**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

** **

**FOR THE QUARTER ENDEDMARCH 31, 2007**

** **

**o**                                 TRANSITIONREPORT 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 registrant as 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 mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.   x  Yes   o  No

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b 2 of the Exchange Act. (Check one):

Large accelerated filer   o         Acceleratedfiler   x         Non-accelerated filer   o

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Act.)   o  Yes   x  No

Asof May 1, 2007, we had 13,106,742 shares outstanding of the registrant’s commonstock.

 

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** **

**SIINTERNATIONAL, INC.FORM 10-QINDEX**
|          | ** ** | **  **                                                                                                           | ** ** | **Page** | ** ** |
|--------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| **PART  I.**       |       | **FINANCIAL  INFORMATION**                                                                                                 |       |     |       |
| ITEM  1            |       | Financial  Statements                                                                                                      |       | 3        |       |
| **  **   | ** ** | Consolidated  Balance Sheets at March 31, 2007 (unaudited) and December 30, 2006                                           |       | 3        |       |
| **  **   | ** ** | Consolidated Statements of Operations for the three  months ended March 31, 2007 (unaudited) and April 1, 2006 (unaudited) |       | 4        |       |
| **  **   | ** ** | Consolidated Statements of Cash Flows for the three  months ended March 31, 2007 (unaudited) and April 1, 2006 (unaudited) |       | 5        |       |
| **  **   | ** ** | Notes to Consolidated Financial Statements                                                                                 |       | 6        |       |
| ITEM 2             |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                |       | 15       |       |
| ITEM 3             |       | Quantitative and Qualitative Disclosures About Market  Risk                                                                |       | 21       |       |
| ITEM 4             |       | Controls and Procedures                                                                                                    |       | 21       |       |
|               |       |                                                                                                                       |       |     |       |
| **PART  II.**      |       | **OTHER  INFORMATION**                                                                                                     |       |     |       |
| ITEM  1            |       | Legal  Proceedings                                                                                                         |       | 22       |       |
| ITEM  1A.          |       | Risk  Factors                                                                                                              |       | 22       |       |
| ITEM 2             |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                               |       | 22       |       |
| ITEM 3             |       | Defaults Upon Senior Securities                                                                                            |       | 22       |       |
| ITEM 4             |       | Submission of Matters to a Vote of Security Holders                                                                        |       | 22       |       |
| ITEM  5            |       | Other  Information                                                                                                         |       | 22       |       |
| ITEM 6             |       | Exhibits                                                                                                                   |       | 22       |       |
| Signatures         |       |                                                                                                                       |       | 23       |       |
| Index to  Exhibits |       |                                                                                                                       |       | 24       |       |

 

2

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**PART I:  FINANCIAL INFORMATION**

**Item 1.**                          FinancialStatements

**SI International, Inc. and SubsidiariesConsolidated Balance Sheets(Amounts in thousands, except share data)**
| ** **                                                                                                                                                                                              | ** ** | **March 31,  2007** | ** ** | **December 30,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                              | ** ** | **Unaudited**            | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                                                              | ** ** | ** **               | ** ** | ** **                  | ** ** |
| **Current assets:**                                                                                                                                                                                     |       |                     |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                              |       | $                        | 6,000      |                        | $          | 19,457 |   |
| Marketable  securities                                                                                                                                                                                  |       | 5,000                    |       | —                      |       |
| Accounts  receivable, net                                                                                                                                                                               |       | 97,498                   |       | 91,972                      |       |
| Other current  assets                                                                                                                                                                                   |       | 11,086                   |       | 8,627                       |       |
| Total current assets                                                                                                                                                                                    |       | 119,584                  |       | 120,056                     |       |
| **Property and equipment, net**                                                                                                                                                                         |       | 13,491                   |       | 12,372                      |       |
| **Intangible assets, net**                                                                                                                                                                              |       | 19,670                   |       | 20,418                      |       |
| **Other assets**                                                                                                                                                                                        |       | 10,453                   |       | 7,661                       |       |
| **Goodwill**                                                                                                                                                                                            |       | 220,565                  |       | 220,626                     |       |
| Total assets                                                                                                                                                                                            |       | $                        | 383,763    |                        | $          | 381,133 |   |
|                                                                                                                                                                                                    |       |                     |       |                        |       |
| **Liabilities and stockholders’  equity**                                                                                                                                                          | ** ** | ** **               | ** ** | ** **                  | ** ** |
| **Current liabilities:**                                                                                                                                                                                |       |                     |       |                        |       |
| Current portion  of long-term debt                                                                                                                                                                      |       | 754                      |       | 754                         |       |
| Note payable —  former owner of acquired business                                                                                                                                                  |       | 5,936                    |       | 5,839                       |       |
| Accounts payable                                                                                                                                                                                        |       | 23,196                   |       | 20,715                      |       |
| Accrued expenses  and other current liabilities                                                                                                                                                         |       | 23,200                   |       | 28,547                      |       |
| Total current  liabilities                                                                                                                                                                              |       | 53,086                   |       | 55,855                      |       |
| **Long-term  debt, net of current portion**                                                                                                                                                             |       | 69,264                   |       | 69,452                      |       |
| **Deferred  income tax, net**                                                                                                                                                                           |       | 8,855                    |       | 8,961                       |       |
| **Other long-term  liabilities**                                                                                                                                                                        |       | 7,870                    |       | 7,653                       |       |
| **Stockholders’ equity:**                                                                                                                                                                          |       |                     |       |                        |       |
| **Common  stock**—$0.01 par value per share; 50,000,000 shares  authorized; 13,004,259 and 12,967,377 shares issued and outstanding as of March  31, 2007 and December 30, 2006, respectively |       | 130                      |       | 130                         |       |
| Additional paid-in  capital                                                                                                                                                                             |       | 185,628                  |       | 184,845                     |       |
| Accumulated  other comprehensive income                                                                                                                                                                 |       | 131                      |       | 172                         |       |
| Retained  earnings                                                                                                                                                                                      |       | 58,799                   |       | 54,065                      |       |
| Total stockholders’  equity                                                                                                                                                                        |       | 244,688                  |       | 239,212                     |       |
| Total liabilities and stockholders’ equity                                                                                                                                                         |       | $                        | 383,763    |                        | $          | 381,133 |   |

 

***Seeaccompanying notes***

3

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** **

**SI International, Inc. and SubsidiariesConsolidated Statements of Operations(Amounts in thousands, except per share data)Unaudited**
| ** **                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **March 31,  2006**         | ** ** | **April 1,  2006** | ** ** |
| Revenue                                      |       | $                                | 113,700    |   | $ | 107,232 |   |
| Costs and  expenses:                         |       |                             |       |   |   |
| Cost of services                             |       | 70,892                           |       | 66,609 |   |
| Selling, general and administrative          |       | 32,139                           |       | 30,546 |   |
| Depreciation and amortization                |       | 794                              |       | 548 |   |
| Amortization of intangible assets            |       | 748                              |       | 647 |   |
| Total operating  expenses                    |       | 104,573                          |       | 98,350 |   |
|                                         |       |                             |       |   |   |
| Income from  operations                      |       | 9,127                            |       | 8,882 |   |
| Other income                                 |       | 71                               |       | 30 |   |
| Interest expense                             |       | (1,397                           | )          | (1,782 | ) |
| Income before  provision for income taxes    |       | 7,801                            |       | 7,130 |   |
| Provision for  income taxes                  |       | 3,067                            |       | 2,816 |   |
| Net income                                   |       | $                                | 4,734      |   | $ | 4,314 |   |
|                                         |       |                                  |       |  |   |
|                                         |       |                             |       |   |   |
| Earnings per  common share:                  |       |                             |       |   |   |
| Basic                                        |       | $                                | 0.36       |   | $ | 0.38 |   |
| Diluted                                      |       | $                                | 0.36       |   | $ | 0.36 |   |
| Basic weighted-average  shares outstanding   |       | 12,977                           |       | 11,422 |   |
| Diluted weighted-average  shares outstanding |       | 13,252                           |       | 11,899 |   |

 

***Seeaccompanying notes***

4

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*** ***

**SI International, Inc. and SubsidiariesConsolidated Statements of Cash Flows(Amounts in thousands)Unaudited**
| ** **                                                                     | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                     | ** ** | **March 31,  2007**         | ** ** | **April 1,  2006** | ** ** |
| **Cash  flows from operating activities:**                                     |       |                             |       |   |   |
| Net income                                                                     |       | $                                | 4,734      |   | $ | 4,314 |   |
| Adjustments to reconcile net income to net cash used  in operating activities: |       |                             |       |   |   |
| Depreciation and amortization                                                  |       | 794                              |       | 548 |   |
| Amortization of intangible assets                                              |       | 748                              |       | 647 |   |
| Stock-based compensation                                                       |       | 203                              |       | — |   |
| Loss on disposal of fixed assets                                               |       | 35                               |       | — |   |
| Amortization of deferred financing costs                                       |       | 249                              |       | 194 |   |
| Changes in operating assets and liabilities, net of  effect of acquisitions:   |       |                             |       |   |   |
| Accounts receivable, net                                                       |       | (5,525                           | )          | 14,465 |   |
| Other current assets                                                           |       | (2,590                           | )          | (4,546 | ) |
| Other assets                                                                   |       | (2,938                           | )          | (1,218 | ) |
| Accounts payable and accrued expenses                                          |       | (2,712                           | )          | (16,734 | ) |
| Other long term liabilities                                                    |       | 153                              |       | 2,235 |   |
| Net cash used in  operating activities                                         |       | (6,849                           | )          | (95 | ) |
| **Cash  flows from investing activities:**                                     |       |                             |       |   |   |
| Purchase of property and equipment                                             |       | (1,955                           | )          | (461 | ) |
| Proceeds from sale of marketable securities                                    |       | 23,000                           |       | 7,850 |   |
| Purchase of marketable securities                                              |       | (28,000                          | )          | — |   |
| Former owner payable                                                           |       | —                           |       | (8,042 | ) |
| Cash paid for business acquisitions, net of cash  assumed                      |       | (23                              | )          | (45,943 | ) |
| Net cash used in  investing activities                                         |       | (6,978                           | )          | (46,596 | ) |
| **Cash  flows from financing activities:**                                     |       |                             |       |   |   |
| Proceeds from exercise of stock options                                        |       | 581                              |       | 3,734 |   |
| Income tax benefit for stock option exercises                                  |       | —                           |       | 880 |   |
| Proceeds from long-term debt                                                   |       | —                           |       | 30,000 |   |
| Repayments of long-term debt                                                   |       | (188                             | )          | (323 | ) |
| Payments of debt issuance costs                                                |       | —                           |       | (476 | ) |
| Repayments of capital lease obligations                                        |       | (23                              | )          | (28 | ) |
| Net cash  provided by financing activities                                     |       | 370                              |       | 33,787 |   |
| **Net  change in cash and cash equivalents**                                   |       | (13,457                          | )          | (12,904 | ) |
| **Cash  and cash equivalents, beginning of period**                            |       | 19,457                           |       | 26,160 |   |
| **Cash  and cash equivalents, end of period**                                  |       | $                                | 6,000      |   | $ | 13,256 |   |
| **Supplemental  disclosures of cash flow information:**                        |       |                             |       |   |   |
| Cash payments for interest                                                     |       | $                                | 1,454      |   | $ | 1,791 |   |
| Cash payments  for income taxes                                                |       | $                                | 2,369      |   | $ | 1,915 |   |

 

***Seeaccompanying notes***

5

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** **

**SI International, Inc. and Subsidiaries**

**Notes to consolidated financial statements(Unaudited)**

**1.             Basis of Presentation**

The accompanying unauditedconsolidated financial statements of SI International, Inc. and itssubsidiaries have been prepared in accordance with U.S. generally acceptedaccounting principles 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 footnotes requiredby U.S. generally accepted accounting principles for complete financialstatements. In the opinion of management, all adjustments (consisting of normalrecurring accruals) considered necessary for a fair presentation have beenincluded. Operating results for the quarter ended March 31, 2007 are notnecessarily indicative of the results that may be expected for the year endingDecember 28, 2007.  For furtherinformation, refer to the financial statements and footnotes included in SIInternational’s Annual Report on Form 10-K for the year ended December 30,2006.  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 consolidated financialstatements 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 U.S. generally accepted accounting principlesrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

**Reporting periods**

The Company’s fiscal year isbased on the calendar year and ends each year on the Saturday nearest, but not fallingafter, December 31 of that year.  As aresult, 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.

As a result of this policy, weended our first quarter on March 31, 2007 to provide us with 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.

**Marketablesecurities**

During thequarters ended March 31, 2007 and April 1, 2006, the Company invested inmunicipal auction rate securities. The Company’s marketable securities areclassified as available for sale and are recorded at quoted market prices thatapproximate cost.  All auction ratesecurities purchased during fiscal year 2006 were sold at the end of theyear.  As of March 31, 2007, marketablesecurities consisted primarily of municipal auction rate securities with finalmaturity dates ranging from 2024 to 2036. Both realized and unrealized gains and losses were not material in thequarters ended March 31, 2007 and April 1, 2006.

6

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**Revenue Recognition**

The Companyrecognizes revenue when a contract has been executed, the contract price isfixed and determinable, delivery of services or products has occurred, andcollectibility of the contract price is considered probable and can bereasonably estimated.  Revenue is earnedunder cost reimbursable, time and materials and fixed price contracts.

Under cost reimbursable contracts, the Company is reimbursed forallowable 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. The Company considers fixed feesunder cost reimbursable contracts to be earned in proportion of the allowablecosts incurred in performance of the contract. For cost reimbursable contractsthat include performance based fee incentives, the Company recognizes therelevant portion of the expected fee to be awarded by the customer at the timesuch fee can be reasonably estimated, based on factors such as the Company’sprior award experience and communications with the customer regardingperformance.

Revenue on time and materials contracts are recognized based ondirect labor hours expended at contract billing rates and adding other billabledirect costs.  For fixed price contractsthat are based on unit pricing or level of effort, the Company recognizesrevenue for the number of units delivered in any given fiscal period.  For fixed price contracts in which the Companyis paid a specific amount to provide a particular service for a stated periodof time, revenue is recognized ratably over the service period.

For fixed pricecontracts that provide for the delivery of a specific product with relatedcustomer acceptance provisions, revenues are recognized upon product deliveryand customer acceptance.  However, asignificant portion of the Company’s fixed price-completion contracts involvethe design and development of complex, client systems.  For those contracts that are within scope ofSOP 81-1, *Accounting for Performance of Construction-Type andCertain Production-Type Contracts*, revenue is recognized on thepercentage-of-completion method using costs incurred in relation to totalestimated costs.

The Company’s contractswith agencies of the government are subject to periodic funding by therespective contracting agency. Funding for a contract may be provided infull at inception of the contract or ratably throughout the contract as theservices are provided.  In evaluating theprobability of funding for purposes of assessing collectibility of the contractprice, the Company considers its previous experiences with its customers,communications with its customers regarding funding status, and the Company’sknowledge of available funding for the contract or program. If funding is notassessed as probable, revenue recognition is deferred until realization isdeemed 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 normalmanagement processes, facts develop that require management to revise its 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 allowabilityof certain costs under government contracts is subject to audit by thegovernment.  Certain indirect costs arecharged to contracts using provisional or estimated indirect rates, which aresubject to later revision based on government audits of those costs.  Management is of the opinion that costssubsequently disallowed, if any, would not be significant.

**Significantcustomers**

Revenue generated from contracts with the Federal government or primecontractors doing business with the Federal government accounted for asignificant percent of revenues in the fiscal quarters ending March 31,2007 and April 1, 2006.

|                            | ** ** | **Three Months Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **March 31,  2007**         | ** ** | **April 1,  2006** | ** ** |
|                       |       |                             |       |   |   |
| Department of  Defense     |       | 44.9                             | %          | 48.0 | % |
| Federal civilian  agencies |       | 53.4                             |       | 50.2 |   |
| Commercial  entities       |       | 1.7                              |       | 1.8 |   |
|                       |       |                             |       |   |   |
| Total revenue              |       | 100.0                            | %          | 100.0 | % |

 

7

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For the three months ended March 31, 2007 and April 1, 2006, we had onecontract vehicle that generated more than 10% of our revenue.  That contract is our Command, Control,Communications, Computer, Intelligence, Information, Technology, Surveillance,and Reconnaissance contract vehicle (C4I2TSR), which is an ID/IQ contract vehicle administered and primarily used by the U.S.Air Force Space Command, however, it is also available for use by differentFederal Government agencies.  As thereare projects issued under C4I2TSR for different customers, we assign and reportrevenue generated from any task order to the appropriate Company business unit.  Under this approach, for the three months endedMarch 31, 2007 and April 1, 2006, our C4I2TSR contract vehicle representedapproximately 20.1% and 22.1% 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):

|                           | ** ** | **March 31,  2007** | ** ** | **December 30,  2006** | ** ** |
|---------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Deferred loan  costs      |       | $                        | 5,527      |                        | $          | 5,527 |   |
| Accumulated  amortization |       | (3,515                   | )          | (3,363                      | )          |
|                      |       | $                        | 2,012      |                        | $          | 2,164 |   |

 

**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 March 31, 2007 and December 30, 2006.

**Stock-based compensation**

Effective January 1, 2006, the Company adopted the provisions ofStatement of Financial Accounting Standards (SFAS) No. 123R using the modifiedprospective transition method, which required the Company to record compensationcost related to unvested stock awards as of December 31, 2005 by recognizingthe unamortized grant date fair value of these awards over the remainingservice periods of those awards with no change in historical reported earnings.  Awards granted after December 31, 2005 arevalued at fair value in accordance with the provisions of SFAS 123R andrecognized as an expense on a straight-line basis over the service periods ofeach award.   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 total stock compensation expense recognized for stock options andrestricted stock awards during the quarter ended March 31, 2007 was $0.2million. The total remaining unrecognized compensation expense related to theunvested options and restricted stock awards as of March 31, 2007 was $3.2million and $2.5 million, respectively.

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 March 31, 2007 andApril 1, 2006:
| ** **                       | ** ** | **Fiscal Year**         | ** ** |
|----------------------------------|------------|------------------------------|------------|
| ** **                       | ** ** | **March 31, 2007** | ** ** | **April 1, 2006** | ** ** |
| Risk-free  interest rate         |       | 4.48%                        |       | 4.72% |   |
| Expected life of  options        |       | 5 years                      |       | 5 years |   |
| Expected stock  price volatility |       | 36%                          |       | 44% |   |
| Expected dividend yield          |       | 0%                           |       | 0% |   |

 

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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. 123R requires the cash flowsresulting from the tax benefits generated from tax deductions in excess of thecompensation costs recognized for those options to be classified as financingcash 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 gives effect tocommon stock equivalents and other potentially dilutive securities outstandingduring the period.

The following details thecomputation of net income per common share (in thousands):

|                                              | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **March 31,  2007**         | ** ** | **April 1,  2006** | ** ** |
|                                         |       |                             |       |   |   |
| Net Income –  Basic and Diluted         |       | $                                | 4,734      |   | $ | 4,314 |   |
|                                         |       |                             |       |   |   |
| **Weighted-average  share calculation:**     |       |                             |       |   |   |
|                                         |       |                             |       |   |   |
| Basic  weighted-average shares outstanding   |       | 12,977                           |       | 11,422 |   |
| Treasury stock  effect of stock options      |       | 275                              |       | 477 |   |
| Diluted weighted  average shares outstanding |       | 13,252                           |       | 11,899 |   |
|                                              |            |                                  |            |  |  |  |  |

 

**Reclassifications**

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

**New accounting pronouncements**

In July 2006, the Financial Accounting Standards Board(FASB) issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty inIncome Taxes, an interpretation of FASB Statement No. 109, Accounting forIncome Taxes”.  FIN 48 provides guidanceon recognition, derecognition, measurement, classification, interest andpenalties, accounting in interim periods, disclosure and transition. FIN 48requires an entity to recognize the financial statement impact of a taxposition when it is more likely than not that the position will be sustainedupon examination. The amount recognized is measured as the largest amount ofbenefit that is greater than fifty percent likely of being realized uponultimate settlement. In addition, FIN 48 permits an entity to recognizeinterest and penalties related to tax uncertainties either as income taxexpense or operating expenses. FIN 48 is effective for fiscal years beginningafter December 15, 2006.

The Company adopted the provisions of FIN 48 onJanuary 1, 2007. The Company believes that its income tax filing positions willbe sustained on audit and does not anticipate any adjustments that will resultin a material effect on its financial position, results of operations or cashflows. Therefore, no reserves for uncertain income tax position have beenrecorded. The Company had recognized interest and penalties related to taxuncertainties as income tax expense and will continue this treatment uponadoption of FIN 48.

The Company is subject to U.S. federal income tax aswell as to income tax of multiple state jurisdictions. Federal income taxreturns of the Company are subject to IRS examination for the 2003 through 2006tax years. State income tax returns are subject to examination for a period ofthree to six years after filing.

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In September 2006, the FASB issued SFASNo. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value, establishes a framework for measuringfair value and expands disclosures about fair value measurements.  SFAS No. 157 is effective for fiscal yearsbeginning after December 15, 2007. The adoption of SFAS No. 157 is effectiveJanuary 1, 2008 for the Company. The Company believes that the adoption ofthis statement will not have a material effect on its financial condition,results of operations or cash flows.

**3.          Accounts receivable:**

Accounts receivable consists ofthe following (in thousands):

|                                                                                                    | ** ** | **March 31, 2007** | ** ** | **December 30, 2006** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
|                                                                                               |       |                         |       |                            |       |
| Billed accounts  receivable                                                                        |       | $                            | 48,460     |                            | $          | 46,540 |   |
| Unbilled  accounts receivable:                                                                     |       |                         |       |                            |       |
| Currently billable                                                                                 |       | 46,948                       |       | 41,192                          |       |
| Unbilled retainages and milestone paymentsexpected  to be billed within the next 12 months         |       | 3,410                        |       | 5,609                           |       |
| Indirect costs incurred and charged to cost-plus  contracts in excess of provisional billing rates |       | 185                          |       | 136                             |       |
| Total unbilled  accounts receivable                                                                |       | 50,543                       |       | 46,937                          |       |
| Allowance for  doubtful accounts                                                                   |       | (1,505                       | )          | (1,505                          | )          |
| Accounts  receivable, net                                                                          |       | $                            | 97,498     |                            | $          | 91,972 |   |

 

The currently billable amounts includedas unbilled accounts receivable as of March 31, 2007 represent amounts that arebilled during the following quarter of the current year. They are billings forservices rendered prior to quarter-end, which are billed once necessary billingdata has been collected and an invoice is produced.

**4.             Property and equipment:**

Property and equipment consist ofthe following (in thousands):

|                                                      | ** ** | **March 31, 2007** | ** ** | **December 30, 2006** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| Computers and  equipment                             |       | $                            | 11,944     |                            | $          | 11,899 |   |
| Software                                             |       | 4,012                        |       | 2,972                           |       |
| Furniture and  fixtures                              |       | 5,422                        |       | 5,072                           |       |
| Leasehold  improvements                              |       | 4,721                        |       | 4,257                           |       |
|                                                 |       | 26,099                       |       | 24,200                          |       |
| Less—Accumulated  depreciation and amortization |       | (12,608                      | )          | (11,828                         | )          |
| Property and  equipment, net                         |       | $                            | 13,491     |                            | $          | 12,372 |   |

 

Property and equipment includesassets financed under capital lease obligations of approximately $311,000 and$341,000, net of accumulated amortization, as of March 31, 2007 andDecember 30, 2006, respectively.

10

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**5.             Intangible assets**

Intangible assets consist of the following (in thousands):

|                                     | ** ** | **March 31,  2007** | ** ** | **December 30,   2006** | ** ** |
|-------------------------------------|------------|--------------------------|------------|-----------------------------------|------------|
| Contractual  customer relationships |       | $                        | 26,336     |                              | $          | 26,336 |   |
| Non-compete  agreements             |       | 150                      |       | 150                               |       |
| Total intangible  assets            |       | 26,486                   |       | 26,486                            |       |
| Less:  Accumulated amortization     |       | (6,816                   | )          | (6,068                            | )          |
| Intangible assets, net              |       | $                        | 19,670     |                              | $          | 20,418 |   |

 

Intangible assets from acquisitions, which consistprimarily of contractual customer relationships, are amortized utilizing anaccelerated method over 6 to 14 years, based on their estimated useful lives.The weighted-average amortization period of total intangible assets as of March31, 2007, is 5.8 years. Amortization expense is estimated to be $2.9 million,$2.5 million, $2.2 million, $2.2 million and $1.8 million for the years 2007,2008, 2009, 2010 and 2011, respectively.

**6.             Accruedexpenses and other current liabilities:**

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

|                                                 | ** ** | **March 31,  2007** | ** ** | **December 30,  2006** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Accrued vacation                                |       | $                        | 7,878      |                        | $          | 7,068 |   |
| Accrued  compensation                           |       | 7,715                    |       | 10,349                      |       |
| Accrued bonus                                   |       | 391                      |       | 4,413                       |       |
| Other accrued  liabilities                      |       | 7,216                    |       | 6,717                       |       |
| Accrued expenses and  other current liabilities |       | $                        | 23,200     |                        | $          | 28,547 |   |

 

**7.             Debt:**

Debt consists of thefollowing (in thousands):
| ** **                                                                                                                                                                                                                                                                                                                         | ** ** | **March 31,  2007** | ** ** | **December 30,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| 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, as of March 31, 2007 bears interest at  LIBOR plus 200 basis points or a specified base rate plus 100 basis points,  with twenty-one consecutive quarterly principal and interest payments of  $188,404 starting on December 29, 2006, with the unpaid principal of $67.2 million  payment due on February 9, 2011 |       | 70,017                   |       | 70,206                      |       |
| Total debt                                                                                                                                                                                                                                                                                                                         |       | $                        | 70,017     |                        | $          | 70,206 |   |

 

Since 2002, the Company has maintained a creditfacility with Wachovia Bank, National Association (“Wachovia Bank”)  acting as Administration Agent for aconsortium of lenders.  The creditfacility has been amended from time to time when the Company has madeacquisitions.  The credit facility issecured by a pledge of substantially all of our current and future tangible andintangible assets, as well as those of our current and future subsidiaries,including accounts receivable, inventory and capital stock.

11

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On February 9, 2005, contemporaneously with theclosing of our acquisition of Shenandoah Electronic Intelligence, Inc., or SEI,the Company entered into an Amended and Restated Credit Agreement (the “CreditAgreement”) which increased its borrowing capacity to $160 million., comprisedof a $60 million five-year revolving credit facility and a $100 millionsix-year term loan facility.    OnFebruary 27, 2006, contemporaneously with our closing the acquisition ofZen Technology, Inc. or Zen, a Virginia corporation, we entered into a FirstAmendment to the Amended and Restated Credit Agreement, or First Amendment,with a syndicate of lenders, including Wachovia Bank which continues to act asadministrative agent (collectively, the Amended and Restated Credit Agreementand the First Amendment shall be known as the “Amended Credit Agreement”).  The Company had approximately $129.3 millionof outstanding debt under our First Amendment on February 27, 2006following the closing of our acquisition of Zen.  However, as of March 31, 2007, we hadapproximately $70.0 million of debt outstanding under the term loan portion ofour Amended Credit Agreement, and no borrowings outstanding under the line ofcredit portion of our Amended Credit Agreement.

In connection with the Credit Agreement, the Companyhad incurred approximately $3.2 million financing costs. With respect tothe First Amendment, the Company incurred approximately $0.5 million infinancing costs.  Such costs associatedwith the Credit Agreement were capitalized as deferred financing costs on thebalance sheet 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 under theAmended Credit Agreement, it may choose from two interest rate options.  The Company may elect to have the borrowingsbear interest at floating rates equal to LIBOR plus a spread ranging from 200to 270 basis points or an alternative base rate plus a spread ranging from 100to 175 basis points.  Under either theLIBOR or alternative base rate option, the exact interest rate spread will bedetermined based upon the Company’s leverage ratio as defined in the AmendedCredit Agreement.

The Company also has a note payable in the amount of$6.0 million, to be paid in May 2007 for the acquisition of Zen.

**8.             Commitments and contingencies:**

**Leases**

As of March 31, 2007, the Company has noncancelableoperating leases, primarily for real estate, that expire over the next tenyears.   Rental expense during the quarter ended March 31, 2007 was approximately$2.2 million, compared to rental expense of approximately $2.1 million duringthe quarter ended April 1, 2006.

**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 the negotiation and determination ofthe final indirect cost rates that the Company may use for theperiod(s) audited. The final rates, if different from the provisionalrates, may create an additional receivable or liability for the Company. TheCompany’s revenue recognition policy calls for revenue recognized on all costreimbursable government contracts to be recorded at actual rates unlesscollectibility is not reasonably assured. To the extent the indirect ratedifferential creates a liability for the Company, the differential isrecognized as a reduction to revenue when identified.

**Litigation and claims**

The Company is a party to litigation and legalproceedings that management believes to be a part of the ordinary course of ourbusiness. While we cannot predict the ultimate outcome of these matters, wecurrently believe that any ultimate liability arising out of these proceedingswill not have a material adverse effect on our financial position. We maybecome involved in other legal and governmental, administrative or contractualproceedings in the future.

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 2007.

12

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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’s claims arose out of the Company’sallegation that NTA breached a contract which obligated NTA to subcontractcertain 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 judge’s original ruling. The Company has filed a petition with the Virginia Supreme Court requestingthat it agree to hear an appeal of the trial court’s final judgment.  The Company cannot presently determine theultimate outcome of the matter.

**9.              Stockholders’ equity:**

**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 Plan by (i) increasingthe number of shares of common stock reserved and available under the Plan by1,000,000 shares to a total share allocation of 2,920,000, (ii) permittingthe grant of deferred shares, performance shares and performance units,(iii) prohibiting repricing of options without prior stockholder approval,(iv) limiting the number of shares of common stock and performance unitssubject to awards a participant may receive in any calendar year to 300,000 and500,000, respectively, and adding other administrative provisions to complywith the performance-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 and 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 participation requirements,or materially increase benefits accruing to the participants under the Planwill be subject to stockholder approval; and (ix) making other technicalchanges to the Plan.

A summary of optionactivity under the plan as of March 31, 2007, is presented below:
| ** **                             | ** ** | **Options** | ** ** | **Shares  exercisable** | ** ** | **Weighted-average  exercise price** | ** ** |
|----------------------------------------|------------|-------------|------------|-------------------------|------------|-------------------------------------------|------------|
| Outstanding at  December 30, 2006      |       | 1,468,305   |       |                    |       | $                                         | 22.33      |   |
| 2007 grants                            |       | 113,500     |       |                    |       | 28.22                                     |       |
| 2007 exercises                         |       | (36,882     | )          |                    |       | 15.73                                     |       |
| 2007 forfeitures                       |       | (6,481      | )          |                    |       | 28.19                                     |       |
| Balance, March  31, 2007               |       | 1,538,442   |       |                    |       | $                                         | 22.90      |   |
| Options exercisable at  March 31, 2007 |       |        |       | 1,263,067               |       | $                                         | 21.62      |   |

 

Prior to fiscal 2006, awards under the Company’s stockincentive plan consisted principally of stock options.  During fiscal 2006, the Company revised itsstock incentive arrangement to provide restricted stock awards to directors andexecutives. The stock awards granted during fiscal 2006 were generally vestedratably over a period of four or five years. During fiscal 2007, the Companyrevised its stock incentive arrangement to issue restricted stock awards thatwill be fully vested only if the Company meets certain revenue targetdetermined by the Board of Directors.

13

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A summary of restrictedawards activity under the plan as of March 31, 2007, is presented below:
| ** **                                          | ** ** | **Shares** | ** ** | **Weighted-average  fair value** | ** ** |
|-----------------------------------------------------|------------|------------|------------|---------------------------------------|------------|
| Non-vested  shares outstanding at December 30, 2006 |       | 32,200     |       | $                                     | 28.98      |   |
| 2007 grants                                         |       | 69,200     |       | 28.32                                 |       |
| 2007 vests                                          |       | —     |       | —                                |       |
| 2007 forfeitures                                    |       | (625       | )          | 28.61                                 |       |
| Non-vested shares  outstanding at March 31, 2007    |       | 100,775    |       | $                                     | 28.53      |   |

 

**Stock repurchase program**

During the Company’s Board of Directors meeting onDecember 6, 2005, the Board authorized the repurchase of up to 300,000 sharesof its common stock up to an aggregate maximum dollar amount of $8million.  The Company had approximately13.0 million shares outstanding as of March 31, 2007.  Timing and volumeof any purchases will be guided by management’s assessment of marketconditions, securities law limitations, the number of shares of common stockoutstanding, and alternative, potentially higher value uses for cashresources.  The repurchase plan may be suspended or discontinued at anytime without prior notice.

14

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**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  for the fiscal year ended December 30,2006.   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. However, in order to ensure that the fiscal quarters presented in thisForm 10-Q include 13 weeks, we ended the first quarter on Saturday, March 31,2007.   Similarly, we will end futurefiscal quarters on the Saturday which provides us with a 13 week quarter tocompare with the previous year’s quarterly results even if that Saturday fallsafter the end of the calendar quarter. As a result, our fiscal year may 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,Department of Homeland Security, Department of Energy, Department ofAgriculture, Missile Defense Agency, National Institutes of Health, FederalRetirement Thrift Investment Board, National Guard Bureau, and the Intelligencecommunity. We combine our technology and industry expertise to provide a fullspectrum of state-of-the-practice solutions and services, from design anddevelopment to implementation and operations, which assist our clients inachieving mission success. We believe that our company is distinguishable fromour peers within the federal IT sector in several important respects.

We employ a “Rapid Response • Rapid Deployment®”methodology that enables the rapid standing up of innovative solutions and theincorporation of additional capabilities in rapid succession. This capabilityallows us to respond to urgent IT imperatives quickly, often in a matter ofmonths, and within a well defined budget. We can, therefore, provide solutionsfor current IT needs, while establishing a platform for advancing long-termtransformational objectives. We possess a proven ability to respond to highpriority information technology and network needs through innovation, and anenviable reputation for timely delivery of robust solutions on assignmentswhere failure is not an option. Our solutions enable clients to respond to newmandates, expand the scope of their missions, and reengineer underlyingbusiness processes. We have a demonstrated ability of turning troubled ITprojects into winning outcomes and realized exceptional growth fromhigh-quality client engagements. We also utilize mature and proven processes tomanage and market large-scale ID/IQ contracts, such as C4I2TSR. We employ adiverse, innovative team that effectively utilizes small business partners’unique skills and expertise for mission critical IT projects.

For the fiscal quarters ended March 31, 2007 and April1, 2006, we received 98.3% and 98.2%, respectively, of our revenues fromservices we provided to various departments and agencies of the FederalGovernment, both directly and through other prime contractors, and 1.7% and1.8%, respectively, of our total revenues from work performed for commercialentities. The following table shows our revenues from the client groups listedas a percentage of total revenue. Revenue data for the DoD includes revenuegenerated from work performed under engagements for both the DoD and theIntelligence community.

15

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|                            | ** ** | **Three Months Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **March 31,  2007**         | ** ** | **April 1,  2006** | ** ** |
|                       |       |                             |       |   |   |
| Department of  Defense     |       | 44.9                             | %          | 48.0 | % |
| Federal civilian  agencies |       | 53.4                             | %          | 50.2 | % |
| Commercial  entities       |       | 1.7                              | %          | 1.8 | % |
| Total revenue              |       | 100.0                            | %          | 100.0 | % |

 

We derived a substantialmajority of our revenues from governmental contracts under which we act as aprime contractor. We also provide services indirectly as a subcontractor. Thefollowing table shows our revenues as prime contractor and as subcontractor asa percentage of our total revenue for the following periods:

|                         | ** ** | **Three Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **March 31,  2007**         | ** ** | **April 1,  2006** | ** ** |
|                    |       |                             |       |   |   |
| Prime contract  revenue |       | 80.0                             | %          | 77.4 | % |
| Subcontract  revenue    |       | 20.0                             | %          | 22.6 | % |
| Total revenue           |       | 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** | ** ** |
|---------------------|------------|----------------------------------|------------|
| ** **          | ** ** | **March 31,  2007**         | ** ** | **April 1,  2006** | ** ** |
|                |       |                             |       |   |   |
| Cost  reimbursable  |       | 31.9                             | %          | 31.8 | % |
| Time and  materials |       | 33.2                             | %          | 37.3 | % |
| Fixed price         |       | 34.9                             | %          | 30.9 | % |
| Total               |       | 100.0                            | %          | 100.0 | % |

 

Under cost reimbursable contracts, the Company isreimbursed for allowable costs, and paid a fee, which may be fixed orperformance based. Revenues on cost reimbursable contracts are recognized ascosts are incurred plus an estimate of applicable fees earned.  The Company considers fixed fees under costreimbursable contracts to be earned in proportion of the allowable costsincurred in performance of the contract. For cost reimbursable contracts that include performance based feeincentives, the Company recognizes the relevant portion of the expected fee tobe awarded by the client at the time such fee can be reasonably estimated,based on factors such as our prior award experience and communications with theclient regarding performance.

Revenue on time and materials contracts are recognizedbased on direct labor hours expended at contract billing rates and adding otherbillable direct costs.  To the extentthat our actual labor costs under a time and materials contract are higher orlower than the billing rates under the contract, our profit under the contractmay either be greater or less than we anticipated or we may suffer a loss underthe contract. We recognize revenues under time and materials contracts bymultiplying the number of direct labor hours expended by the contract billingrates and adding the effect of other billable direct costs.

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For fixed price contracts that provide for thedelivery of a specific product with related customer acceptance provisions,revenues are recognized upon product delivery and customer acceptance.  However, a significant portion of the Company’sfixed price-completion contracts involve the design and development of complex,client systems. For those contracts that are within the scope of SOP 81-1,Accounting for Performance of Construction-Type and certain Production-TypeContracts, revenue is recognized on the percentage-of-completion method usingcosts incurred in relation to total estimated costs.

The Company’s contracts with agencies of thegovernment are subject to periodic funding by the respective contractingagency.  Funding for a contract may beprovided in full at inception of the contract or ratably throughout thecontract as the services are provided. In evaluating the probability of funding for purposes of assessingcollectibility of the contract price, the Company considers its previousexperiences with its customers, communications with its customers regardingfunding status, and the Company’s knowledge of available funding for thecontract or program.  If funding is notassessed as probable, revenue recognition is deferred until realization isprobable.

Contract revenue recognition inherently involvesestimation, including the contemplated level of effort to accomplish the tasksunder the contract, the cost of the effort, and an ongoing assessment ofprogress toward completing the contract. From time to time, as part of the normal management processes, factsdevelop that require revisions to estimated total costs or revenuesexpected.  The cumulative impact of anyrevisions to estimates and the full impact of anticipated losses on any type ofcontract are recognized in the period in which they become known.

The allowability of certain costs under governmentcontracts is subject to audit by the government.  Certain indirect costs are charged tocontracts using provisional or estimated indirect rates, which are subject tolater revision based on government audits of those costs.  Management is of the opinion that costssubsequently disallowed, if any, would not be significant.

**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, theCompany is required to maintain compliance with financial and non-financialcovenants.  The Company is in compliancewith all such covenants as of March 31, 2007.

*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 as of the end of three months ending March 31, 2007 and April1, 2006 was $6.0 million and $13.3 million, respectively.

*Cash Flow.*  The following table sets forth our sources and uses of cash and cashequivalents for the three months ended March 31, 2007 and April 1, 2006.

|                                            | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **March 31,  2007**         | ** ** | **April 1,  2006** | ** ** |
| ** **                                 | ** ** | **(in thousands)**          | ** ** |
| Net cash used in  operations               |       | $                                | (6,849     | ) | $ | (95 | ) |
| Net cash used in  investing activities     |       | (6,978                           | )          | (46,596 | ) |
| Net cash  provided by financing activities |       | 370                              |       | 33,787 |   |
| Net decrease in cash  and cash equivalents |       | $                                | (13,457    | ) | $ | (12,904 | ) |

 

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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 used inoperations in the three months ended March 31, 2007 was attributable to netincome of $4.7 million, plus depreciation, amortization and other non-cashitems of $2.1 million, and an increase in working capital and other operatingassets and liabilities of $13.6 million. Cash used in operations in the threemonths ended April 1, 2006 was attributable to net income of $4.3 million,depreciation, amortization, and other non-cash items of $1.4 million, andan increase in working capital and other operating assets and liabilities of$5.8 million.

Our cash flow used in investing activities consistsprimarily of capital expenditures, the purchase and sale of marketablesecurities, and acquisitions. In the three months ended March 31, 2007, wepurchased $28.0 million of marketable securities and purchased capital assetstotaling $2.0 million. We partially offset the cash use with $23.0 million ofproceeds from the sale of marketable securities. During the three months ended April 1, 2006, we paid $45.9 million forbusiness acquisitions, net of cash assumed, repaid a contract settlementto a former owner for $8.0 million, and purchased capital assets totaling $0.5million. We partially offset the cash use with $7.8 million of proceeds fromthe sale of marketable securities.

Our cash flow provided by financing activitiesconsists primarily of borrowing under and payments on our credit facility andproceeds from the issuance and exercise of common stock. For the three monthsended March 31, 2007, cash flow provided by financing activities consists ofproceeds of $0.6 million from the exercise of stock options, partially offsetby the $0.2 million repayments of the term loan portion of our credit facilityand capital lease.  Cash provided by financing activities for thethree months ended April 1, 2006 was attributable to proceeds of $30.0 millionfrom the term debt provided by our credit facility, proceeds of $3.7 millionprovided by the exercise of stock options, and $0.9 million income tax benefitfor the stock option exercises. Cash provided by financing activities waspartially offset by payments of debt issuance fees of $0.5 million, and partialrepayments of the term loan portion of our credit facility and capital lease of$0.3 million.

**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** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | **March 31,  2007**         | ** ** | **April 1,  2006** | ** ** |
|                                      |       |                             |       |   |   |
| Revenue                                   |       | 100.0                            | %          | 100.0 | % |
| Costs and  expenses:                      |       |                             |       |   |   |
| Direct costs                              |       | 62.3                             |       | 62.1 |   |
| Indirect costs                            |       | 28.3                             |       | 28.5 |   |
| Depreciation                              |       | 0.7                              |       | 0.5 |   |
| Amortization                              |       | 0.7                              |       | 0.6 |   |
| Total operating expenses                  |       | 92.0                             |       | 91.7 |   |
| Income from  operations                   |       | 8.0                              |       | 8.3 |   |
|  Other income                        |       | 0.1                              |       | 0.0 |   |
| Interest expense                          |       | (1.2                             | )          | (1.7 | ) |
| Income before  provision for income taxes |       | 6.9                              |       | 6.6 |   |
| Provision for  income taxes               |       | 2.7                              |       | 2.6 |   |
| Net income                                |       | 4.2                              | %          | 4.0 | % |

 

**Three months ended March 31, 2007compared with three months ended April 1, 2006**

*Revenue.*  For thethree months ended March 31, 2007, our revenues increased 6.0% to$113.7 million from $107.2 million for the three months ended April1, 2006. Revenues from work under Federal Government contracts increased 6.1%to $111.7 million for the three months ended March 31, 2007 from $105.3million for the three months ended April 1, 2006. This increase wasattributable to the 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.  We continue to focus primarily onopportunities for the Federal government.

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* *

*Cost ofservices.*  Cost of services include direct labor andother direct costs such as materials and subcontractor costs, incurred toprovide our services and solutions to our customers.  Generally, changes in costs of services arecorrelated to changes in revenue as resources are consumed in the production ofthat revenue. For the three months ended March 31, 2007, cost of servicesincreased 6.4% to $70.9 million from $66.6 million for the threemonths ended April 1, 2006.  Thisincrease was attributable primarily to the increase in revenue. As a percentageof revenue, cost of service were 62.3% for the three months ended March 31,2007 as compared to 62.1% for the three months ended April 1, 2006.

*Selling,general and administrative expenses.*  Selling, general andadministrative expenses include facilities, selling, bid and proposal, indirectlabor, fringe benefits and other discretionary costs. For the three monthsended March 31, 2007, indirect costs increased 5.2% to $32.1 million from$30.5 million for the three months ended April 1, 2006.  This $1.6 million increase was primarilyattributable to the expected growth of support functions necessary tofacilitate and administer the growth in direct costs.  As a percentage of revenue, selling, generaland administrative costs were 28.3% for the three months ended March 31, 2007as compared to 28.5% for the three months ended April 1, 2006.

*Depreciationand amortization.*Depreciation and amortization includes thedepreciation of computers, furniture and other equipment, the amortization ofthird party software we use internally, and leasehold improvements.  * *For the three months ended March 31, 2007, depreciation expense was$794,000, an increase****compared to$548,000 for the three months ended April 1, 2006.  As a percentage of revenue, depreciationexpense was 0.7% for the three months ended March 31, 2007 compared to 0.5% forthe three months ended April 1, 2006.

*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.  Identifiableintangible assets are amortized over their estimated useful lives.  Non-compete agreements are generallyamortized straight-line over the term of the agreement, while contracts andrelated client relationships are amortized using an accelerated method overtheir estimated useful lives.  For thethree months ended March 31, 2007, amortization of intangible assets was$748,000, compared to $647,000 for the three months ended April 1, 2006.   As a percentage of revenue amortization ofintangible assets was 0.7% for the three months ended March 31, 2007 comparedto 0.6% for the three months ended April 1, 2006.

*Income fromoperations.*  For the three months ended March 31, 2007,income from operations increased 2.8% to $9.1 million from$8.9 million for the three months ended April 1, 2006. This increase wasattributable primarily to increased revenues. As a percentage of revenue, income from operations was 8.0% for thethree months ended March 31, 2007 compared to 8.3% for the three months endedApril 1, 2006.

*Interestexpense.*  Interest expense decreased 21.6% to$1.4 million for the three months ended March 31, 2007 from$1.8 million for the three months ended April 1, 2006. This decrease wasattributable primarily to the prepayments of the term loan during fiscal2006.  As a percentage of revenue,interest expense was 1.2% for the three months ended March 31, 2007 as comparedto 1.7% for the three months ended April 1, 2006.

*Provisionfor  income taxes.*  The provisionfor income taxes was $3.1 million in the three months ended March 31,2007, compared to $2.8 million for the three months ended April 1,2006.   Our first quarters of 2007 and2006 tax provision, represents an estimated annual effective tax rate of 39.3%.Our estimated annual effective tax rate is greater than the federal statutoryrate of 35% due primarily to state income taxes.

**Off-Balance Sheet Arrangements**

As of March 31, 2007, we have nooff-balance sheet arrangements that are reasonably likely to have a current orfuture material effect on our financial condition, revenues, or expenses,result of operations, liquidity, capital expenditures, or capital resources.

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**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 U.S. generally accepted accounting principles. As such, we are required tomake certain estimates, judgments and assumptions that we believe arereasonable based upon the information available. These estimates, judgments andassumptions affect the reported amounts of assets and liabilities at the dateof the financial statements and the reported amounts of revenue and expensesduring the periods presented. Actual results could be different from theseestimates.

*Revenue Recognition*

The Company recognizes revenue when a contract hasbeen executed, the contract price is fixed and determinable, delivery ofservices or products has occurred, and collectibility of the contract price isconsidered probable and can be reasonably estimated.  Revenue is earned under cost reimbursable,time and materials and fixed price contracts.

Under cost reimbursable contracts, the Company isreimbursed for allowable costs, and paid a fee, which may be fixed orperformance-based. Revenues on cost reimbursable contracts are recognized ascosts are incurred plus an estimate of applicable fees earned. The Companyconsiders fixed fees under cost reimbursable contracts to be earned inproportion of the allowable costs incurred in performance of the contract. Forcost reimbursable contracts that include performance based fee incentives, theCompany recognizes the relevant portion of the expected fee to be awarded bythe customer at the time such fee can be reasonably estimated, based on factorssuch as the Company’s prior award experience and communications with thecustomer regarding performance.

Revenue on time and materials contracts are recognizedbased on direct labor hours expended at contract billing rates and adding otherbillable direct costs.  For fixed pricecontracts that are based on unit pricing or level of effort, the Companyrecognizes revenue for the number of units delivered in any given fiscalperiod.  For fixed price contracts inwhich the Company is paid a specific amount to provide a particular service fora stated period of time, revenue is recognized ratably over the service period.

For fixed price contracts that provide for thedelivery of a specific product with related customer acceptance provisions,revenues are recognized upon product delivery and customer acceptance.  However, a significant portion of the Company’sfixed price-completion contracts involve the design and development of complex,client systems.  For those contracts thatare within scope of SOP 81-1, *Accounting for Performanceof Construction-Type and Certain Production-Type Contracts*, revenueis recognized on the percentage-of-completion method using costs incurred inrelation to total estimated costs.

The Company’s contracts with agencies of the governmentare subject to periodic funding by the respective contracting agency. Fundingfor a contract may be provided in full at inception of the contract orratably throughout the contract as the services are provided.  In evaluating the probability of funding forpurposes of assessing collectibility of the contract price, the Companyconsiders its previous experiences with its customers, communications with itscustomers regarding funding status, and the Company’s 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 involvesestimation, including the contemplated level of effort to accomplish the tasksunder contract, the cost of the effort, and an ongoing assessment of progresstoward completing the contract. From time to time, as part of the normalmanagement processes, facts develop that require revisions to estimated totalcosts or revenues expected. The cumulative impact of any revisions to estimatesand the full impact of anticipated losses on any type of contract arerecognized in the period in which they become known.

The allowability of certain costs under governmentcontracts is subject to audit by the government.  Certain indirect costs are charged tocontracts using provisional or estimated indirect rates, which are subject tolater revision based on government audits of those costs.  Management is of the opinion that costssubsequently disallowed, if any, would not be significant.

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*Stock Based Compensation*

Effective January 1, 2006, theCompany adopted the provisions of SFAS No. 123R using the modified prospective transition method, which required the Company to recordcompensation cost related to unvested stock awards as of December 31, 2005 byrecognizing the unamortized grant date fair value of these awards over theremaining service periods of those awards with no change in historical reportedearnings.  Awards granted after December31, 2005 are valued at fair value in accordance with the provisions of SFAS123R and recognized as an expense on a straight-line basis over the serviceperiods of each award.   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 total stock compensation expense recognized for stock options andrestricted stock awards during the quarter ended March 31, 2007 was $0.2 million.The total remaining unrecognized compensation expense related to the unvestedoptions and restricted stock awards as of March 31, 2007 was $3.2 million and$2.5 million, respectively.

**Item 3.  Quantitative and Qualitative Disclosures AboutMarket 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 March 31, 2007, we had $70.0 million outstandingunder our Amended Credit Agreement. A 1% change in interest rates would haveresulted in our interest expense fluctuating by approximately $175,000 for thethree months ended March 31, 2007.

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 March 31, 2007, hada 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 rate rangingfrom 7.32% to 7.40%. At stated monthly intervals the difference between theinterest on the floating LIBOR-based debt and the interest calculated in theswap agreement are settled in cash. The estimated value of the swap at March31, 2007 was $0.2 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 andbank instruments.  Since our initialpublic offering, the Board of Directors approved an investment policy that requiresus to invest in relatively short-term, high quality, and high liquidityobligations.

**Item 4.  Controlsand 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 March 31, 2007.  Based upon the evaluation, the Company’sChief Executive Officer and Chief Financial Officer have concluded that, as ofMarch 31, 2007, the Company’s disclosure controls and procedures wereeffective.

*Changes in Internal Control Over FinancialReporting.*During the three months ended March 31, 2007,there were no changes in the Company’s internal control over financialreporting that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control for financial reporting.

 

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**PART II: OTHER INFORMATION**

**Item 1.  Legal Proceedings**

From time to time,the Company is involved in litigation, claims and disputes that arise in theordinary course of its business.  Inaddition, the Company is subject to audit, review, and investigation by variousagencies of the Federal government to determine compliance with applicablefederal statutes and regulations.  As aFederal government contractor, the Company is subject to audit by certainfederal agencies to determine if the Company’s performance and administrationof its government contracts are compliant with contractual requirements andapplicable federal statutes and regulations. While the Company cannot predict theultimate outcome of legal proceedings, government audits, investigations,claims and disputes to which it is or may be subject, the Companycurrently believes, based upon information available to us as of the date ofthis filing, that any ultimate liability arising out of these matters will nothave a material adverse effect on our financial position, results ofoperations, or cash flows.

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 2007.

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’s claims arose out of the Company’sallegation that NTA breached a contract which obligated NTA to subcontractcertain 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 judge’s original ruling. The Company has filed a petition with the Virginia Supreme Courtrequesting that it agree to hear an appeal of the trial court’s finaljudgment.  The Company cannot presentlydetermine the ultimate outcome of the matter.

**Item 1A.  Risk Factors**

There are no material updates to the risk factorspreviously disclosed in our Form 10-K for the year ended December 30, 2006.

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

None.

**Item 3.  Defaults Upon SeniorSecurities**

None.

**Item4.  Submission of Matters To a Vote ofSecurity Holders**

None.

**Item 5. Other Information**

None.

**Item 6.  Exhibits**

The exhibits required by this item are set forth onthe Index to Exhibits attached hereto.

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SIGNATURES

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|              |   | SI INTERNATIONAL, INC.       |
|--------------|--------|------------------------------|
|         |   |                         |
|         |   |                         |
|         |   | /s/ Thomas E. Dunn           |
|    |   | Thomas E. Dunn               |
|    |   | Executive Vice President and |
|    |   | Chief Financial Officer      |

 

Date:  May 9, 2007

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**INDEX TOEXHIBITS**

** **
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                    |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                                                                                               |
| 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 Fifth Amendment 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 2004 10-K 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, Including Notice of  Stock Option Grant (filed as Exhibit 99.1 to the Company’s Current Report on  Form 8-K filed on March 17, 2005 and incorporated herein by reference). |
| 10.7        |       | 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).                                                                                                                                            |
| 10.8        |       | 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).                                                                                                                                  |
| 10.9        |       | Executive Employment Agreement with S. Bradford  Antle (filed as Exhibit 10.6 to the Third Amendment and incorporated  herein by reference).                                                                                                                                                                                                                  |
| 10.10       |       | Executive Employment Agreement with Thomas E. Dunn  (filed as Exhibit 10.8 to the Third Amendment and incorporated herein by  reference).                                                                                                                                                                                                                     |
| 10.11       |       | Executive Employment Agreement with Thomas E. Lloyd  (filed as Exhibit 10.9 to the Third Amendment and incorporated herein by  reference).                                                                                                                                                                                                                    |
| 10.12       |       | Executive Employment Agreement with Ray J. Oleson  (filed as Exhibit 10.10 to the Third Amendment and incorporated herein  by reference).                                                                                                                                                                                                                     |
| 1013        |       | 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).                                                                                                                                                         |
| 10.14       |       | 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).                                                                                                                                                               |

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| Exhibit No.                 | ** ** | **Description**                                                                                                                                                                                        |
|-----------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.15                       |       | 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).    |
| 10.16                       |       | 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). |
| 10.17                       |       | Consulting Services Agreement with Walter J. Culver  (filed as Exhibit 10.12 to the 2004 10-K and incorporated herein by  reference).                                                                  |
| 10.18                       |       | Form of Indemnification Agreement (filed as  Exhibit 10.11 to the Third Amendment 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 (*).        |
|                        |       |                                                                                                                                                                                                   |
| * Indicates filed herewith. |

 

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