stock awards in the quarter ended September 30, 2006. Thetotal stock compensation expense recognized during the first three quarters was$0.1 million. Had we adopted SFAS No. 123R in prior periods, the impact of thatstandard would have approximated the impact of SFAS No. 123 as described in thedisclosure of pro forma net income and pro forma earnings per share in theStock-Based Compensation section of this note to our consolidated financialstatements. Statement 123R also requires the benefits of tax deductions inexcess of recognized compensation cost to be reported as a financing cash flow,rather than as an operating cash flow as required under APB No. 25. Theadoption of this requirement reduced net operating cash flows and increased netfinancing cash flows in periods after adoption.

**In July 2006, the FASB issued Interpretation No. 48 (FIN48), *Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109, Accounting for Income Taxes*.**  FIN 48 clarifies theaccounting for income taxes by prescribing the minimum recognition threshold atax position is required to meet before being recognized in the financialstatements. FIN 48 also provides guidance on derecognition, measurement,classification, interest and penalties, accounting in interim periods,disclosure and transition. In addition, FIN 48 scopes out income taxes fromFinancial Accounting Standards Board Statement No. 5, *Accountingfor Contingencies*.  FIN 48 iseffective for fiscal years beginning after December 15, 2006. Management is inthe process of determining the effect of this proposal on its financialstatements.

**3.****                                         Acquisitions:**

On February 27, 2006, we closed the acquisition of ZenTechnology, Inc., or Zen, a Virginia corporation pursuant to a Stock PurchaseAgreement dated February 8, 2006 (the “Zen Agreement”). Zen is a provider ofcritical IT services, specializing in managed network services, informationassurance, software development and systems engineering, database and systemsadministration and IT consulting to various U.S. Government agencies.  Pursuantto the terms of the Zen Agreement we acquired all of the outstanding capitalstock of Zen for $60 million in cash, of which we are withholding $6 millionfor 15 months in order to secure post-closing indemnity obligations of thesellers.

Approximately $47.8 million of the purchaseconsideration has been allocated to goodwill based primarily on the excess ofthe purchase price over the estimated fair value of net assets acquired.Approximately $6.9 million and $0.2 million of the purchase price has been assignedto the identifiable intangible assets of contractual customer relationships andnon-compete agreements, respectively. Each customer relationship, whichincludes each customer’s contract, is being amortized on an accelerated basisover their remaining useful life of 9 years. The non-compete agreements areamortized on a straight-line basis over a 3-year period.

 The totalpurchase price paid, including transaction costs of $0.8 million, has beenpreliminarily allocated as follows (in thousands):

| Cash and cash equivalents              |   | $       | 2,542  |   |
|----------------------------------------|--------|---------|--------|--------|
| Accounts  receivable                   |   | 10,720  |   |
| Other current  assets                  |   | 129     |   |
| Property and  equipment                |   | 491     |   |
| Accounts payable  and accrued expenses |   | (12,287 | )      |
| Other long term  liabilities           |   | (41     | )      |
| Intangible  assets                     |   | 7,050   |   |
| Goodwill                               |   | 47,756  |   |
| Total consideration                    |   | $       | 56,360 |   |

 

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Similarly, in the first quarter of 2005, we completedthe purchase of Shenandoah Electronic Intelligence, Inc. (SEI). SEIprovides critical business process outsourcing primarily for the Department ofHomeland Security (DHS), including services such as: data and recordsmanagement; applications processing; file and mail management; analyticalsupport services; and secure optical card processing.  On February 9, 2005, the acquisition of SEIclosed pursuant to the terms of the definitive stock purchase agreement.  The purchase price was $75 million in cash,subject to certain adjustments totaling approximately $0.6 million.

Approximately $52.6 million of the purchaseconsideration has been allocated to goodwill based primarily on the excess ofthe purchase price over the estimated fair value of net assets acquired, andapproximately $12.2 million of the purchase price has been assigned toidentifiable intangible assets on the basis of contractual customerrelationships. The contractual customer relationships are being amortized usingan accelerated method over their estimated useful life of 14 years.

The following unaudited proforma combined condensedstatements of operations (in thousands, except per share) set forth theconsolidated results of operations of the Company for the nine months endedSeptember 30, 2006 and September 24, 2005 as if the above describedacquisitions had occurred at the beginning of each period presented. Thisunaudited proforma information does not purport to be indicative of the actualfinancial position or the results that would actually have occurred if thecombination had been in effect for the nine months ended September 30, 2006 andSeptember 24, 2005.

|                             | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------|------------|----------------------------------|------------|
| ** **                  | ** ** | **September 30, 2006** | ** ** | **September 24, 2005** | ** ** |
| Revenue                     |       | $                                | 353,876    |   | $ | 317,188 |   |
| Net income                  |       | $                                | 14,262     |   | $ | 12,780 |   |
| Diluted earnings per  share |       | $                                | 1.12       |   | $ | 1.10 |   |

 

In accordance with the purchase accounting method, theoperations of Zen and SEI have been included in the Company’s statement ofoperations since their respective dates of acquisition.

**4.                Accounts receivable:**

Accounts receivable consists ofthe following (in thousands):

|                                                                                                    | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Billed accounts  receivable                                                                        |       | $                            | 40,634     |                        | $          | 47,939 |   |
| Unbilled  accounts receivable:                                                                     |       |                         |       |                        |       |
| Currently billable                                                                                 |       | 44,400                       |       | 40,094                      |       |
| Unbilled retainages and milestone paymentsexpected  to be billed within the next 12 months         |       | 8,896                        |       | 5,546                       |       |
| Indirect costs incurred and charged to cost-plus  contracts in excess of provisional billing rates |       | 621                          |       | 1,563                       |       |
| Total unbilled  accounts receivable                                                                |       | 53,917                       |       | 47,203                      |       |
| Allowance for  doubtful accounts                                                                   |       | (1,505                       | )          | (1,509                      | )          |
| Accounts  receivable, net                                                                          |       | $                            | 93,046     |                        | $          | 93,633 |   |

 

The currently billable amountsincluded as unbilled accounts receivable as of September 30, 2006 representamounts that are billed during the following quarter of the current year. Theyare billings for services rendered prior to quarter-end, which are billed oncenecessary billing data has been collected and an invoice is produced.

The Company billed and collected$0.9 million related to an unbilled rate variance that had been fullyreserved in prior years and had been previously classified as other assets inthe accompanying consolidated balance sheets. This resulted in the reserval ofthat reserve during the quarter.

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**5.              Property and equipment:**

Property and equipment consist ofthe following (in thousands):

|                                                      | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Computers and  equipment                             |       | $                            | 10,055     |                        | $          | 8,691 |   |
| Software                                             |       | 3,905                        |       | 2,623                       |       |
| Furniture and  fixtures                              |       | 4,834                        |       | 2,356                       |       |
| Leasehold  improvements                              |       | 4,030                        |       | 1,581                       |       |
|                                                 |       | 22,824                       |       | 15,251                      |       |
| Less—Accumulated  depreciation and amortization |       | (11,223                      | )          | (9,343                      | )          |
| Property and  equipment, net                         |       | $                            | 11,601     |                        | $          | 5,908 |   |

 

Property and equipment includesassets financed under capital lease obligations of approximately $371,000 and$273,000, net of accumulated amortization, as of September 30, 2006 andDecember 31, 2005, respectively.  The increase in the value of Property and Equipment is primarily relatedto the furnishings in our new Colorado Springs Campus — a 121,888 square footfacility that replaces two other locations nearby.

**6.            Accrued expenses and other current liabilities:**

Accrued expenses and othercurrent liabilities consist of the following (in thousands):

|                                                 | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Accrued vacation                                |       | $                            | 7,627      |                        | $          | 6,183 |   |
| Accrued  compensation                           |       | 8,125                        |       | 9,638                       |       |
| Accrued bonus                                   |       | 2,597                        |       | 6,755                       |       |
| Other accrued  liabilities                      |       | 8,704                        |       | 7,098                       |       |
| Accrued expenses and  other current liabilities |       | $                            | 27,053     |                        | $          | 29,674 |   |

 

**7.            Debt:**

Debt consists of the following (in thousands):
| ** **                                                                                                                                                                                                                                                                                                                                                                       | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Credit  facilities:                                                                                                                                                                                                                                                                                                                                                              |       |                         |       |                        |       |
| Line of credit  bears interest at LIBOR plus 200 to 275 base points or a specified base rate  plus 100 to 175 basis points, interest due monthly, principal due  February 9, 2010                                                                                                                                                                                           |       | $                            | —     |                        | $          | — |   |
| Term loan,  pursuant to the First Amendment, as of September 30, 2006 bears interest at  LIBOR plus 200 basis points or a specified base rate plus 100 basis points,  with nineteen consecutive quarterly principal and interest payments of  $209,816 starting on June 30, 2006, with the unpaid principal and interest of  approximately $74.8 million due on February 9, 2011 |       | 78,394                       |       | 99,250                      |       |
| Total debt*                                                                                                                                                                                                                                                                                                                                                                      |       | $                            | 78,394     |                        | $          | 99,250 |   |

----

*                    Excludesdebt of approximately $6.0 million (including imputed interest) payable as ofSeptember 30, 2006 in connection with the acquisition of Zen; and $2.3million  payable as of December 31, 2005(but paid in June 2006) in connection with the Bridge acquisition.

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On February 9, 2005, contemporaneously with theclosing of our acquisition of SEI, the Company entered into an Amended andRestated Credit Agreement (the “Credit Agreement”) which increased itsborrowing capacity to $160 million, which is comprised of a $60 millionfive-year revolving credit facility and a $100 million six-year term loanfacility. Additionally, the Credit Agreement provides that up to an additional $75million in uncommitted incremental term loan funds are available to the Companyupon its request at any time for up to two years from one or more of thelenders under the Credit Agreement.

On February 27, 2006, contemporaneously with theclosing of our acquisition of Zen, we entered into a First Amendment to theCredit Agreement (the “First Amendment”). The Credit Agreement, as amended by the First Amendment, is referred toherein as the “Amended Credit Agreement”. The Company had approximately $129.3 million of outstanding debt underour First Amendment on February 27, 2006 following the closing of ouracquisition of Zen. The outstanding balance as of September 30, 2006 wasapproximately $78.4 million.  As with theprevious credit facilities, we are required to maintain compliance withfinancial and non-financial covenants including, maintaining certain leverageand fixed charge ratios, as well as certain annual limits on our capitalexpenditures.  The First Amendmentamended the leverage ratio that requires us to maintain a ratio of funded debtto consolidated EBITDA for such period as follows:

| Period                                                               | ** ** | ** **   | ** ** | **New Maximum Ratio** | ** ** | **Prior Maximum Ratio** | ** ** |
|----------------------------------------------------------------------|------------|--------------|------------|---------------------------------|------------|-----------------------------------|------------|
| July 1,  2006 through fiscal quarter ending June 29, 2007  |       | 3.50 to 1.00 |       | 3.25 to 1.00                    |       |
| June 30,  2007 through fiscal quarter ending June 27, 2008 |       | 3.00 to 1.00 |       | 3.00 to 1.00                    |       |
| June 28, 2008 and  thereafter                                   |       | 2.75 to 1.00 |       | 2.75 to 1.00                    |       |

 

These ratios will be calculated in accordance with thedefinitions and terms contained in the Amended Credit Agreement, which may bedifferent than calculations pursuant to GAAP.

In connection with the Credit Agreement, the Companyincurred approximately $3.2 million financing costs. With respect to theFirst Amendment, the Company incurred approximately $0.5 million in financingcosts.  Such costs associated with theCredit Agreement were capitalized as deferred financing costs on the balancesheet and amortized over the six year term of the Credit Agreement.  Such costs associated with the FirstAmendment are being amortized over five year term of the First Amendment.

At the time the Company borrows funds from either theloan facilities under the Amended Credit Agreement, it may choose from twointerest rate options.  The Company mayelect to have the borrowings bear interest at floating rates equal to LIBORplus a spread ranging from 200 to 270 basis points or an alternative base rateplus a spread ranging from 100 to 175 basis points.  Under either the LIBOR or alternative baserate option, the exact interest rate spread will be determined based upon theCompany’s leverage ratio as defined in the Amended Credit Agreement.

  During the quarters ended July 1, 2006 andSeptember 30, 2006, the Company made prepayments and regular quarterly paymentstotaling $45.5 million and $5.0 million, respectively, of outstanding term debtunder the First Amendment, after which the remaining principal balance as ofSeptember 30, 2006, was approximately $78.4 million. As a result of the paydown of principal, the Company’s quarterly payment was reduced from $323,125 to$209,816 in consecutive quarterly payments starting from June 30, 2006through December 30, 2010, and a final payment of approximately $74.8million on February 9, 2011.  The amountof deferred loan origination fees written off in connection with the pay downin the quarters ended July 1, 2006 and September 30, 2006 was $0.9 million and$0.1million, respectively.

The Company also had a note payable outstanding in theamount of $2.3 million, which was paid in June 2006 for the acquisition ofBridge, and has a note payable with a face value of $6.0 million includingimputed interest, payable in May 2007 for the acquisition of Zen.

**8.             Commitments and contingencies:**

**Leases**

As of September 30, 2006, the Company has noncancelableoperating leases, primarily for real estate, that expire over the next tenyears.   Rental expense during the quarter ended September 30, 2006 wasapproximately $2.5 million, compared to rental expense of approximately $2.0million during the quarter ended September 24, 2005.

**Contract cost audits**

Payments to the Company on government costreimbursable contracts are based on provisional, or estimated indirect rates,which are subject to audit on an annual basis by the Defense Contract AuditAgency (DCAA). The cost audits result in 

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thenegotiation and determination of the final indirect cost rates that the Companymay use for the period(s) audited. The final rates, if different from theprovisional rates, may create an additional receivable or liability for theCompany. The Company’s revenue recognition policy calls for revenue recognizedon all cost reimbursable government contracts to be recorded at actual ratesunless collectibility is not reasonably assured. To the extent the indirectrate differential creates a liability for the Company, the differential isrecognized as a reduction to revenue when identified.

**Litigation and claims**

We are a party to litigation and legal proceedingsthat we believe to be a part of the ordinary course of our business. While wecannot predict the ultimate outcome of these matters, we currently believe thatany ultimate liability arising out of these proceedings will not have amaterial adverse effect on our financial position. We may become involved inother legal and governmental, administrative or contractual proceedings in thefuture.

The SEI acquisition agreement provides for a purchaseprice adjustment based upon the working capital of SEI as of the closingdate.  Subsequent to the closing date, we received a payment of $1.6million in connection with services performed prior to the closing date thatSEI had not previously billed, and was not authorized to bill, its customer asof the closing date.  The SEI selling stockholders have asserted that theyare entitled to a credit in connection with the calculation of working capitaladjustment in an amount equal to the amount received by us for thispost-closing payment.  We believe that, in accordance with GAAP, the SEIselling stockholders should not receive the benefit of the post-closingpayment.  In accordance with the terms of the SEI acquisition agreement,the parties have jointly submitted the issue to an independent accounting firmfor resolution.  We anticipate that this matter will be resolved beforethe end of 2006.

In June 2006, the Company, through one of itssubsidiaries, was awarded a judgment, after a trial before a judge, in alawsuit filed in the Circuit Court of Fairfax County, Virginia against NationalTechnologies Associates, Inc. (“NTA”) in the amount of $841,612. The Company’sclaims arose out of the Company’s allegation that NTA breached a contract whichobligated NTA to subcontract certain work to the Company’s subsidiary. The Company did not record the judgment because NTA filed a motion for reconsiderationbefore the trial court.   The trial courtjudge granted NTA’s motion for reconsideration, thereby overturning the judge’soriginal ruling. The Company anticipates that it will appeal the trial court’sfinal judgment to the appropriate appellate court.   The Company cannot presently determine theultimate outcome of the matter.

**9.              Stockholders’ equity:**

**April 2006 common stock offering**

On April 7, 2006, we issued1,200,000 shares of common stock in an underwritten public offering at aninitial price to the public of $34.00 per share under our shelf registrationstatement on Form S-3 (No. 333-113827) declared effective by the SEC on May 21,2004.  Net sale proceeds to the Company,after deducting underwriting discounts and commissions, but before otherexpenses relating to the sale, totaled approximately $40.5 million.  The Company used the net proceeds from thesale together with cash on hand to pay down outstanding term debt under theFirst Amendment.

**Stock incentive plans**

In April 2005, the Board of Directors voted toadopt the 2002 Amended and Restated Omnibus Stock Incentive Plan (the “Amendedand Restated Plan”), and the Amended and Restated Plan was approved by ourstockholders at the annual meeting of stockholders held in June 2005. TheAmended and Restated Plan amends and restates the Company’s prior 2002 StockIncentive Plan, or the “Plan”, by (i) increasing the number of shares ofcommon stock reserved and available under the Plan by 1,000,000 shares to atotal share allocation of 2,920,000, (ii) permitting the grant of deferredshares, performance shares and performance units, (iii) prohibitingrepricing of options without prior stockholder approval, (iv) limiting thenumber of shares of common stock and performance units subject to awards aparticipant may receive in any calendar year to 300,000 and 500,000,respectively, and adding other administrative provisions to comply with theperformance-based compensation exception to the deduction limit ofSection 162(m) of the Internal Revenue Code of 1986, as amended;(v) eliminating the provision that previously provided for an automaticincrease in the number of shares reserved for issuance under the Amended andRestated Plan each fiscal year by a number equal to the lesser of 160,000shares or an amount determined by the Board of Directors, (vi) providingthat non-qualified stock option grants will be priced at one hundred percent(100%) of fair market value; (vii) providing for minimum vesting periodsof stock bonus awards, restricted common stock awards, stock appreciationrights, deferred shares, and other stock awards subject to the possibleacceleration of the vesting schedule at the discretion of the administrator;(viii) providing that future amendments to the Amended and Restated Planthat increase the number of shares allocated, modify participationrequirements, or materially increase benefits accruing to the participantsunder the Plan will be subject to stockholder approval; and (ix) makingother technical changes to the Plan.

 

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On December 13, 2005, the Board of Directorsannounced the accelerated vesting of unvested stock options previously awardedto employees, officers and directors as of December 7, 2005 in light of anew accounting regulation that came into effect on January 1, 2006. Basedon the Statement of Financial Accounting Standards No. 123R, “Share-BasedPayment” (SFAS 123R), the Board took the action to accelerate the unvestedstock with the belief that it was in the best interest of stockholders, as itwill reduce the Company’s reported compensation expense in future periods.

A summary of option activity under the plan as ofSeptember 30, 2006, is presented below:
| ** **                                | ** ** | **Options** | ** ** | **Shares   exercisable** | ** ** | **Weighted-average   exercise price** | ** ** |
|-------------------------------------------|------------|-------------|------------|-------------------------------|------------|-------------------------------------------------|------------|
| Outstanding at December  31, 2005         |       | 1,750,937   |       |                          |       | $                                               | 20.29      |   |
| 2006 grants                               |       | 157,525     |       |                          |       | 29.00                                           |       |
| 2006 exercises                            |       | (373,674    | )          |                          |       | 17.16                                           |       |
| 2006 forfeitures                          |       | (23,801     | )          |                          |       | 27.91                                           |       |
| Balance, September 30,  2006              |       | 1,510,987   |       |                          |       | $                                               | 22.13      |   |
| Options exercisable at September 30, 2006 |       |        |       | 1,356,362                     |       | $                                               | 21.35      |   |

 

The following table shows the number of optionsoutstanding, the weighted average exercise price, the weighted averageremaining life, and the options exercisable for each range of exercise pricesof options outstanding at September 30, 2006.
| ** ** | ** ** | **Number of  Options  Outstanding** | ** ** | **Range of  Exercise  Price**        | ** ** | **Weighted  Avg. Exercise  Price** | ** ** | **Weighted  Average  Remaining Life** | ** ** | **Options  Exercisable** | ** ** | **Weighted  Avg. Exercise  Price** | ** ** |
|------------|------------|------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|--------------------------------------------|------------|--------------------------|------------|-----------------------------------------|------------|
|       |       | 58,424                                   |       | $  1.58 –   9.27 |       | $                                       | 9.03       |                                       | 2.6        |                     | 58,424     |                                    | $          | 9.03 |   |
|       |       | 346,858                                  |       | $10.81 – 14.00                       |       | $                                       | 13.80      |                                       | 6.1        |                     | 346,858    |                                    | $          | 13.80 |   |
|       |       | 294,869                                  |       | $16.40 – 19.26                       |       | $                                       | 16.50      |                                       | 7.2        |                     | 294,869    |                                    | $          | 16.50 |   |
|       |       | 178,213                                  |       | $20.55 – 26.60                       |       | $                                       | 25.88      |                                       | 8.2        |                     | 178,213    |                                    | $          | 25.88 |   |
|       |       | 460,743                                  |       | $26.80 – 29.87                       |       | $                                       | 28.29      |                                       | 8.8        |                     | 320,118    |                                    | $          | 28.14 |   |
|       |       | 171,350                                  |       | $30.46 – 32.83                       |       | $                                       | 31.01      |                                       | 9.1        |                     | 157,350    |                                    | $          | 30.93 |   |
|       |       | 530                                      |       | $556.26                                   |       | $                                       | 556.26     |                                       | 1.3        |                     | 530        |                                    | $          | 556.26 |   |
| Total      |       | 1,510,987                                |       |                                      |       | $                                       | 22.13      |                                       | 7.6        |                     | 1,356,362  |                                    | $          | 21.35 |   |

 

Each stock option grant establishes the vestingschedule applicable to the grant. The weighted-average remaining contractuallife of the stock options outstanding and exercisable as of September 30, 2006was 7.3 years with the maximum contractual term of 10 years.

The weighted-average grant-date fair value of optionsgranted during the quarters ended September 30, 2006 and September 24, 2005 was$12.53 and $13.13, respectively. The total intrinsic value of options exercisedduring the quarters ended September 30, 2006, and September 24, 2005 was $0.6million and $2.0 million, respectively. The total intrinsic value of optionsoutstanding and exercisable as of September 30, 2006 was $13.6 million.

Prior to fiscal 2006, the Company’s stock incentiveplan consisted principally of stock options. During fiscal 2006, the Companyrevised its stock incentive arrangement to provide restricted stock awards todirectors and employees. A summary of restricted awards activity under the planas of September 30, 2006, is presented below:
| ** **                                           | ** ** | **Shares** | ** ** | **Weighted-average  fair value** | ** ** |
|------------------------------------------------------|------------|------------|------------|---------------------------------------|------------|
| Non-vested  shares outstanding at December 31, 2005  |       | —     |       | —                                |       |
| Granted                                              |       | 29,125     |       | $                                     | 28.65      |   |
| Vested                                               |       | —     |       | —                                |       |
| Forfeited                                            |       | —     |       | —                                |       |
| Non-vested shares  outstanding at September 30, 2006 |       | 29,125     |       | $                                     | 28.65      |   |

 

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**Stock repurchase program**

In December 2005 the Company’s Board of Directorsauthorized the repurchase of up to 300,000 shares of its common stock up to anaggregate maximum dollar amount of $8 million.  The Company had 12,959,159shares outstanding as of November 1, 2006.  Timing and volume of anypurchases will be guided by management’s assessment of market conditions,securities law limitations, the number of shares of common stock outstanding,and alternative, potentially higher value uses for cash resources.  Therepurchase plan may be suspended or discontinued at any time without priornotice.

**Recent Events**

**On October 30, 2006, theCompany prepaid $8.0 million of term debt, after which our remainingprincipal balance is approximately $70.4 million. The amount of deferredloan origination fees to be written off in the fourth quarter as a result ofthis prepayment is approximately $0.1 million. Additionally, the prepaymentof term debt will result in a reduction of our quarterly principal payment dueDecember 30, 2006 from $209,816 to $188,404.**

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

*The following discussion andanalysis should be read in conjunction with the consolidated financialstatements and related notes included elsewhere in this Form 10-Q. Thisdiscussion and analysis contains forward-looking statements that involveknown and unknown risks, uncertainties, and other factors that may cause ouractual results, level of activity, performance or achievements to be materiallydifferent from any future results, levels of activity, performance orachievements expressed or implied by such forward-looking statements. In somecases, you can identify these statements by forward-looking words such as “anticipate,”“believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,”“should,” “will,” and “would” or similar words. You should read statements thatcontain these words carefully because they discuss our future expectations,contain projections of our future results of operations or of our financialposition, or state other forward-looking information. We believe that it isimportant to communicate our future expectations to our investors. However,there may be events in the future that we are not able to predict accurately orcontrol. In particular, statements that wemake in this section relating to the sufficiency of anticipated sources ofcapital to meet our cash requirements are forward- looking statements.Our actual results could differ materially from those anticipated in theseforward-looking statements for many reasons, including as a result ofsome of the factors described below, elsewhere in this Form 10-Q and in thesection entitled “Risk Factors” in our Form 10-K/A  for the fiscal year ended December 31,2005.   You should not place unduereliance on these forward-looking statements, which apply only as of thedate of the filing of this Form 10-Q.*

*The Company’s fiscal year isbased on the calendar year and ends each year on the Saturday nearest, but notfalling after, December 31 of that year. Typically, fiscal quarters also end on the Saturday nearest, but notfalling after, the end of the calendar quarter. Similarly, we will end future fiscal quarters on the Saturday whichprovides us with a 13 week quarter to compare with the previous year’squarterly results even if that Saturday falls after the end of the calendarquarter.  As a result, our fiscal yearmay be comprised of 52 or 53 weeks.*

*References to the “Company,” “we,”“us” and “our” refer to SI International, Inc. and its subsidiaries.*

**Overview**

We are, first and foremost, a provider of informationtechnology and network solutions (IT) to the Federal Government. Our clientsinclude the U.S. Air Force, U.S. Army, U.S. Navy, Department of State, MissileDefense Agency, Department of Homeland Security, Department of Energy,Department of Agriculture, National Institutes of Health, Federal RetirementThrift Investment Board, National Guard Bureau, and the Intelligence community.We combine our technology and industry expertise to provide a full spectrum ofstate-of-the-practice solutions and services, from design and development toimplementation and operations, which assist our clients in achieving missionsuccess. We believe that our Company is distinguishable from our peers withinthe federal IT sector in several important respects.

We employ a Rapid Response • Rapid Deployment®methodology that enables us to quickly and effectively stand up innovativesolutions and incorporate additional capabilities in rapid succession. Thiscapability allows us to respond to urgent IT imperatives quickly, often in amatter of months, and within a well defined budget. We can, therefore, providesolutions for current IT needs, while establishing a platform for advancinglong-term transformational objectives. We possess a proven ability to respondto high priority information technology and network needs through innovation,and an enviable reputation for timely delivery of robust solutions onassignments where failure is not an option. Our Mission Critical • Mission 

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AccomplishedTMsolutions enable clients to respond to new mandates, expand the scope of theirmissions, and reengineer underlying business processes. We have a demonstratedability of turning troubled IT projects into winning outcomes and realizedexceptional growth from high-quality client engagements. We also utilize matureand proven processes to manage and market large-scale ID/IQ contracts, such asC4I2TSR. We employ a diverse, innovative team that effectively utilizes smallbusiness partners’ unique skills and expertise for mission critical ITprojects.

For the fiscal quarters ended September 30, 2006 andSeptember 24, 2005, we received 98.9% and 98.3%, respectively, of our revenuesfrom services we provided to various departments and agencies of the FederalGovernment, both directly and through other prime contractors.  Additionally, for the fiscal quarters endedSeptember 30, 2006 and September 24, 2005, 1.1% and 1.7%, respectively, of ourtotal revenues from work performed for commercial entities. The following tableshows our revenues from the client groups listed as a percentage of totalrevenue. Revenue data for the DoD includes revenue generated from workperformed under engagements for both the DoD and the Intelligence community.
| ** **                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **Sept. 30,  2006**         | ** ** | **Sept. 24,  2005**        | ** ** | **Sept. 30,  2006** | ** ** | **Sept. 24,  2005** | ** ** |
| Department of  Defense     |       | 46.6                             | %          | 46.8                            | %          | 47.2 | % | 46.6 | % |
| Federal civilian  agencies |       | 52.3                             | %          | 51.5                            | %          | 51.3 | % | 51.6 | % |
| Commercial  entities       |       | 1.1                              | %          | 1.7                             | %          | 1.5 | % | 1.8 | % |
| Total revenue              |       | 100.0                            | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |

 

We derived a substantial majority of our revenues fromgovernmental contracts under which we act as a prime contractor. We alsoprovide services indirectly as a subcontractor. The following table shows ourrevenues a as prime contractor and as subcontractor as a percentage of ourtotal revenue for the following periods:
| ** **              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **Sept. 30,  2006**         | ** ** | **Sept. 24,  2005**        | ** ** | **Sept. 30,  2006** | ** ** | **Sept. 24,  2005** | ** ** |
| Prime contract  revenue |       | 79.9                             | %          | 74.8                            | %          | 79.2 | % | 74.7 | % |
| Subcontract  revenue    |       | 20.1                             | %          | 25.2                            | %          | 20.8 | % | 25.3 | % |
| Total revenue           |       | 100.0                            | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |

 

Our services are provided to clients pursuant to threetypes of contracts: cost reimbursable, time and materials and fixed pricecontracts. The following table shows our revenues from each of these types ofcontracts as a percentage of our total revenue for the following periods:
| ** **          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **          | ** ** | **Sept. 30,   2006**   | ** ** | **Sept. 24,  2005**        | ** ** | **Sept. 30,  2006** | ** ** | **Sept. 24,   2005** | ** ** |
| Cost  reimbursable  |       | 32.8                             | %          | 29.5                            | %          | 31.6 | % | 28.4 | % |
| Time and  materials |       | 39.3                             | %          | 44.5                            | %          | 40.5 | % | 48.8 | % |
| Fixed price         |       | 27.9                             | %          | 26.0                            | %          | 27.9 | % | 22.8 | % |
| Total               |       | 100.0                            | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |

 

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Under cost reimbursable contracts, we are reimbursedfor costs that are determined to be reasonable, allowable and allocable to thecontract, and paid a fee representing the profit margin negotiated between usand the contracting agency, which may be fixed or performance based. Under costreimbursable contracts we recognize revenues and an estimate of applicable feesearned as costs are incurred. We consider fixed fees under cost reimbursablecontracts to be earned in proportion to the allowable costs incurred inperformance of the contract. For performance-based fees under cost reimbursablecontracts, we recognize the relevant portion of the expected fee to be awardedby the client at the time such fee can be reasonably estimated, based on factorssuch as our prior award experience and communications with the client regardingperformance. In general, cost reimbursable contracts are the least profitableof our government contracts.

Under time and materials contracts, we are reimbursedfor labor at fixed hourly rates and generally reimbursed separately forallowable materials, costs and expenses. To the extent that our actual laborcosts under a time and materials contract are higher or lower than the billingrates under the contract, our profit under the contract may either be greateror less than we anticipated or we may suffer a loss under the contract. Werecognize revenues under time and materials contracts by multiplying the numberof direct labor hours expended by the contract billing rates and adding theeffect of other billable direct costs. In general, we realize a higher profitmargin on work performed under time and materials contracts than costreimbursable contracts.

Under fixed price contracts, we perform specific tasksfor a fixed price. Compared to cost reimbursable and time and materialscontracts, fixed price contracts generally offer higher profit marginopportunities but involve greater financial risk because we bear the impact ofcost overruns in return for the full benefit of any cost savings. We generallydo not undertake complex, high-risk work, such as long-term softwaredevelopment, under fixed price terms. Fixed price contracts may include eithera product delivery or specific service performance over a defined period. Revenueon fixed price contracts that provide for the Company to render servicesthroughout a period is recognized as earned according to contract terms as theservice is provided on a proportionate performance basis. While a substantialnumber of these contracts are generally less than six months in duration, wehave several multi-year contracts of this type in which the customer has theoption to extend the contractual term beyond the current term.

If we anticipate a loss on a contract, we provide forthe full amount of anticipated loss at the time of that determination.

Our most significant expense is cost of services,which consists primarily of direct labor costs for program personnel and directexpenses incurred to complete contracts, including cost of materials andsubcontract efforts. Our ability to predict accurately the number and types ofpersonnel, their salaries, and other costs, can have a significant impact onour direct cost.

The allowance of certain costs of services andselling, general and administrative costs in federal contracts is subject toaudit by the client, usually through the DCAA. Certain indirect costs arecharged to contracts and paid by the client using provisional, or estimated,indirect rates, which are subject to later revision, based on the governmentaudits of those costs.

**Recent Events**

**On October 30, 2006, theCompany prepaid $8.0 million of term debt, after which our remainingprincipal balance is approximately $70.4 million. The amount of deferredloan origination fees to be written off in the fourth quarter as a result ofthis prepayment is approximately $0.1 million. Additionally, theprepayment of term debt will result in a reduction of our quarterly principalpayment due December 30, 2006 from $209,816 to $188,404.**

**Liquidity and Capital Resources**

*General.*  Short-term liquidity requirements are created by our use of funds for workingcapital, capital expenditures, and the need to provide debt service. We expectto meet these requirements through a combination of cash flow from operationsand borrowings under our Amended Credit Agreement.

We anticipate that our long-term liquidityrequirements, including any further acquisitions, will be funded through acombination of cash flow from operations, borrowings under our Amended CreditAgreement, additional secured or unsecured debt or the issuance of common orpreferred stock, each of which may be initially funded through borrowings underour Amended Credit Agreement.

Under the terms of our Amended Credit Agreement, the Companyis required to maintain compliance with financial and non-financialcovenants.  The Company is in compliancewith all such covenants as of September 30, 2006.

*Cash and Cash Equivalents.*  We consider cash on deposit and all highly liquid investments with originalmaturities of three months or less to be cash and cash equivalents. Cash andcash equivalents, including marketable securities, as of the end of threemonths ending September 30, 2006 and September 24, 2005 was $15.6 million and$26.4 million, respectively.

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*Cash Flow.*  The following table sets forth our sources and uses of cash for the nine monthsended September 30, 2006 and September 24, 2005.

|                                  | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **Sept. 30, 2006**    | ** ** | **Sept. 24, 2005** | ** ** |
| ** **                       | ** ** | **(in thousands)**         | ** ** |
| Net cash  provided by (used in): |       |                            |       |   |   |
| Operating  activities            |       | $                               | 20,195     |   | $ | 25,983 |   |
| Investing  activities            |       | (57,585                         | )          | (81,690 | ) |
| Financing  activities            |       | 26,862                          |       | 70,396 |   |
| Net (decrease) increase  in cash |       | $                               | (10,528    | ) | $ | 14,689 |   |

 

Our operating cash flow is primarily affected by theoverall profitability of our contracts, our ability to invoice and collect fromour clients in a timely manner, and our ability to manage our vendor payments.We bill most of our clients monthly after services are rendered. Cash providedby operations in the nine months ended September 30, 2006 was attributable tonet income of $14.1 million, plus depreciation, amortization and other non-cashitems of $6.4 million, which was reduced by an increase in working capital andother operating assets and liabilities of $0.3 million.  Cash providedby operations in the nine months ended September 24, 2005 was attributable tonet income of $11.8 million, depreciation, amortization, and other non-cashitems of $5.1 million, and a decrease in working capital and other operatingassets and liabilities of $9.1 million.

Our cash flow used in investing activities consistsprimarily of capital expenditures, the purchase and sale of marketablesecurities, and acquisitions. In the nine months ended September 30, 2006, wepaid $48.1 million for business acquisitions, net of cash assumed, repaid acontract settlement to a former owner for $10.3 million, and purchased capitalassets totaling $7.0 million. We partially offset the cash use with $7.8million of proceeds from the sale of marketable securities, net of purchases. During the nine months ended September 24, 2005,we paid $74.2 million for business acquisitions, net of cash assumed, invested$1.5 million in capital assets, and we purchased $6.0 million of marketablesecurities, net of  sales.

For the ninemonths ended September 30, 2006, cash flow provided by financing activities wasattributed to proceeds of $40.3 million from the sale of common stock, $30.0million of proceeds from the issuance of term debt, $6.4 million ofproceeds from the exercise of stock options and $1.7 million of income taxbenefit from stock option exercises, net of $50.9 million repayment of termdebt and $0.6 million of other items.  For the nine months ended September24, 2005, cash flow provided by financing activities was attributed to proceedsof $100.0 million from the issuance of term debt and $2.9 million of proceedsfrom the exercise of stock options, net of a $29.0 million repayment ofrevolving debt, a $3.2 million payment of debt issuance fees and $0.3 millionother items.

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**Results of Operations**

The following table sets forthcertain items from our consolidated statements of operations as a percentage ofrevenues for the periods indicated.
| ** **                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **Sept. 30,  2006**         | ** ** | **Sept. 24,  2005**        | ** ** | **Sept. 30,  2006** | ** ** | **Sept. 24,   2005** | ** ** |
| Revenue                                   |       | 100.0                            | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |
| Operating costs  and expenses:            |       |                             |       |                            |       |   |   |   |   |
| Cost of services                          |       | 64.3                             |       | 61.7                            |       | 63.1 |   | 61.8 |   |
| Selling, general and administrative       |       | 25.6                             |       | 28.2                            |       | 27.1 |   | 28.5 |   |
| Depreciation and amortization             |       | 0.6                              |       | 0.5                             |       | 0.6 |   | 0.6 |   |
| Amortization of intangible assets         |       | 0.7                              |       | 0.6                             |       | 0.7 |   | 0.6 |   |
| Total operating costs and expenses        |       | 91.2                             |       | 91.0                            |       | 91.5 |   | 91.5 |   |
| Income from  operations                   |       | 8.8                              |       | 9.0                             |       | 8.5 |   | 8.5 |   |
|  Other income  (expense)             |       | 0.0                              |       | 0.1                             |       | 0.0 |   | 0.0 |   |
|  Interest  expense                   |       | 1.4                              |       | 1.7                             |       | 1.8 |   | 1.6 |   |
| Income before  provision for income taxes |       | 7.4                              |       | 7.4                             |       | 6.7 |   | 6.9 |   |
| Provision for  income taxes               |       | 2.9                              |       | 2.9                             |       | 2.6 |   | 2.7 |   |
| Net income                                |       | 4.5                              | %          | 4.5                             | %          | 4.1 | % | 4.2 | % |

 

**Three months ended September 30, 2006compared with three months ended September 24, 2005**

*Revenue.* Substantially all of our revenue is derived from services and solutionsprovided to the Federal Government, primarily by our employees and, to a lesserextent, our subcontractors.  For thethree months ended September 30, 2006, our revenues increased 17.8% to$119.9 million from $101.8 million for the three months endedSeptember 24, 2005. Revenues from work under Federal Government contractsincreased 18.4% to $118.5 million for the three months ended September 30,2006 from $100.1 million for the three months ended September 24, 2005. Thisincrease was attributable to the acquisition and integration of Zen in thefirst quarter of 2006, new contract awards, successful recompetition wins onexisting programs, new contracts from and growth within existing programs inour four focus areas: Federal IT Modernization, Defense Transformation,Homeland Defense, and Mission-Critical Outsourcing.  Commercial revenues decreased to $1.3 millionin the three months ended September 30, 2006 from $1.7 million in the threemonths ended September 24, 2005.  Wecontinue to focus primarily on opportunities for the Federal Government.

*Cost ofservices.*  Cost of services includes direct labor andother direct costs such as materials and subcontractor costs, incurred toprovide our services and solutions to our customers. Generally, changes in costof services are correlated to changes in revenue as resources are consumed inthe production of that revenue. Please note that in our reported financialstatements prior to the second quarter ended July 1, 2006, we referred to costof services as “direct costs”.  We expectto use the term cost of services in all future periods.  For the three months ended September 30,2006, cost of services increased 22.9% to $77.1 million from$62.7 million for the three months ended September 24, 2005. This increasewas attributable primarily to the increase in revenue. As a percentage ofrevenue, cost of services were 64.3% for the three months ended September 30,2006 as compared to 61.7% for the three months ended September 24, 2005.

*Selling,general and administrative expenses.* Selling, general and administrative expenses include facilities,selling, bid and proposal, indirect labor, fringe benefits and otherdiscretionary costs. Please note that in our reported financial statementsprior to the second quarter ended July 1, 2006, we referred to selling, generaland administrative expenses as “indirect costs”.  We expect to use the term selling, generaland administrative expenses in all future periods.  During the quarter ended September 30, 2006,the Company billed our customer under the C4I2TSR contract for rate variancesfor prior years, resulting in a reversal of $0.9 million of reserve. For thethree months ended September 30, 2006, selling, general and administrativeexpenses increased 6.7% to $30.7 million from $28.7 million for thethree months ended September 24, 2005. This $2.0 million increase was primarily attributable to theexpected growth of support functions necessary to facilitate and administer thegrowth in cost of 

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services as well as the integration of Zen.  As a percentage of revenue, selling, generaland administrative expenses were 25.6% for the three months ended September 30,2006 as compared to 28.2% for the three months ended September 24, 2005.

*Depreciationand amortization.*Depreciation and amortization includes thedepreciation of computers, furniture and other equipment, the amortization ofthird party software we use internally, and leasehold improvements.  Forthe three months ended September 30, 2006, depreciation and amortizationexpense was $0.8 million, a slight increase compared to $0.5 million for thethree months ended September 24, 2005. As a percentage of revenue, depreciation and amortization expense was0.6% for the three months ended September 30, 2006 compared to 0.5% for thethree months ended September 24, 2005.

*Amortization of intangibleassets.*Amortization ofintangible assets includes the amortization of intangible assets acquired inconnection with acquisitions in accordance with SFAS 142, Goodwill and OtherIntangible Assets.  We discontinued theamortization of goodwill effective December 30, 2001.  Identifiable intangible assets are amortizedover their estimated useful lives. Non-compete agreements are generally amortized straight-line over theterm of the agreement, while contracts and related client relationships areamortized using an accelerated method over their estimated remaining lives. Forthe three months ended September 30, 2006, amortization of intangible assetswas $0.8 million, compared to $0.6 million for the three months ended September24, 2005.  This increase was attributedprimarily to the Zen acquisition. As a percentage of revenue amortization ofintangible assets was 0.7% for the three months ended September 30, 2006compared to 0.6 % for the three months ended September 24, 2005.

*Income fromoperations.*  For the three months ended September 30,2006, income from operations increased 14.7% to $10.5 million from$9.2 million for the three months ended September 24, 2005. This increasewas attributable primarily to increased revenues.  As a percentage of revenue, income from operationswas 8.8% for the three months ended September 30, 2006 compared to 9.0% for thethree months ended September 24, 2005.

*Interestexpense.*  Interest expense increased 1.8% to$1.72 million for the three months ended September 30, 2006 from$1.69 million for the three months ended September 24, 2005. As apercentage of revenue, interest expense was 1.4% for the three months endedSeptember 30, 2006 as compared to 1.7% for the three months ended September 24,2005.  We anticipate interest expense toremain at the same levels throughout the rest of fiscal year 2006 as comparedto the same periods in 2005.

*Provision forincome taxes.*  The provision for income taxes was$3.5 million in the three months ended September 30, 2006, compared to$3.0 million for the three months ended September 24, 2005.   Our third quarters of 2006 and 2005 taxprovision, represents an estimated annual effective tax rate of 39.5%. Ourestimated annual effective tax rate is greater than the federal statutory rateof 34% due primarily to state income taxes.

**Nine months ended September 30, 2006compared with nine months ended September 24, 2005**

*Revenue.* Substantially all of our revenue is derived from services and solutionsprovided to the Federal Government, primarily by our employees and, to a lesserextent, our subcontractors.  For the ninemonths ended September 30, 2006, our revenues increased 23.0% to$346.3 million from $281.5 million for the nine months endedSeptember 24, 2005. Revenues from work under Federal Government contractsincreased 23.3% to $341.0 million for the nine months ended September 30,2006 from $276.6 million for the nine months ended September 24, 2005. Thisincrease was attributable to the acquisition of Zen and SEI in the firstquarters of 2006 and 2005, respectively, new contract awards, successful recompetitionwins on existing programs, new contracts from and growth within existingprograms in our four focus areas: Federal IT Modernization, DefenseTransformation, Homeland Defense, and Mission-Critical Outsourcing.  Commercial revenues increased 8.2% to $5.3million in the nine months ended September 30, 2006 from $4.9 million in thenine months ended September 24, 2005.  Wecontinue to focus primarily on opportunities for the Federal Government.

*Cost ofservices.* Cost of servicesincludes direct labor and other direct costs such as materials andsubcontractor costs, incurred to provide our services and solutions to ourcustomers. Generally, changes in costs of services are correlated to changes inrevenue as resources are consumed in the production of that revenue. For thenine months ended September 30, 2006, costs of services increased 25.7% to$218.7 million from $173.9 million for the nine months ended September 24,2005. This increase was attributable primarily to the increase in revenue. As apercentage of revenue, costs of services were 63.1% for the nine months endedSeptember 30, 2006 as compared to 61.8% for the nine months ended September 24,2005.

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*Selling,general and administrative expenses.*  Selling, general andadministrative expenses include facilities, selling, bid and proposal, indirectlabor, fringe benefits and other discretionary costs.  During the quarter ended September 30, 2006,the Company billed our customer under the C4I2TSR contract for rate variancesfor prior years, resulting in a reversal of $0.9 million of reserve. For thenine months ended September 30, 2006, selling, general and administrativeexpenses increased 17.0% to $93.8 million from $80.2 million for thenine months ended September 24, 2005. This $13.6 million increase was primarily attributable to the expectedgrowth of support functions necessary to facilitate and administer the growthin costs of services as well as the integration of Zen.  As a percentage of revenue, selling, generaland administrative expenses were 27.1% for the nine months ended September 30,2006 as compared to 28.5% for the nine months ended September 24, 2005.

*Depreciationand amortization.*Depreciation and amortization includes thedepreciation of computers, furniture and other equipment, the amortization ofthird party software we use internally, and leasehold improvements.  Forthe nine months ended September 30, 2006, depreciation expense was $2.0million, a slight increase compared to $1.6 million for the nine months endedSeptember 24,  2005.  However, as a percentage of revenue,depreciation expense was 0.6% for the nine months ended September 30, 2006compared to 0.6% for the nine months ended September 24, 2005.

*Amortization of intangibleassets.*Amortization ofintangible assets includes the amortization of intangible assets acquired inconnection with acquisitions in accordance with SFAS 142, Goodwill and OtherIntangible Assets.  We discontinued theamortization of goodwill effective December 30, 2001.  Identifiable intangible assets are amortizedover their estimated useful lives. Non-compete agreements are generally amortized straight-line over theterm of the agreement, while contracts and related client relationships areamortized using an accelerated method over their estimated remaining lives. Forthe nine months ended September 30, 2006, amortization of intangible assets was$2.3 million, compared to $1.7 million for the nine months ended September 242005.  This increase was attributed primarilyto the Zen acquisition.  As a percentageof revenue amortization of intangible assets was 0.7% for the nine months endedSeptember 30, 2006 compared to 0.6 % for the nine months ended September 24,2005.

*Income fromoperations.*  For the nine months ended September 30, 2006,income from operations increased 23.0% to $29.6 million from$24.0 million for the nine months ended September 24, 2005. This increasewas attributable primarily to increased revenues.  As a percentage of revenue, income fromoperations was 8.5% for the nine months ended September 30, 2006 compared to8.5% for the nine months ended September 24, 2005.

*Interestexpense.*  Interest expense increased 39.3% to $6.2million for the nine months ended September 30, 2006 from $4.4 million forthe nine months ended September 24, 2005. This increase was attributableprimarily to the $1.0 million write off of loan origination fees due to theprepayment of term debt. As a percentage of revenue, interest expense was 1.8%for the nine months ended September 30, 2006 as compared to 1.6% for the ninemonths ended September 24, 2005.  Weanticipate interest expense to remain at the same levels throughout the rest offiscal year 2006 as compared to the same periods in 2005.

*Provision forincome taxes.*  The provision for income taxes was $9.2 millionin the nine months ended September 30, 2006, compared to $7.7 million forthe nine months ended September 24, 2005.  Our year to date 2006 and 2005 tax provision, represents an estimatedannual effective tax rate of 39.5%. Our estimated annual effective tax rate isgreater than the federal statutory rate of 34% due primarily to state incometaxes.

**Off-Balance Sheet Arrangements**

As of September 30, 2006, we haveno off-balance sheet arrangements that are reasonably likely to have a currentor future material effect on our financial condition, revenues, or expenses,result of operations, liquidity, capital expenditures, or capital resources.

**Critical Accounting Policies andEstimates**

Our significant accounting policies are described inNote 2 to our accompanying consolidated financial statements. We considerthe accounting policies related to revenue recognition to be critical to theunderstanding of our results of operations. Our critical accounting policiesalso include the areas where we have made what we consider to be particularlydifficult, subjective or complex judgments in making estimates, and where theseestimates can significantly impact our financial results under differentassumptions and conditions. We prepare our financial statements in conformitywith accounting principles generally accepted in the United States. As such, weare required to make certain estimates, judgments and assumptions that we 

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believeare reasonable based upon the information available. These estimates, judgmentsand assumptions affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts of revenue andexpenses during the periods presented. Actual results could be different fromthese estimates.

*Revenue Recognition*

We recognize revenue under its contracts when acontract has been executed, the contract price is fixed and determinable,delivery of services or products has occurred, and collectibility of thecontract price is considered probable and can be reasonably estimated. Revenueis earned under cost reimbursable, time and materials and fixed pricecontracts. Direct contract costs are expensed as incurred.

Under cost reimbursable contracts, we are reimbursedfor allowable costs, and paid a fee, which may be fixed or performance-based.Revenues on cost reimbursable contracts are recognized as costs are incurredplus an estimate of applicable fees earned. We consider fixed fees under costreimbursable contracts to be earned in proportion of the allowable costsincurred in performance of the contract. For cost reimbursable contracts thatinclude performance based fee incentives, we recognize the relevant portion ofthe expected fee to be awarded by the customer at the time such fee can bereasonably estimated, based on factors such as our prior award experience andcommunications with the customer regarding performance.

Revenue on time and materials contracts are recognizedbased on direct labor hours expended at contract billing rates and adding otherbillable direct costs.

Fixed price contracts may include either a productdelivery or specific service performance throughout a period. For fixed pricecontracts that are based on unit pricing, we recognize revenue for the numberof units delivered in any given fiscal period. For fixed price contracts thatare based on the proportionate performance method and involve a specifiednumber of similar acts, we recognize revenue based on the proportion of thoseacts completed compared to the number of total specified acts required by thecontract. For fixed price contracts that are based on the proportionateperformance method and involve a specified number of defined but not similaracts, we recognize revenue based on the proportion of the project’s percentagetotal costs incurred compared to the estimated total costs associated with theentire transaction. For fixed price contracts that provide for the delivery ofa specific product with related customer acceptance provisions, revenues andassociated contract costs are recognized upon product delivery and customeracceptance.

Our contracts with agencies of the government aresubject to periodic funding by the respective contracting agency. Funding for acontract may be provided in full at inception of the contract or ratablythroughout the contract as the services are provided. In evaluating theprobability of funding for purposes of assessing collectibility of the contractprice, we consider our previous experiences with our customers, communicationswith our customers regarding funding status, and our knowledge of availablefunding for the contract or program. If funding is not assessed as probable,revenue recognition is deferred until realization is deemed probable.

Contract revenue recognition inherently involves estimation,including the contemplated level of effort to accomplish the tasks undercontract, the cost of the effort, and an ongoing assessment of progress towardcompleting the contract. From time to time, as part of the normal managementprocesses, new information comes to light that require revisions to estimatedtotal costs or revenues expected. The cumulative impact of any revisions toestimates and the full impact of anticipated losses on any type of contract arerecognized in the period in which they become known.

The allowance of certain costs under governmentcontracts is subject to audit by the government. Certain indirect costs arecharged to contracts using provisional or estimated indirect rates, which aresubject to later revision based on government audits of those costs. Managementis of the opinion that costs subsequently disallowed, if any, would not besignificant.

*Stock Based Compensation*

In December 2004, the FASB issued SFAS No.123R (revised 2004), *Share BasedPayment.* SFAS No. 123R addresses the accounting for share-basedpayment transactions in which an enterprise receives employee services inexchange for (a) equity instruments of the enterprise or(b) liabilities that are based on the fair value of the enterprise’sequity instruments or that may be settled by the issuance of such equityinstruments. SFAS No. 123R requires an entity to recognize the grant-datefair-value of stock options and other equity-based compensation issued toemployees in the income statement. The revised SFAS No. 123R generally requiresthat an entity account for those transactions using the fair-value-basedmethod, and eliminates the intrinsic value method of accounting in APB OpinionNo. 25, *Accounting for Stock Issued toEmployees*, which was permitted under SFAS No. 123R, as originallyissued. The revised SFAS No. 123R requires entities to disclose informationabout the nature of the share-based payment transactions and the effects ofthose transactions on the financial statements. All public companies must useeither the modified prospective or the modified retrospective transitionmethod.

 

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Effective January 1, 2006, theCompany adopted the provisions of SFAS No. 123R using the modified prospectivetransition method. Due to the use of the modified prospective method,prior interim periods and fiscal years will not reflect any restated amounts.As disclosed in the stock incentive plan section of Note 9, the Companyaccelerated the vesting of unvested stock options previously awarded toemployees, officers and directors in December 2005. The Company had no unvestedstock options on January 1, 2006. The Company issued an insignificant number ofstock options in the quarters ended April 1, 2006 and July 1, 2006, and issued 143,625shares of stock options and 29,125 shares of restricted stock in the quarterended September 30, 2006. The stock compensation expense recognized during thefirst three quarters was $0.1 million. The total remaining unrecognizedcompensation expense related to unvested options and restricted stock awardswas $1.7 million and $0.7 million, respectively, which will be recognized overthe weighted average period of 3 years.

**Item 3.Quantitative and Qualitative Disclosures About Market Risk.**

We are exposed to certain financial market risks, themost predominant being fluctuations in interest rates for borrowings under ourcredit facility. Interest rate fluctuations are monitored by our management asan integral part of our overall risk management program, which recognizes theunpredictability of financial markets and seeks to reduce the potentiallyadverse effect on our results of operations. As part of this strategy, we mayuse interest rate swap arrangements to manage or hedge our interest rate risk.We do not use derivative financial instruments for speculative or tradingpurposes.

As of September 30, 2006, we had $78.4 millionoutstanding under our Amended Credit Agreement. A 1% change in interest rateswould have resulted in our interest expense fluctuating by approximately $0.2million for the three months ended September 30, 2006.

Effective February 14, 2006, an interest swapagreement came into effect which reduced our exposure associated with themarket volatility of floating LIBOR interest rates. This agreement has anotional principal amount of $30.0 million and, as of September 30, 2006,had a rate ranging from 4.05% to 4.74%. This agreement is a hedge against termdebt, which bears interest at LIBOR plus a margin which has a current rateranging from 7.36% to 7.46%. At stated monthly intervals the difference betweenthe interest on the floating LIBOR-based debt and the interest calculated inthe swap agreement are settled in cash. The estimated value of the swap atSeptember 30, 2006 was $0.3 million.

In addition, historically, our investment positionshave been relatively small and short-term in nature. We have typically madeinvestments in a fund with an effective average maturity of fewer than 40 daysand a portfolio make-up consisting primarily of commercial paper and notes,variable rate instruments, and, to a lesser degree, overnight securities and bankinstruments.  Since our initial publicoffering, the Board of Directors approved an investment policy that requires usto invest in relatively short-term, low risk, and high liquidity obligations.

**Item 4.     Controls and Procedures.**

*Evaluation of Disclosure Controls and Procedures.*The Company performed an evaluation under the supervision and with theparticipation of management, including the Company’s Chief Executive Officerand Chief Financial Officer, of the design and operation of the Company’sdisclosure controls and procedures as of September 30, 2006.  Based upon the evaluation, the Company’sChief Executive Officer and Chief Financial Officer have concluded that, as ofSeptember 30, 2006, the Company’s disclosure controls and procedures wereeffective.

*Changes in Internal Control Over FinancialReporting.*During the three months ended September 30, 2006,there were no significant changes in the Company’s internal control overfinancial reporting that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control for financial reporting.

**PART II:  OTHER INFORMATION**

**Item 1.   Legal Proceedings**

We are a party to litigation and legal proceedingsthat we believe to be a part of the ordinary course of our business. While wecannot predict the ultimate outcome of these matters, we currently believe thatany ultimate liability arising out of these proceedings will not have amaterial adverse effect on our financial position. We may become involved in otherlegal and governmental, administrative or contractual proceedings in thefuture.

The SEI acquisition agreement provides for a purchaseprice adjustment based upon the working capital of SEI as of the closingdate.  Subsequent to the closing date, we received a payment of $1.6million in connection with services performed 

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priorto the closing date that SEI had not previously billed, and was not authorizedto bill its customer as of the closing date.  The SEI selling stockholdershave asserted that they are entitled to a credit in connection with thecalculation of working capital adjustment in an amount equal to the amountreceived by us for this post-closing payment.  We believe that, inaccordance with GAAP, the SEI selling stockholders should not receive thebenefit of the post-closing payment.  In accordance with the terms of theSEI acquisition agreement, the parties have jointly submitted the issue to anindependent accounting firm for resolution.  We anticipate that thismatter will be resolved before the end of 2006.

In June 2006, the Company, through one of itssubsidiaries, was awarded a judgment, after a trial before a judge, in alawsuit filed in the Circuit Court of Fairfax County, Virginia against NationalTechnologies Associates, Inc. (“NTA”) in the amount of $841,612. The Company’sclaims arose out of the Company’s allegation that NTA breached a contract whichobligated NTA to subcontract certain work to the Company’s subsidiary. The Company did not record the judgment because NTA filed a motion forreconsideration before the trial court. The trial court judge granted NTA’s motion for reconsideration, therebyoverturning  the trial judge’s originalruling.  The Company anticipates that itwill appeal the trial court’s final judgment to the appropriate appellatecourt.   The Company cannot presentlydetermine the ultimate outcome of the matter.

**Item 1A.  Risk Factors**

There are nomaterial updates to the risk factors previously disclosed in our Form 10-K/Afor the year ended December 31, 2005.

**Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds**

None.

**Item 3.  Defaults Upon Senior Securities**

None.

**Item 4.   Submission of Matters To a Vote of SecurityHolders**

None.

**Item 5.  Other Information**

None.

**Item 6.  Exhibits**

The exhibits requiredby this item are set forth on the Index to Exhibits attached hereto.

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**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
|        |   | SI INTERNATIONAL INC.        |
|--------|--------|------------------------------|
|   |   |                         |
|   |   |                         |
|   |   | /s/ Thomas E. Dunn           |
|   |   | Thomas E. Dunn               |
|   |   | Executive Vice President and |
|   |   | Chief Financial Officer      |

Date:  November 7, 2006

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**INDEX TO EXHIBITS**
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1         |       | Stock Purchase Agreement among the Company,  Shenandoah Electronic Intelligence, Inc. (“SEI”), and the stockholders of SEI  dated January 12, 2005 (filed as Exhibit 99.1 to the Company’s  Current Report on Form 8-K filed March 1, 2005 and incorporated by  reference). (The appendices and exhibits have been omitted pursuant to  Item 601(b)(2) of Regulation S-K. SI International, Inc.  hereby undertakes to furnish supplementally to the Securities and Exchange  Commission copies of any omitted appendices and exhibits upon request by the  Securities and Exchange Commission).                |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 2.2         |       | Stock Purchase Agreement among the Company, Zen  Technology, Inc., and the stockholders of Zen Technology, Inc. dated February  8, 2006 (filed as Exhibit 2.2 to the Company’s Annual Report on  Form 10-K/A for the fiscal year ended December 31, 2005 and filed  May 12, 2006 and incorporated herein by reference). (The appendices and  exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. SI  International, Inc., hereby undertakes to furnish supplementally to the  Securities and Exchange Commission copies of any omitted appendices and  exhibits upon request by the Securities and Exchange Commission). |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.1         |       | Second Restated Certificate of Incorporation (filed  as Exhibit 3.1 to the Company’s Registration Statement on Form S-1/A  (File No. 333-87964) filed on October 25, 2002 (the “Third  Amendment”) and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 3.2         |       | Amended and Restated Bylaws, as amended (filed as  Exhibit 3.2 to the Company’s Current Report on Form 8-K filed  October 11, 2005 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.1         |       | Registration Rights Agreement, as amended (filed as  Exhibit 4.1 to the Third Amendment and incorporated herein by  reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.2         |       | Specimen Certificate of our common stock (filed as  Exhibit 4.2 to the Company’s Registration Statement on Form S-1/A  (File No. 333-87964) filed on November 5, 2002 (the “Fourth  Amendment) and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.3         |       | Stock Purchase Agreement, as amended (filed as  Exhibit 4.3 to the Company’s Registration Statement on Form S-1/A (File  No. 333-87964) filed on November 8, 2002 and incorporated herein by  reference).                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.4         |       | Amendment to Stock Purchase Agreements (filed as  Exhibit 4.4 to the Fourth Amendment and incorporated herein by  reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.1        |       | 2002 Amended and Restated Omnibus Stock Incentive  Plan (filed as Annex B to the Company’s Proxy Statement on Schedule 14A for  the 2005 Annual Meeting of Stockholders filed on April 21, 2005 and incorporated  herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.2        |       | January 2001 Nonqualified Stock Option Plan  (filed as Exhibit 10.2 to the Company’s Registration Statement on  Form S-1/A (File No. 333-87964) filed on June 24,  2002 (the “First Amendment) and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.3        |       | SI International, Inc. 2001 Service Award Stock  Option Plan (filed as Exhibit 10.3 to the First Amendment and  incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.4        |       | 1998 Stock Option Plan (filed as Exhibit 10.5  to the First Amendment and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.5        |       | Non-Qualified Deferred Compensation Plan, as amended  (filed as Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the  fiscal year ended December 25, 2004 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.6        |       | Form of SI International, Inc. Stock Option  Agreement Evidencing Grant of Stock Options Under the SI International, Inc.  2002 Amended and Restated Omnibus Stock Incentive Plan.(*)                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.7        |       | Form of Notice to Stock Option Grant under SI  International, Inc. Stock Option Agreement (filed as Exhibit 4.3 to the  Company’s Current Report on Form 8-K filed on August 10, 2006 and incorporated  herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.8        |       | Form of SI International, Inc. Restricted Stock  Bonus Award Agreement Evidencing Grant of Restricted Stock Under the SI  International, Inc. 2002 Amended and Restated Omnibus Stock Incentive Plan.(*)                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

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| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                    |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9        |       | Form of Notice of Restricted Stock Bonus Award Under  SI International, Inc. Restricted Stock Bonus Award Agreement (filed as  Exhibit 4.5 to the Company’s Current Report on Form 8-K filed on August 10,  2006 and incorporated herein by reference).                                                       |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 10.10       |       | Notice of Stock Option Acceleration of Vesting  (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on  December 13, 2005 and incorporated herein by reference).                                                                                                                         |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 10.11       |       | Amended and Restated Credit Agreement, dated as of  February 9, 2005 (filed as Exhibit 99.1 to the Company’s Current Report  on Form 8-K filed February 15, 2005 and incorporated herein by  reference).                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 10.12       |       | First Amendment to Amended and Restated Credit  Agreement, dated February 27, 2006 (filed as Exhibit 10.1 to the  Company’s Current Report on Form 8-K filed March 3, 2006 and  incorporated herein by reference).                                                                                  |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 10.13       |       | Executive Employment Agreement with S. Bradford  Antle (filed as Exhibit 10.6 to the Third Amendment and incorporated  herein by reference) with updated information included in the Company’s  Current Report on Form 8-K filed on June 21, 2006.                                                       |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 10.14       |       | Executive Employment Agreement with Thomas E. Dunn  (filed as Exhibit 10.8 to the Third Amendment and incorporated herein by  reference) with updated information included in the Company’s Current Report  on Form 8-K filed on June 21, 2006                                                           |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 10.15       |       | Executive Employment Agreement with Thomas E. Lloyd  (filed as Exhibit 10.9 to the Third Amendment and incorporated herein by  reference) with updated information included in the Company’s Current Report  on Form 8-K filed on June 21, 2006                                                          |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 10.16       |       | Executive Employment Agreement with Ray J. Oleson  (filed as Exhibit 10.10 to the Third Amendment and incorporated herein  by reference) with updated information included in the Company’s Current  Report on Form 8-K filed on June 21, 2006                                                           |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 10.17       |       | Executive Employment Agreement with Harry D. Gatanas  (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K/A  filed November 15, 2005 and incorporated herein by reference) with updated  information included in the Company’s Current Report on Form 8-K filed on  June 21, 2006.   |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 10.18       |       | Executive Employment Agreement with Marylynn Stowers  (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K/A  filed February 2, 2006 and incorporated herein by reference) with updated  information included in the Company’s Current Report on Form 8-K filed on  June 21, 2006.    |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 10.19       |       | Executive Employment Agreement with P. Michael  Becraft (filed as Exhibit 10.1 to the Company’s Current Report on Form  8-K/A filed February 24, 2006 and incorporated herein by reference) with  updated information included in the Company’s Current Report on Form 8-K  filed on June 21, 2006. |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 10.20       |       | Executive Employment Agreement with Leslee H. Gault  (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed on  October 2, 2006 and incorporated herein by reference).                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 10.21       |       | Form of Indemnification Agreement (filed as  Exhibit 10.11 to the Third Amendment and incorporated herein by  reference).                                                                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 10.22       |       | Consulting Services Agreement with Walter J. Culver  (filed as Exhibit 10.12 to the 2004 10-K and incorporated herein by  reference).                                                                                                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 31.1        |       | Certifications of Chief Executive Officer and Chief  Financial Officer pursuant to Rule 13a-14(a) as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (*).                                                                                                                        |
|        |       |                                                                                                                                                                                                                                                                                                               |
| 32.1        |       | Certifications of Chief Executive Officer and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes Oxley Act of 2002 (*).                                                                                                                    |

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*                    Indicatesfiled herewith.

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