Table ofContents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **(Mark One)** |
|---------------------|
| ** **          |
| **x**               | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **          | ** ** | **FOR THE  QUARTER ENDED JUNE 28, 2008** |
|                |   |   |
| **o**               | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission File Number**

**000-50080**

 

**SI International, Inc.**

(Exact name of 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’stelephone number, including area code: **(703)234-7000**

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b 2 of the Exchange Act. (Check one):

 
| Large  accelerated filer o                                             |   | Accelerated  filer x         |
|------------------------------------------------------------------------|--------|------------------------------|
| Non-accelerated  filer o (Do not check if a smaller reporting company) |   | Smaller  reporting company o |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act.)   oYes  x No

 

As of August 1,2008, we had 13,276,729  sharesoutstanding of the registrant’s common stock.

 

 

 

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**SIINTERNATIONAL, INC.**

 

**FORM 10-Q**

 

**INDEX**

** **
| ** **        | ** **                                                                                                                                     | **Page** |
|-------------------|------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                                      |     |
| ITEM 1            | Financial Statements                                                                                                                           | 3        |
|              | Consolidated Balance Sheets  (unaudited) at June 28, 2008 and December 29, 2007                                                      | 3        |
|              | Consolidated Statements of  Operations (unaudited) for the three and six months ended June 28, 2008  and June 30, 2007               | 4        |
|              | Consolidated Statements of  Cash Flows (unaudited) for the six months ended June 28, 2008 and  June 30, 2007                         | 5        |
|              | Consolidated Statements of  Comprehensive Income (unaudited) for the three and six months ended  June 28, 2008 and for June 30, 2007 | 6        |
|              | Notes to  Consolidated Financial Statements                                                                                                    | 7        |
| ITEM 2            | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                                    | 17       |
| ITEM 3            | Quantitative  and Qualitative Disclosures about Market Risk                                                                                    | 23       |
| ITEM 4            | Controls and  Procedures                                                                                                                       | 23       |
|              |                                                                                                                                           |     |
| **PART II.** | **OTHER INFORMATION**                                                                                                                          |     |
| ITEM 1            | Legal Proceedings                                                                                                                              | 24       |
| ITEM 1A.          | Risk Factors                                                                                                                                   | 24       |
| ITEM 2            | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                   | 24       |
| ITEM 3            | Defaults upon  Senior Securities                                                                                                               | 24       |
| ITEM 4            | Submission of  Matters to a Vote of Security Holders                                                                                           | 25       |
| ITEM 5            | Other Information                                                                                                                              | 25       |
| ITEM 6            | Exhibits                                                                                                                                       | 25       |
| Signatures        | 26                                                                                                                                             |
| Index to Exhibits | 27                                                                                                                                             |

 

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**PART I:  FINANCIALINFORMATION**

 

**Item1.   Financial Statements**

 

**SIInternational, Inc. and Subsidiaries**

**Consolidated Balance Sheets**

**(Amountsin thousands, except share data)**

**Unaudited**

** **
| ** **                                                                                                                                                                                                  | ** ** | **June 28,  2008** | ** ** | **December 29,  2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                                                                                                  |       |                    |       |                        |       |
| **Current  assets:**                                                                                                                                                                                        |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                  |       | $                       | 14,433     |                        | $          | 13,129 |   |
| Accounts  receivable, net                                                                                                                                                                                   |       | 111,333                 |       | 117,098                     |       |
| Other current  assets                                                                                                                                                                                       |       | 13,023                  |       | 12,511                      |       |
| Total current  assets                                                                                                                                                                                       |       | 138,789                 |       | 142,738                     |       |
| **Property  and equipment, net**                                                                                                                                                                            |       | 14,686                  |       | 15,080                      |       |
| **Intangible  assets, net**                                                                                                                                                                                 |       | 24,393                  |       | 26,583                      |       |
| **Other  assets**                                                                                                                                                                                           |       | 11,612                  |       | 11,572                      |       |
| **Goodwill**                                                                                                                                                                                                |       | 265,474                 |       | 265,474                     |       |
| Total assets                                                                                                                                                                                                |       | $                       | 454,954    |                        | $          | 461,447 |   |
|                                                                                                                                                                                                        |       |                    |       |                        |       |
| **Liabilities  and stockholders’ equity**                                                                                                                                                              |       |                    |       |                        |       |
| **Current  liabilities:**                                                                                                                                                                                   |       |                    |       |                        |       |
| Accounts payable                                                                                                                                                                                            |       | 20,286                  |       | 26,000                      |       |
| Accrued expenses  and other current liabilities                                                                                                                                                             |       | 41,801                  |       | 35,172                      |       |
| Note payable –  line of credit                                                                                                                                                                         |       | —                  |       | 20,000                      |       |
| Current portion  of long-term debt                                                                                                                                                                          |       | —                  |       | 1,004                       |       |
| Total current  liabilities                                                                                                                                                                                  |       | 62,087                  |       | 82,176                      |       |
| **Long-term  debt, net of current portion**                                                                                                                                                                 |       | 101,750                 |       | 93,261                      |       |
| **Deferred  income tax, net**                                                                                                                                                                               |       | 14,160                  |       | 14,241                      |       |
| **Other  long-term liabilities**                                                                                                                                                                            |       | 10,374                  |       | 11,066                      |       |
| **Stockholders’  equity:**                                                                                                                                                                             |       |                    |       |                        |       |
| **Common  stock—**$0.01 par value per share; 50,000,000 shares  authorized; 13,110,542 and 13,087,164 shares issued and outstanding as of  June 28, 2008 and December 29, 2007, respectively |       | 131                     |       | 131                         |       |
| Additional  paid-in capital                                                                                                                                                                                 |       | 189,641                 |       | 188,308                     |       |
| Accumulated  other comprehensive loss                                                                                                                                                                       |       | (1,271                  | )          | (1,094                      | )          |
| Treasury stock –  109,264 shares as of June 28, 2008, at cost                                                                                                                                     |       | (2,532                  | )          | —                      |       |
| Retained  earnings                                                                                                                                                                                          |       | 80,614                  |       | 73,358                      |       |
| Total  stockholders’ equity                                                                                                                                                                            |       | 266,583                 |       | 260,703                     |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                            |       | $                       | 454,954    |                        | $          | 461,447 |   |

 

***See accompanying notes***

 

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**SIInternational, Inc. and Subsidiaries**

**Consolidated Statements of Operations**

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

**Unaudited**

** **
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **June 28, 2008**      | ** ** | **June 30, 2007**    | ** ** | **June 28, 2008** | ** ** | **June 30, 2007** | ** ** |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Revenue                                      |       | $                                | 142,832    |                           | $          | 118,794 |   | $ | 277,189 |   | $ | 232,494 |   |
| Operating costs  and expenses:               |       |                             |       |                           |       |   |   |   |   |
| Cost of services                             |       | 94,476                           |       | 73,733                         |       | 182,738 |   | 144,625 |   |
| Selling, general  and administrative         |       | 38,126                           |       | 33,648                         |       | 74,573 |   | 65,716 |   |
| Depreciation and  amortization               |       | 1,041                            |       | 822                            |       | 2,135 |   | 1,616 |   |
| Amortization of  intangible assets           |       | 1,075                            |       | 769                            |       | 2,190 |   | 1,517 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Total operating  costs and expenses          |       | 134,718                          |       | 108,972                        |       | 261,636 |   | 213,474 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Income from  operations                      |       | 8,114                            |       | 9,822                          |       | 15,553 |   | 19,020 |   |
| Interest  expense, net                       |       | (1,637                           | )          | (1,572                         | )          | (3,358 | ) | (2,969 | ) |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Income before  provision for income taxes    |       | 6,477                            |       | 8,250                          |       | 12,195 |   | 16,051 |   |
| Provision for  income taxes                  |       | 2,652                            |       | 3,226                          |       | 4,939 |   | 6,293 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Net income                                   |       | $                                | 3,825      |                           | $          | 5,024 |   | $ | 7,256 |   | $ | 9,758 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Earnings per  common share:                  |       |                             |       |                           |       |   |   |   |   |
| Basic                                        |       | $                                | 0.29       |                           | $          | 0.39 |   | $ | 0.55 |   | $ | 0.75 |   |
| Diluted                                      |       | $                                | 0.29       |                           | $          | 0.38 |   | $ | 0.55 |   | $ | 0.74 |   |
| Basic  weighted-average shares outstanding   |       | 13,089                           |       | 13,011                         |       | 13,094 |   | 12,994 |   |
| Diluted  weighted-average shares outstanding |       | 13,313                           |       | 13,302                         |       | 13,313 |   | 13,276 |   |

 

***See accompanying notes***

 

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**SIInternational, Inc. and Subsidiaries**

**Consolidated Statements of Cash Flows**

**(Amountsin thousands)**

**Unaudited**

** **
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **June 28,  2008**        | ** ** | **June 30,  2007** | ** ** |
| **Cash  flows from operating activities:**                                         |       |                           |       |   |   |
| Net income                                                                         |       | $                              | 7,256      |   | $ | 9,758 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                           |       |   |   |
| Depreciation and  amortization                                                     |       | 2,135                          |       | 1,616 |   |
| Amortization of  intangible assets                                                 |       | 2,190                          |       | 1,517 |   |
| Stock-based  compensation                                                          |       | 876                            |       | 516 |   |
| Loss on disposal  of fixed assets                                                  |       | —                         |       | 39 |   |
| Amortization of  deferred financing costs                                          |       | 260                            |       | 467 |   |
| Changes in  operating assets and liabilities, net of effect of acquisitions:       |       |                           |       |   |   |
| Accounts  receivable, net                                                          |       | 5,765                          |       | 590 |   |
| Other current  assets                                                              |       | (472                           | )          | (635 | ) |
| Other assets                                                                       |       | 594                            |       | (5,173 | ) |
| Accounts payable  and accrued expenses                                             |       | 175                            |       | 621 |   |
| Other long-term  liabilities                                                       |       | (152                           | )          | 1,536 |   |
| Net cash  provided by operating activities                                         |       | 18,627                         |       | 10,852 |   |
| **Cash  flows from investing activities:**                                         |       |                           |       |   |   |
| Purchase of  property and equipment                                                |       | (1,741                         | )          | (3,770 | ) |
| Proceeds from  sale of marketable securities                                       |       | —                         |       | 43,250 |   |
| Purchase of  marketable securities                                                 |       | —                         |       | (43,250 | ) |
| Former owner  payable                                                              |       | —                         |       | (6,000 | ) |
| Cash paid for  business acquisitions, net of cash assumed                          |       | —                         |       | (60,162 | ) |
| Net cash used in  investing activities                                             |       | (1,741                         | )          | (69,932 | ) |
| **Cash  flows from financing activities:**                                         |       |                           |       |   |   |
| Borrowings under  line of credit                                                   |       | 56,750                         |       | 25,000 |   |
| Repayments under  line of credit                                                   |       | (35,000                        | )          | — |   |
| Proceeds from  exercise of stock options                                           |       | 361                            |       | 912 |   |
| Income tax  benefit for stock option exercises                                     |       | 97                             |       | 142 |   |
| Proceeds from  long-term debt                                                      |       | 60,000                         |       | 25,000 |   |
| Repayments of  long-term debt                                                      |       | (94,265                        | )          | (377 | ) |
| Repurchase of  common stock                                                        |       | (2,532                         | )          | — |   |
| Payments of debt  issuance costs                                                   |       | (935                           | )          | (108 | ) |
| Repayments of  capital lease obligations                                           |       | (58                            | )          | (54 | ) |
| Net cash (used  in) provided by financing activities                               |       | (15,582                        | )          | 50,515 |   |
| **Net  change in cash and cash equivalents**                                       |       | 1,304                          |       | (8,565 | ) |
| **Cash  and cash equivalents, beginning of period**                                |       | 13,129                         |       | 19,457 |   |
| **Cash  and cash equivalents, end of period**                                      |       | $                              | 14,433     |   | $ | 10,892 |   |
| **Supplemental  disclosures of cash flow information:**                            |       |                           |       |   |   |
| Cash payments  for interest                                                        |       | $                              | 3,090      |   | $ | 2,875 |   |
| Cash payments  for income taxes                                                    |       | $                              | 4,853      |   | $ | 6,427 |   |

 

***See accompanying notes***

 

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**SIInternational, Inc. and Subsidiaries**

**Consolidated Statements ofComprehensive Income**

**(Amountsin thousands)**

**Unaudited**

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **June 28, 2008**      | ** ** | **June 30, 2007**    | ** ** | **June 28, 2008** | ** ** | **June 30, 2007** | ** ** |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Net income                                    |       | $                                | 3,825      |                           | $          | 5,024 |   | $ | 7,256 |   | $ | 9,758 |   |
| Unrealized gain (loss)  on interest rate swap |       | 906                              |       | (131                           | )          | (176 | ) | (172 | ) |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Comprehensive  income                         |       | $                                | 4,731      |                           | $          | 4,893 |   | $ | 7,080 |   | $ | 9,586 |   |

 

***See accompanying notes***

 

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**SIInternational, Inc. and Subsidiaries**

 

**Notes to consolidated financialstatements**

 

**(Unaudited)**

 

**1.****             Basis of Presentation**

 

The accompanyingunaudited consolidated financial statements of SI International, Inc. andits subsidiaries 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 June 28, 2008 are notnecessarily indicative of the results that may be expected for the year ending December 27,2008.  For further information, refer to the financial statements andfootnotes included in SI International’s Annual Report on Form 10-K forthe year ended December 29, 2007.  References to the “Company,” “we,”“us” and “our” refer to SI International, Inc. and its subsidiaries.

 

**2.****             Summary ofsignificant accounting policies:**

 

**Principlesof consolidation**

 

The accompanyingconsolidated financial statements include the accounts of SI International, Inc.and its wholly-owned subsidiaries.   All significant intercompanytransactions and accounts have been eliminated in consolidation.

 

**Use ofestimates**

 

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actualresults could differ from those estimates.

 

**Reportingperiods**

 

The Company’s fiscal yearis based on the calendar year and ends each year on the Saturday nearest, butnot falling after, December 31 of that year.  As a result, our fiscalyear may be comprised of 52 or 53 weeks.  Typically, fiscal quarters alsoend on the Saturday nearest, but not falling after, the end of the calendarquarter.  However, we will end those fiscal quarters presented in ourForms 10-Q (the first three fiscal quarters) on the Saturday which provides uswith a 13-week quarter even if that Saturday falls after the end of thecalendar quarter.  As a result, in the future, if our fiscal yearcomprises 53 weeks, the first three quarters shall each be comprised of 13weeks and the fourth quarter shall be comprised of 14 weeks.  Consistent with this policy, our secondquarters ended June 28, 2008 and June 30, 2007 were 13-week quarters.

 

**Cash andcash equivalents**

 

We consider cash ondeposit and all highly liquid investments with original maturities of threemonths or less to be cash and cash equivalents.

 

**Marketablesecurities**

 

During the fiscal quarterended June 28, 2008, the Company did not invest in auction ratesecurities. As of June 28, 2008 and December 29, 2007, the Company maintainedno marketable securities. The Company’s marketable securities were classifiedas available-for-sale and were recorded at quoted market prices thatapproximated cost.

 

**RevenueRecognition**

 

The Company recognizesrevenue when a contract has been executed, the contract price is fixed anddeterminable, delivery of services or products has occurred, and collectibilityof the contract price is considered probable and can be reasonablyestimated.  Revenue is earned under cost reimbursable, time and materialsand fixed price contracts.

 

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Under cost reimbursablecontracts, the Company is reimbursed for allowable costs, and paid a fee, whichmay be fixed or performance-based. Revenues on cost reimbursable contractsare recognized as costs are incurred plus an estimate of applicable feesearned. The Company considers fixed fees under cost reimbursable contracts tobe earned in proportion of the allowable costs incurred in performance of thecontract. For certain cost reimbursable contracts that includeperformance-based fee incentives, the Company recognizes the relevant portionof the expected fee to be awarded by the customer at the time such fee can bereasonably estimated, based on factors such as the Company’s prior awardexperience and communications with the customer regarding performance. Other performance-based fees are recognized upon customer approval.

 

Revenues on time andmaterials contracts are recognized based on direct labor hours expended atcontract billing rates and adding other billable direct costs.  For fixedprice contracts 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 in which the Company is paid a specificamount to provide a particular service for a stated period of time, revenue isrecognized ratably over the service period.

 

For fixed price contractsthat provide for the delivery of a specific product with related customeracceptance provisions, revenues are recognized upon product delivery andcustomer acceptance.  A significant portion of the Company’s fixedprice-completion contracts involve the design and development of complex clientsystems.  For those contracts that are within scope of the AICPA’sStatement of Position 81-1,*Accounting forPerformance of Construction-Type and Certain Production-Type Contracts*(SOP 81-1), revenue is recognized onthe percentage-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 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 revenuerecognition inherently involves estimation, including the contemplated level ofeffort to accomplish the tasks under contract, the cost of the effort, and anongoing assessment of progress toward completing the contract. From time totime, as part of the normal management processes, facts develop thatrequire revisions to estimated total costs or revenues expected. The cumulativeimpact of any revisions to estimates and the full impact of anticipated losseson contracts accounted for under SOP 81-1 are recognized in the period in whichthey become known.  Losses on all other contracts are recognized as theservices and materials are provided.

 

The allowability ofcertain costs under government contracts is subject to audit by thegovernment.  Certain indirect costs are charged to contracts usingprovisional or estimated indirect rates, which are subject to later revisionbased on government audits of those costs.  Management is of the opinionthat costs subsequently disallowed, if any, would not be significant.

 

**Significantcustomers**

 

 Revenue generatedfrom contracts with the Federal Government, both directly and through otherprime contractors, accounted for a significant percent of revenues in thefiscal periods ending June 28, 2008 and June 30, 2007, as follows:

 
| ** **                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                 | ** ** | **June 28, 2008**      | ** ** | **June 30, 2007**    | ** ** | **June 28, 2008** | ** ** | **June 30, 2007** | ** ** |
|                       |       |                             |       |                           |       |   |   |   |   |
| Department of  Defense     |       | 42.5                             | %          | 45.1                           | %          | 42.3 | % | 45.0 | % |
| Federal civilian  agencies |       | 56.7                             |       | 53.4                           |       | 56.9 |   | 53.4 |   |
| Commercial  entities       |       | 0.8                              |       | 1.5                            |       | 0.8 |   | 1.6 |   |
| Total revenue              |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |

 

For the three monthsended June 28, 2008 and June 30, 2007, we had one contract vehiclethat generated more than 10% of our revenue.  That contract is ourCommand, Control, Communications, Computer, Intelligence, Information,Technology, Surveillance, and Reconnaissance contract vehicle, or C4I2TSR,which is an Indefinite Delivery-Indefinite Quantity, or ID/IQ, contract vehicleadministered and primarily used by the U.S. Air Force Space Command, however,it is also available for use by different Federal Government agencies.  Asthere are projects issued under C4I2TSR for different customers, we assign andreport revenue generated from any task order to the appropriate Company businessunit.  Under this approach, for the three and six months ended June 28,2008, our C4I2TSR contract vehicle represented approximately 13.3% and 12.0% ofour revenue, respectively.  For the threeand six months ended June 30, 2007, our C4I2TSR contract vehiclerepresented approximately 16.4% and 18.2% of our revenue, respectively.

 

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**Deferredfinancing costs**

 

Costs incurred in raisingdebt are deferred and amortized as interest expense over the term of therelated debt using the effective interest method. These deferred costs arereflected as a component of other assets in the accompanying consolidatedbalance sheets. The deferred financing costs consist of the following (inthousands):

 
| ** **                     | ** ** | **June 28,  2008** | ** ** | **December 29,  2007** | ** ** |
|--------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                           |       |                    |       |                        |       |
| Deferred loan  costs           |       | $                       | 6,530      |                        | $          | 5,635 |   |
| Accumulated  amortization      |       | (4,247                  | )          | (3,987                      | )          |
| Deferred  financing costs, net |       | $                       | 2,283      |                        | $          | 1,648 |   |

 

The increase in deferredloan costs of approximately $0.9 million in 2008 was due to the Company’sexecution of its Second Amended and Restated Credit Agreement on February 13,2008, as more fully described in Note 7.

 

**Fairvalue of financial instruments**

 

The Company’s financialinstruments consist primarily of cash and cash equivalents, marketablesecurities, accounts receivable, accounts payable, credit facilities, andlong-term debt. In management’s opinion, the carrying amounts of thesefinancial instruments approximate their fair values at June 28, 2008 and December 29,2007.

 

**Stock-basedcompensation**

 

Effective January 1,2006, the Company adopted the provisions of Statement of Financial AccountingStandards (SFAS) No. 123R,*Share BasedPayment,* using the modified prospective transition method.  Dueto the use of the modified prospective method, prior interim periods and fiscalyears do not reflect any restated amounts.  The Company accelerated thevesting of unvested stock options previously awarded to employees, officers anddirectors in December 2005; thus the Company had no unvested stock optionson January 1, 2006.  Since January 1, 2006, the Company hasissued 507,200 stock options through June 28, 2008.  The total stockcompensation expense recognized for stock options during the quarters ended June 28,2008 and June 30, 2007 was $0.3 million and $0.2 million, respectively.The total remaining unrecognized compensation expense related to the unvestedoptions as of June 28, 2008 was $3.9 million.

 

From January 1, 2006through June 28, 2008, the Company has issued 182,125 shares of restrictedstock to directors and employees under its 2002 Amended and Restated OmnibusStock Incentive Plan. The fair value of the restricted stock awards isdetermined based on the grant date stock price. The compensation expense forrestricted stock awards is recognized beginning on the date of grant on eithera straight-line basis over the vesting term, which is typically five years, orover the expected period of performance for awards with performance-basedvesting. The total compensation expense recognized during fiscal quarters endedJune 28, 2008 and June 30, 2007 was $0.2 million and$0.1 million, respectively. The total remaining unrecognized compensationexpense related to the unvested restricted stock awards as of June 28,2008 was $3.3 million.

 

The fair value of eachoption is estimated on the date of grant using the Black-Scholes option-pricingmodel with the following assumptions used for grants during the fiscal periodsended June 28, 2008 and June 30, 2007:

 
| ** **                       | ** ** | **Fiscal Period**      | ** ** |
|----------------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **June 28, 2008** | ** ** | **June 30, 2007** | ** ** |
| Risk-free  interest rate         |       | 2.80 – 2.89            | %          | 4.67 – 5.03 | % |
| Expected life of  options        |       | 5 years                     |       | 5 years |   |
| Expected stock  price volatility |       | 41.7                        | %          | 34.8 | % |
| Expected  dividend yield         |       | 0                           | %          | 0 | % |

 

The risk-free interest isbased on U.S. Treasury yields in effect at the time of grant over the expectedterm of the option. The expected life of options is derived from the Company’shistorical option exercise data. The expected stock price volatility is basedon the historical volatility of the Company’s common stock.

 

 Prior to theadoption of SFAS No. 123R, the Company presented all tax benefits relatedto the exercise of stock options as operating cash flows in the consolidatedstatements 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.

 

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**Earningsper share**

 

Basic earnings per shareis computed 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.  Dilutedearnings per share give effect to common stock equivalents and otherpotentially dilutive securities outstanding during the period.

 

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

 
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **June 28,  2008**          | ** ** | **June 30,  2007**        | ** ** | **June 28,  2008** | ** ** | **June 30,  2007** | ** ** |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Net Income —  Basic and Diluted         |       | $                                | 3,825      |                           | $          | 5,024 |   | $ | 7,256 |   | $ | 9,758 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| **Weighted  average share calculation:**     |       |                             |       |                           |       |   |   |   |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Basic  weighted-average shares outstanding   |       | 13,089                           |       | 13,011                         |       | 13,094 |   | 12,994 |   |
| Treasury stock  effect of stock options      |       | 224                              |       | 291                            |       | 219 |   | 282 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Diluted  weighted-average shares outstanding |       | 13,313                           |       | 13,302                         |       | 13,313 |   | 13,276 |   |
|                                              |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

**Income Taxes**

 

Income taxes areaccounted for using an asset and liability approach that requires therecognition of taxes payable or refundable for the current year and deferredtax liabilities and assets for the future tax consequences of events that havebeen recognized in the Company’s financial statements or tax returns. Themeasurement of current and deferred tax liabilities and assets are based onprovisions of the enacted tax law; the effects of future changes in tax laws orrates are not considered. Net deferred tax assets are reduced, if necessary, bya valuation allowance for the amount of any tax benefits that, based onavailable evidence, are not expected to be realized.

 

**DerivativeInstrument and Hedging Activities**

 

The Company accounts forderivative instruments and hedging activities in accordance with SFAS No. 133,*Accounting for Derivative Instruments and HedgingActivities*, as amended. Derivatives are recognized as either assetsor liabilities in the consolidated balance sheets, and gains and losses arerecognized based on changes in the fair values. Gains and losses on derivativesdesignated as a hedge, or deemed to be an effective hedge, are deferred inaccumulated other comprehensive loss in the accompanying consolidated balancesheets. Gains and losses on derivatives that are not designated as a hedge, orthat are not intended to be an effective hedge, are recognized upon the changesin fair values and are recorded in the accompanying consolidated statements ofoperations. The classification of gains and losses resulting from the changesin fair values is dependent on the intended use of the derivative and itsresulting designation. The Company uses the change in variable cash flow methodto measure the effectiveness of its hedges.

 

From time to time, theCompany will enter into interest rate swap agreements to manage exposure tofluctuations in rates on its variable rate debt. These agreements effectivelyallow the Company to exchange variable rate debt for fixed rate debt. TheCompany enters into such derivative instrument agreements only to hedge cashflows. The Company does not hold or issue such financial instruments for tradingpurposes, nor is it a party to leveraged derivatives.

 

**NonqualifiedDeferred Compensation Plan**

 

The Company maintains anon-qualified defined contribution supplemental retirement savings plan forcertain key employees whereby participants may elect to defer and contribute aportion of their compensation, as permitted by the plan. The Company maintainssupplemental retirement savings plan assets that are accounted for inaccordance with EITF Issue No. 97-14,*Accounting for Deferred Compensation Arrangements Where Accounts are Held in aRabbi Trust and Invested*, and the underlying assets are held in arabbi trust. The participants can direct their investments in the nonqualifieddeferred compensation plan.

 

A rabbi trust is agrantor trust established to fund compensation for a select group ofmanagement. The assets of this trust are available to satisfy the claims ofgeneral creditors in the event of bankruptcy of the Company. The assets held bythe rabbi trust, which are classified as trading securities, are recorded atfair value in the consolidated financial statements as nonqualified deferredcompensation plan assets. The participants’ investments are recorded at fairvalue as nonqualified deferred compensation plan obligations.

 

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**Segmentreporting**

 

SFAS No. 131,*Disclosure about Segments of an Enterprise andRelated Information*, establishes standards for the way that publicbusiness enterprises report information about operating segments in annualfinancial statements and requires that these enterprises report selectedinformation about operating segments in interim financial reports. SFAS No. 131also establishes standards for related disclosures about products and services,geographic areas and major customers. Management has concluded that the Companyoperates in one segment based upon the information used by management inevaluating the performance of its business and allocating resources andcapital.

 

**Reclassifications**

 

Certain prior yearbalances have been reclassified to conform to the presentation of the currentyear.

 

**Newaccounting pronouncements**

 

 In March 2008,the Financial Accounting Standards Board (FASB) issued SFAS No. 161, *Disclosures about Derivative Instruments and Hedging Activities*– *an Amendment of FASB Statement No. 133*(SFAS No. 161), which requires expanded disclosures about derivative andhedging activities.  This statement changes the disclosure requirementsfor derivative instruments and hedging activities by requiring companies toprovide enhanced disclosures about how and why they use derivative instruments,how derivative instruments and related hedged items are accounted for under SFASNo. 133 and its related interpretations, and how derivative instrumentsand related hedged items affect a company’s financial position, financialperformance and cash flows. SFAS No. 161 is effective for fiscal periodsbeginning after November 15, 2008.  The Company will adopt therequirements of SFAS No. 161 at the beginning of fiscal year 2009 and hasnot yet evaluated the impact, if any, that SFAS No. 161 will have on itsdisclosures.

 

In the first quarter of2008, we adopted SFAS No. 157,*FairValue Measurements*, which defines fair value, establishes amarket-based hierarchy for measuring fair value and expands disclosures aboutfair value measurements. SFAS No. 157 is applicable whenever anotheraccounting pronouncement requires or permits assets and liabilities to bemeasured at fair value, but does not require any new fair value measurements.The SFAS No. 157 requirements for certain non-financial assets andliabilities have been deferred until the first quarter of 2009 in accordancewith Financial Accounting Standards Board Staff Position (FSP) 157-2. Theadoption of SFAS No. 157 did not have a material impact on our results ofoperations, financial position or cash flows.

 

The fair-value hierarchyestablished in SFAS No. 157 prioritizes the inputs used in valuationtechniques into three levels as follows:

 
|   |   | · | Level 1 – Observable  inputs – quoted prices in active markets for identical assets and  liabilities;                                                                                                                                                                                                                                                       |
|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                  |
|   |   | · | Level 2 – Observable  inputs other than the quoted prices in active markets for identical assets  and liabilities – includes quoted prices for similar instruments, quoted  prices for identical or similar instruments in inactive markets, and amounts  derived from valuation models where all significant inputs are observable in  active markets; and |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                  |
|   |   | · | Level 3 – Unobservable  inputs – includes amounts derived from valuation models where one or more  significant inputs are unobservable and require us to develop relevant  assumptions.                                                                                                                                                                     |

 

The amount of financialassets and liabilities we recorded at fair value at June 28, 2008 totaled$4.4 million and $7.2 million, respectively, as follows:

 
| **Description**                                       | ** ** | **Type**             | ** ** | **Valuation  Methodology** | ** ** | **Fair Value   ($ 000’s)** | ** ** |
|-------------------------------------------------------|------------|----------------------|------------|----------------------------|------------|------------------------------------------------|------------|
| Assets held in a  rabbi trust                         |       | Long-term asset      |       | Level 1                    |       | $                                              | 4,412      |   |
| Non-qualified  deferred compensation plan liabilities |       | Long-term liability  |       | Level 1                    |       | $                                              | 5,057      |   |
| Interest rate  swap                                   |       | Short-term liability |       | Level 2                    |       | $                                              | 2,058      |   |

 

In February 2007,the FASB issued SFAS No. 159,*The FairValue Option for Financial Assets and Financial Liabilities—Including an Amendmentof FASB Statement No. 115* (SFAS No. 159).  SFAS No. 159 permits entities to chooseto measure certain financial instruments and other items at fair value. Thefair value option generally may be applied instrument by instrument, isirrevocable, and is applied only to entire instruments and not to portions ofinstruments. SFAS No. 159 is effective for financial statements issued forfiscal years beginning after November 15, 2007. The adoption of thisstatement did not have a material impact on its financial condition, results ofoperations or cash flows, as we did not elect to measure any items at fairvalue under SFAS No. 159.

 

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In December 2007,the FASB issued SFAS No. 141 (revised 2007),*Business Combinations*(SFAS No. 141R). SFAS No. 141R establishes principles and requirements for howcompanies recognize and measure identifiable assets acquired, liabilitiesassumed, and any non-controlling interest in connection with a businesscombination; recognize and measure the goodwill acquired in a businesscombination; and determine what information to disclose to enable users of thefinancial statements to evaluate the nature and financial effects of thebusiness combination. SFAS No. 141R is effective for business combinationsfor which the acquisition date is on or after the beginning of the first annualreporting period beginning on or after December 15, 2008. The Company hasnot yet evaluated what impact, if any, SFAS No. 141R will have on itsresults of operations or financial position.

 

**3.****             Accounts receivable:**

 

Accounts receivableconsists of the following (in thousands):

 
| ** **                                                                                          | ** ** | **June 28,  2008** | ** ** | **December 29,  2007** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Billed accounts  receivable                                                                         |       | $                       | 49,759     |                        | $          | 52,814 |   |
| Unbilled  accounts receivable:                                                                      |       |                    |       |                        |       |
| Currently  billable                                                                                 |       | 55,317                  |       | 58,700                      |       |
| Unbilled  retainages and milestone payments expected to be billed within the next 12  months        |       | 6,423                   |       | 5,837                       |       |
| Indirect costs  incurred and charged to cost-plus contracts in excess of provisional billing  rates |       | 1,117                   |       | 1,030                       |       |
| Total unbilled  accounts receivable                                                                 |       | 62,857                  |       | 65,567                      |       |
| Allowance for  doubtful accounts                                                                    |       | (1,283                  | )          | (1,283                      | )          |
| Accounts  receivable, net                                                                           |       | $                       | 111,333    |                        | $          | 117,098 |   |

 

The currently billableamounts included as unbilled accounts receivable as of June 28, 2008 and December 29,2007 represent amounts which are billed during the following quarter of thecurrent year. They are billings for services rendered prior to quarter-end,which are billed once necessary billing data has been collected and an invoiceis produced.

 

**4.****             Property andequipment:**

 

Property and equipmentconsist of the following (in thousands):

 
| ** **                                           | ** ** | **June 28,  2008** | ** ** | **December 29,  2007** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Computers and  equipment                             |       | $                       | 12,755     |                        | $          | 12,338 |   |
| Software                                             |       | 4,466                   |       | 4,628                       |       |
| Furniture and  fixtures                              |       | 6,984                   |       | 6,382                       |       |
| Leasehold  improvements                              |       | 7,900                   |       | 7,016                       |       |
| Total property  and equipment                        |       | 32,105                  |       | 30,364                      |       |
| Less—Accumulated  depreciation and amortization |       | (17,419                 | )          | (15,284                     | )          |
| Property and  equipment, net                         |       | $                       | 14,686     |                        | $          | 15,080 |   |

 

 Property andequipment includes assets financed under capital lease obligations ofapproximately $165,000 and $221,000, net of accumulated amortization, as of June 28,2008 and December 29, 2007, respectively.

 

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**5.****             Intangible assets:**

 

Intangible assets consistof the following (in thousands):

 
| ** **                          | ** ** | **June 28,  2008** | ** ** | **December 29,  2007** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Contractual  customer relationships |       | $                       | 36,547     |                        | $          | 36,547 |   |
| Non-compete  agreements             |       | 150                     |       | 150                         |       |
| Total intangible  assets            |       | 36,697                  |       | 36,697                      |       |
| Less:  Accumulated amortization     |       | (12,304                 | )          | (10,114                     | )          |
| Intangible  assets, net             |       | $                       | 24,393     |                        | $          | 26,583 |   |

 

Intangible assets fromacquisitions, which consist primarily of contractual customer relationships,are amortized utilizing an accelerated method over 6 to 14 years, based ontheir estimated useful lives. The weighted-average amortization period of totalintangible assets as of June 28, 2008, is 8.8 years.  Amortizationexpense is estimated to be $4.3 million, $3.8 million, $3.4 million, $2.9million, and $2.7 million for the years 2008, 2009, 2010, 2011 and 2012,respectively.

 

**6.****             Accrued expenses andother current liabilities:**

 

Accrued expenses andother current liabilities consist of the following (in thousands):

 
| ** **                                      | ** ** | **June 28,  2008** | ** ** | **December 29,  2007** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Accrued vacation                                |       | $                       | 8,861      |                        | $          | 7,740 |   |
| Accrued  compensation                           |       | 11,092                  |       | 11,412                      |       |
| Accrued  insurance                              |       | 1,789                   |       | 1,944                       |       |
| Accrued  subcontractor costs                    |       | 11,324                  |       | 5,947                       |       |
| Fair value of  interest rate swap               |       | 2,058                   |       | 1,799                       |       |
| Deferred revenue                                |       | 2,298                   |       | 2,338                       |       |
| Other accrued  liabilities                      |       | 4,379                   |       | 3,992                       |       |
| Accrued expenses  and other current liabilities |       | $                       | 41,801     |                        | $          | 35,172 |   |

 

**7.****             Debt:**

 

Since 2002, the Companyhas maintained a credit facility with Wachovia Bank, National Association,acting as Administration Agent for a consortium of lenders.  The creditfacility has been amended from time to time since 2002.  The credit facilityis secured by a pledge of substantially all of our current and future tangibleand intangible assets, as well as those of our current and future subsidiaries,including accounts receivable, inventory and capital stock.

 

On February 9, 2005,we entered into an Amended and Restated Credit Agreement, which wassubsequently amended by a First Amendment to the Amended and Restated CreditAgreement dated February 27, 2006 and a Second Amendment to the Amendedand Restated Credit Agreement (Second Amendment), dated June 8, 2007. TheSecond Amendment, executed contemporaneously with our closing of the LOGTECacquisition, increased the amount of outstanding term debt by $25 million,to a total of approximately $95 million. Additionally, we borrowedapproximately $25 million under the revolving credit facility. As of December 29,2007, we had approximately $94.3 million of term debt and$20.0 million of revolving credit debt outstanding under our creditfacility.

 

On February 13,2008, we entered into a Second Amended and Restated Credit Agreement, (SecondAmended Credit Agreement).  The amended and restated credit facilityconsists of a revolving line of credit of up to $140.0 million and a term loanof $60.0 million.  As of June 28, 2008, we had $60.0 million in termdebt and approximately $41.8 million of revolving credit debtoutstanding.  The Second Amended Credit Agreement also amended debtcovenant thresholds and lowered the variable rate margins that are be to beapplied to LIBOR or an alternative base rate in determining the periodicinterest rate.  In connection with the Second Amended Credit Agreement,the Company incurred commitment fees of approximately $0.9 million.

 

 At the time theCompany borrows funds from either of the loan facilities under the Second AmendedCredit Agreement, it may choose from two interest rate options.  TheCompany may elect to have the borrowings bear interest at floating rates equalto LIBOR plus a spread ranging from 87.5 to 150 basis points or an alternativebase rate plus a spread ranging from zero to 50 basis points. Under either theLIBOR or an alternative base rate option, the exact interest rate spread willbe determined based upon the Company’s 

 

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leverage ratio as definedin the Second Amended Credit Agreement. Currently, the requirements of the Company’s swap agreement necessitatethat the Company elect the LIBOR option for its term debt.  The Company pays a fee, the amount of whichis based on its leverage ratio, on the unused portion of its loan facilities.

 

The term loan facilityrequires final payment in full on the term loan maturity date of February 13,2013.  The outstanding balance under the revolving line of credit facilitywill accrue interest at a variable rate, with interest only payments beingrequired until the facility matures on February 13, 2013.   Wemay repay either or both of the term loan facility and the revolving loanfacility in whole or in part at anytime prior to their respective maturitydates without penalty.

 

Debt consists of thefollowing (in thousands):

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | **December 29,  2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| Credit  facilities*:                                                                                                                                                                                                                                                                                                                                                                              |       |                        |       |
| Line of credit bears  interest at LIBOR plus 200 to 275 basis points or a specified base rate plus  100 to 175 basis points (exact rate based upon the Company’s leverage ratio),  interest due monthly, principal due February 9, 2010                                                                                                                                                 |       | $                           | 20,000     |   |
|                                                                                                                                                                                                                                                                                                                                                                                              |       |                        |       |   |
| Term loan, pursuant to  the Second Amendment, as of December 29, 2007 bears interest at LIBOR  plus 200 basis points or a specified base rate plus 100 basis points, with  twelve consecutive quarterly principal and interest payments of $250,904  starting on December 29, 2007, with the unpaid principal and interest of  approximately $91.3 million due on February 9, 2011 |       | 94,265                      |       |
|                                                                                                                                                                                                                                                                                                                                                                                              |       |                        |       |
| Total debt                                                                                                                                                                                                                                                                                                                                                                                        |       | $                           | 114,265    |   |

 
| ** **                                                                                                                                                                                                                                       | ** ** | **June 28,  2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| Credit  facilities*:                                                                                                                                                                                                                             |       |                    |       |
| Line of credit bears  interest at LIBOR plus 87.5 to 150 basis points or a specified base rate plus  0 to 50 basis points (exact rate based upon the Company’s leverage ratio),  interest due monthly, principal due February 13, 2013 |       | $                       | 41,750     |   |
|                                                                                                                                                                                                                                             |       |                    |       |   |
| Term loan bears  interest at LIBOR plus 87.5 to 150 basis points or a specified base rate plus  0 to 50 basis points (exact rate based upon the Company’s leverage ratio),  interest due monthly, principal due February 13, 2013      |       | 60,000                  |       |
|                                                                                                                                                                                                                                             |       |                    |       |
| Total debt                                                                                                                                                                                                                                       |       | $                       | 101,750    |   |

 

----

*As further discussedabove, the total debt outstanding as of December 29, 2007 was pursuant tothe Amended and Restated Credit Agreement, whereas the total debt outstandingas of June 28, 2008 was pursuant to the Second Amended Credit Agreement.

 

**8.****             Commitments andcontingencies:**

 

**Leases**

 

As of June 28, 2008,the Company has noncancelable operating leases, primarily for real estate, thatexpire over the next ten years.   Rental expense during the quarterended June 28, 2008 was approximately $2.9 million, compared to rentalexpense of approximately $2.2 million during the quarter ended June 30,2007.

 

**Contract cost audits**

 

Payments to the Companyon government cost reimbursable contracts are based on provisional, orestimated indirect rates, which are subject to audit on an annual basis by theDefense Contract Audit Agency (DCAA). The cost audits result in the negotiationand determination of the final indirect cost rates that the Company may use forthe period(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.

 

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**Litigation and claims**

 

We are a party to litigationand legal proceedings that we believe to be a part of the ordinary course ofour business. 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.

 

 TheShenandoah Electronic Intelligence, Inc. (SEI) acquisition agreementprovides for a purchase price adjustment based upon the working capital of SEIas of the closing date. Subsequent to the closing date, we received a paymentof $1.6 million in connection with services performed prior to the closing datethat SEI had not previously billed, and was not authorized to bill, itscustomer as of the closing date. The SEI selling stockholders have assertedthat they are entitled to a credit in connection with the calculation ofworking capital adjustment in an amount equal to the amount received by us forthis post-closing payment. We believe that, in accordance with generallyaccepted accounting principles, the SEI selling stockholders should not receivethe benefit of the post-closing payment. In accordance with the terms of theSEI acquisition agreement, the parties have jointly submitted the issue to anindependent accounting firm for resolution. We anticipate that this matter willbe resolved before the end of 2008.

 

**9.****             Stockholders’ equity:**

 

**Stock incentive plans**

 

In April 2005, theBoard of Directors voted to adopt the 2002 Amended and Restated Omnibus StockIncentive Plan, or the Amended and Restated Plan, and the Amended and RestatedPlan was approved by our stockholders at the annual meeting of stockholdersheld in June 2005. The Amended and Restated Plan amends and restates thePlan by (i) increasing the number of shares of common stock reserved andavailable under the Plan by 1,000,000 shares to a total share allocation of2,920,000, (ii) permitting the grant of deferred shares, performanceshares and performance units, (iii) prohibiting repricing of optionswithout prior stockholder approval, (iv) limiting the number of shares ofcommon stock and performance units subject to awards a participant may receivein any calendar year to 300,000 and 500,000, respectively, and adding otheradministrative provisions to comply with the performance-based compensationexception to the deduction limit of Section 162(m) of the InternalRevenue Code of 1986, as amended; (v) eliminating the provision thatpreviously provided for an automatic increase in the number of shares reservedfor issuance under the Amended and Restated Plan each fiscal year by a numberequal to the lesser of 160,000 shares and an amount determined by the Board ofDirectors, (vi) providing that non-qualified stock option grants will bepriced at one hundred percent (100%) of fair market value; (vii) providingfor minimum vesting periods of stock bonus awards, restricted common stockawards, stock appreciation rights, deferred shares, and other stock awardssubject to the possible acceleration of the vesting schedule at the discretionof the administrator; (viii) providing that future amendments to theAmended and Restated Plan that increase the number of shares allocated, modifyparticipation requirements, or materially increase benefits accruing to theparticipants under the Plan will be subject to stockholder approval; and (ix) makingother technical changes to the Plan.

 

A summary of optionactivity under the plan as of June 28, 2008 is presented below:

 
| ** **                                 | ** ** | **Options** | ** ** | **Options  exercisable** | ** ** | **Weighted-average  exercise price** | ** ** |
|--------------------------------------------|------------|-------------|------------|--------------------------|------------|-------------------------------------------|------------|
|                                       |       |        |       |                     |       |                                      |       |
| Outstanding at  December 29, 2007     |       | 1,491,161   |       | 1,233,331                |       | $                                         | 23.00      |   |
| 2008 grants                                |       | 207,200     |       |                     |       | $                                         | 23.60      |   |
| 2008 exercises                             |       | (23,378     | )          |                     |       | $                                         | 14.56      |   |
| 2008 forfeitures                           |       | (25,863     | )          |                     |       | $                                         | 28.08      |   |
| Outstanding at  June 28, 2008         |       | 1,649,120   |       |                     |       | $                                         | 22.96      |   |
| Options  exercisable at June 28, 2008 |       |        |       | 1,224,550                |       |                                      |       |

 

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Prior to fiscal 2006,awards under the Company’s stock incentive plan consisted principally of stockoptions.  During fiscal 2006, the Company revised its stock incentivearrangement to provide restricted stock awards to directors and executives. Thestock awards granted during fiscal 2006 were generally vested ratably over aperiod of four or five years. During fiscal 2007, the Company revised its stockincentive arrangement to issue restricted stock awards that will be fullyvested only if the Company meets certain revenue targets determined by theBoard of Directors.

 

 Asummary of restricted awards activity under the plan as of June 28, 2008is presented below:

 
| ** **                                               | ** ** | **Shares** | ** ** | **Weighted-average  fair value** | ** ** |
|----------------------------------------------------------|------------|------------|------------|---------------------------------------|------------|
|                                                     |       |       |       |                                  |       |
| Non-vested  shares outstanding at December 29, 2007 |       | 98,872     |       | $                                     | 28.98      |   |
| 2008 grants                                              |       | 74,700     |       | $                                     | 23.53      |   |
| 2008 vests                                               |       | (4,072     | )          | $                                     | 28.32      |   |
| 2008 forfeitures                                         |       | (2,240     | )          | $                                     | 27.61      |   |
| Non-vested  shares outstanding at June 28, 2008     |       | 167,260    |       | $                                     | 26.58      |   |

 

**Stock repurchase program**

 

During the Company’sBoard of Directors meeting on December 6, 2005, the Board authorized therepurchase of up to 300,000 shares of its common stock.  On March 24,2008, the Company announced that its Board of Directors authorized theexpansion of the Company’s stock repurchase program for the repurchase of up toan additional 700,000 shares of its common stock, which brings the total ofshares of common stock authorized for repurchase to 1.0 million.  TheCompany had approximately 13.0 million shares outstanding as of June 28,2008.  The stock repurchase program will be funded, up to an aggregatemaximum dollar amount of $25.0 million, from available cash and the Company’sexisting credit facility.  The timing and volume of any purchases will bedetermined in accordance with a Rule 10b5-1 trading plan.  As of the quarter ended June 28, 2008,we have repurchased 109,264 shares of our common stock for approximately $2.5million under the trading plan.  Subject to Rule 10b5-1 under theExchange Act, the stock repurchase program may be suspended or discontinued atany time and without prior notice.

 

**10.****          Subsequent Events**

 

On July 15, 2008, SIInternational entered into an Agreement and Plan of Merger (the MergerAgreement) by and among SI International, Arrowpoint Corporation, a Virginiacorporation (Arrowpoint), and the stockholders of Arrowpoint (theSellers).  On July 28, 2008, SI International, Arrowpoint, theSellers’ Representative under the Merger Agreement, and the Sellers, mutuallyagreed pursuant to the terms of a letter agreement to terminate the MergerAgreement.  The terms of the Merger Agreement provided that a mergersubsidiary of SI International would have merged with and into Arrowpoint, withArrowpoint continuing as the surviving corporation and a wholly-ownedsubsidiary of SI International.  The Merger Agreement required SIInternational to pay a purchase price of $16.0 million in cash at closing, plusan additional amount of up to $9.0 million in cash to the extent thatArrowpoint achieved certain performance objectives in 2008 and 2009.  Eachof the parties to the Merger Agreement made customary representations andwarranties, entered into certain covenants, including, without limitation, withrespect to a $1.6 million escrow and a two-way working capital adjustment, andagreed to certain indemnification obligations.

 

The Company has incurredcertain transaction costs that would have been capitalized as acquisition costshad the merger been consummated.  Thesecosts will be expensed in the Company’s fiscal quarter ending September 27,2008.  The range of costs expected to beexpensed is $0.4 to $0.5 million.

 

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**Item2.  Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

*Thefollowing discussion and analysis should be read in conjunction with theconsolidated financial statements and related notes included elsewhere in this Form 10-Q.This discussion and analysis contains forward-looking statements that involveknown and unknown risks, uncertainties, and other factors that may cause our actualresults, 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 we make in this section relating to thesufficiency of anticipated sources of capital to meet our cash requirements areforward- looking statements. Our actual results could differ materially fromthose anticipated in these forward-looking statements for many reasons,including as a result of some of the factors described below, elsewhere in thisForm 10-Q and in the section entitled “Risk Factors” in our Form 10-K for the fiscal year ended December 29, 2007.   You should notplace undue reliance on these forward-looking statements, which apply only asof the date of the filing of this Form 10-Q.*

 

*TheCompany’s fiscal year is based on the calendar year and ends each year on theSaturday nearest, but not falling after, December 31 of that year. Typically, fiscal quarters also end on the Saturday nearest, but not fallingafter, the end of the calendar quarter.  However, 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 maybe comprised of 52 or 53 weeks.*

 

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

 

**Overview**

 

We are, first andforemost, a provider of information technology and network solutions (IT) tothe Federal Government. Our clients include the U.S. Air Force, U.S. Army, U.S.Navy, Department of State, Department of Homeland Security, Department ofEnergy, Department of Agriculture, 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 “RapidResponse ·Rapid Deployment®” methodology that enables the rapid standing up of innovativesolutions and the incorporation of additional capabilities in rapid succession.This capability allows us to respond to urgent IT imperatives quickly, often ina matter of months, and within a well defined budget. We can, therefore,provide solutions for current IT needs, while establishing a platform foradvancing long-term transformational objectives. We possess a proven ability torespond to high priority information technology and network needs throughinnovation, and an enviable reputation for timely delivery of robust solutionson assignments where failure is not an option. Our solutions enable clients torespond to new mandates, expand the scope of their missions, and reengineerunderlying business processes. We have a demonstrated ability of turningtroubled IT projects 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 quartersended June 28, 2008 and June 30, 2007, we received 99.2% and 98.5%,respectively, of our revenues from services we provided to various departmentsand agencies of the Federal Government, both directly and through other primecontractors, and 0.8% and 1.5%, respectively, of our total revenues from workperformed for commercial entities. The following table shows our revenues fromthe client groups listed as a percentage of total revenue. Revenue data for theDepartment of Defense (DoD) includes revenue generated from work performed underengagements for both the DoD and the Intelligence community.

 

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| ** **                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                 | ** ** | **June 28,  2008**          | ** ** | **June 30,  2007**        | ** ** | **June 28,  2008** | ** ** | **June 30,  2007** | ** ** |
|                       |       |                             |       |                           |       |   |   |   |   |
| Department of  Defense     |       | 42.5                             | %          | 45.1                           | %          | 42.3 | % | 45.0 | % |
| Federal civilian  agencies |       | 56.7                             |       | 53.4                           |       | 56.9 |   | 53.4 |   |
| Commercial  entities       |       | 0.8                              |       | 1.5                            |       | 0.8 |   | 1.6 |   |
| Total revenue              |       | 100.0                            | %          | 100.0                          | %          | 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** | ** ** | **Six Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **June 28,  2008**          | ** ** | **June 30,  2007**        | ** ** | **June 28,  2008** | ** ** | **June 30,  2007** | ** ** |
|                    |       |                             |       |                           |       |   |   |   |   |
| Prime contract  revenue |       | 85.6                             | %          | 78.5                           | %          | 84.1 | % | 79.2 | % |
| Subcontract  revenue    |       | 14.4                             |       | 21.5                           | %          | 15.9 |   | 20.8 | % |
| Total revenue           |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |

 

Our services are providedto clients pursuant to three types of contracts: cost reimbursable, time andmaterials and fixed price contracts. The following table shows our revenuesfrom each of these types of contracts as a percentage of our total revenue forthe following periods:

 
| ** **          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **          | ** ** | **June 28,  2008**          | ** ** | **June 30,  2007**        | ** ** | **June 28,  2008** | ** ** | **June 30,  2007** | ** ** |
|                |       |                             |       |                           |       |   |   |   |   |
| Cost reimbursable   |       | 28.0                             | %          | 29.1                           | %          | 26.2 | % | 30.5 | % |
| Time and  materials |       | 34.5                             |       | 34.7                           | %          | 36.0 |   | 34.0 | % |
| Fixed price         |       | 37.5                             |       | 36.2                           | %          | 37.8 |   | 35.5 | % |
| Total               |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |

 

Our cost reimbursablerevenues, as a percentage of total revenues, decreased primarily due to lowerequipment pass-through revenue on our C4I2TSR program.

 

Under cost reimbursablecontracts, the Company is reimbursed for allowable costs, and paid a fee, whichmay be fixed or performance based. Revenues on cost reimbursable contracts arerecognized as costs are incurred plus an estimate of applicable feesearned.  The Company considers fixed fees under cost reimbursablecontracts to be earned in proportion of the allowable costs incurred inperformance of the contract.  For certain cost reimbursable contracts thatinclude performance based fee incentives, the Company recognizes the relevantportion of the expected fee to be awarded by the client at the time such feecan be reasonably estimated, based on factors such as our prior award experienceand communications with the client regarding performance.   Otherperformance based fees are recognized upon customer approval.

 

Revenues on time andmaterials contracts are recognized based on direct labor hours expended atcontract billing rates and adding other billable direct costs.  To theextent that our actual labor costs under a time and materials contract arehigher or lower than the billing rates under the contract, our profit under thecontract may either be greater or less than we anticipated or we may suffer aloss under the contract. We recognize revenues under time and materialscontracts by multiplying the number of direct labor hours expended by thecontract billing rates and adding the effect of other billable direct costs.

 

For fixed price contractsthat provide for the delivery of a specific product with related customeracceptance provisions, revenues are recognized upon product delivery andcustomer 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 the AICPA’sStatement of Position 81-1,*Accounting forPerformance of Construction-Type and certain Production-Type Contracts,*revenue is recognized on the percentage-of-completion method using costsincurred in relation to total estimated 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 

 

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provided.  Inevaluating the probability of funding for purposes of assessing collectibilityof the contract price, the Company considers its previous experiences with itscustomers, communications with its customers regarding funding status, and the Company’sknowledge of available funding for the contract or program.  If funding isnot assessed as probable, revenue recognition is deferred until realization isprobable.

 

Contract revenuerecognition inherently involves estimation, including the contemplated level ofeffort to accomplish the tasks under contract, the cost of the effort, and anongoing assessment of progress toward completing the contract. From time totime, as part of the normal management processes, facts develop thatrequire revisions to estimated total costs or revenues expected. The cumulativeimpact of any revisions to estimates and the full impact of anticipated losseson contracts accounted for under SOP 81-1 are recognized in the period in whichthey become known.  Losses on all other contracts are recognized as theservices and materials are provided.

 

The allowability ofcertain costs under government contracts is subject to audit by thegovernment.  Certain indirect costs are charged to contracts usingprovisional or estimated indirect rates, which are subject to later revisionbased on government audits of those costs.  Management is of the opinionthat costs subsequently disallowed, if any, would not be significant.

 

**Liquidity and Capital Resources**

 

*General.*  Short-term liquidityrequirements are created by our use of funds for working capital, capitalexpenditures, and the need to provide debt service. We expect to meet theserequirements through a combination of cash flow from operations and borrowingsunder our Second Amended Credit Agreement.

 

We anticipate that ourlong-term liquidity requirements, including any further acquisitions, will befunded through a combination of cash flow from operations, borrowings under ourSecond Amended Credit Agreement, additional secured or unsecured debt or theissuance of common or preferred stock, each of which may be initially fundedthrough borrowings under our Second Amended Credit Agreement.

 

Under the terms of ourSecond Amended Credit Agreement, the Company is required to maintain compliancewith financial and non-financial covenants.  The Company is in compliancewith all such covenants as of June 28, 2008.

 

*Cashand Cash Equivalents.*   We consider cash on deposit and all highly liquidinvestments with original maturities of three months or less to be cash andcash equivalents. Cash and cash equivalents as of June 28, 2008 and December 29,2007 were $14.4 million and $13.1 million, respectively.

 

*CashFlow.*  The following table sets forth our sources and uses of cash and cash equivalentsfor the six months ended June 28, 2008 and June 30, 2007:

 

| ** **                                            | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                            | ** ** | **June 28,  2008**        | ** ** | **June 30,  2007** | ** ** |
| ** **                                            | ** ** | **(in thousands)**        | ** ** |
| Net cash  provided by operations                      |       | $                              | 18,627     |   | $ | 10,852 |   |
| Net cash used in  investing activities                |       | (1,741                         | )          | (69,932 | ) |
| Net cash (used  in) provided by financing activities  |       | (15,582                        | )          | 50,515 |   |
| Net increase  (decrease in) cash and cash equivalents |       | $                              | 1,304      |   | $ | (8,565 | ) |

 

Our operating cash flowis primarily affected by the overall profitability of our contracts, ourability to invoice and collect from our clients in a timely manner, and ourability to manage our vendor payments. We bill most of our clients monthlyafter services are rendered. Cash provided by operations for the six monthsended June 28, 2008 was attributable to net income of $7.3 million, plusdepreciation, amortization and other non-cash items of $5.5 million, and adecrease in net accounts receivable of $5.8 million, due to the improvement indays sales outstanding from 78 days to 71 days for the six months ended June 28,2008.  Cash provided by operations in the six months ended June 30,2007 was attributable to net income of $9.8 million, plus depreciation,amortization and other non-cash items of $4.2 million, offset by an increase inworking capital and other operating assets and liabilities of $3.1 million.

 

Our cash flow used ininvesting activities consists primarily of capital expenditures, the purchaseand sale of marketable securities, and acquisitions. In the six months ended June 28,2008, we purchased capital assets totaling $1.7 million.  During the sixmonths ended June 30, 2007, we paid $60.2 million for the LOGTECacquisition, net of cash assumed, repaid $6.0 million of note payable to theformer owners of Zen, and invested $3.8 million in capital assets.

 

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Our cash flow fromfinancing activities consists primarily of borrowings under and payments on ourcredit facility and proceeds from the issuance and exercise of common stock,and payment for repurchase of common stock under our stock repurchase program.For the six months ended June 28, 2008, cash flow used in financingactivities consists of repayment of the line of credit and term loan portionsunder our prior and current credit facilities of $129.3 million, repurchase ofcommon stock of $2.5 million, and debt issuance costs of $0.9 million,partially offset by the proceeds of $0.3 million from the exercise of stockoptions, plus proceeds of our credit facility refinancing of $116.8million.  Cash provided by financingactivities for the six months ended June 30, 2007 consists of borrowingsof $25.0 million under the newly amended term loan, borrowings of $25.0 millionunder the revolving line of credit, and proceeds of $0.9 million from theexercise of stock options, partially offset by the $0.4 million repayments ofthe term loan portion of our credit facility and capital lease.

 

**Resultsof Operations**

 

The following table setsforth certain items from our consolidated statements of operations as apercentage of revenues for the periods indicated:

 
| ** **                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **June 28,  2008**          | ** ** | **June 30,  2007**        | ** ** | **June 28,  2008** | ** ** | **June 30,  2007** | ** ** |
|                                      |       |                             |       |                           |       |   |   |   |   |
| Revenue                                   |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |
| Operating costs  and expenses:            |       |                             |       |                           |       |   |   |   |   |
| Cost of services                          |       | 66.1                             |       | 62.1                           |       | 65.9 |   | 62.2 |   |
| Selling, general  and administrative      |       | 26.7                             |       | 28.4                           |       | 26.9 |   | 28.3 |   |
| Depreciation and  amortization            |       | 0.7                              |       | 0.7                            |       | 0.8 |   | 0.7 |   |
| Amortization of  intangible assets        |       | 0.8                              |       | 0.6                            |       | 0.8 |   | 0.6 |   |
| Total operating  costs and expenses       |       | 94.3                             |       | 91.8                           |       | 94.4 |   | 91.8 |   |
| Income from  operations                   |       | 5.7                              |       | 8.2                            |       | 5.6 |   | 8.2 |   |
| Interest  expense, net                    |       | (1.1                             | )          | (1.3                           | )          | (1.2 | ) | (1.3 | ) |
| Income before  provision for income taxes |       | 4.6                              |       | 6.9                            |       | 4.4 |   | 6.9 |   |
| Provision for  income taxes               |       | 1.9                              |       | 2.7                            |       | 1.8 |   | 2.7 |   |
| Net income                                |       | 2.7                              | %          | 4.2                            | %          | 2.6 | % | 4.2 | % |

 

**Threemonths ended June 28, 2008 compared with three months ended June 30,2007**

 

*Revenue.*  For the three months ended June 28,2008, our revenues increased 20.2% to $142.8 million from $118.8 millionfor the three months ended June 30, 2007.   Revenues from workunder Federal Government contracts increased 21.1% to $141.7 million for thethree months ended June 28, 2008 from $117.0 million for the three monthsended June 30, 2007. This increase was primarily attributable to theacquisition of LOGTEC, Inc., along with new contract awards, successfulrecompetition wins on existing programs, new contracts from and growth withinexisting programs in our four focus areas: Federal IT Modernization, DefenseTransformation, Homeland Defense, and Mission-Critical Outsourcing.  Wecontinue to focus primarily on opportunities for the Federal Government.

 

*Costof services.* Cost of services include direct labor and other direct costs such as materialsand subcontractor costs, incurred to provide our services and solutions to ourcustomers.  Generally, changes in costs of services are correlated tochanges in revenue as resources are consumed in the production of that revenue.For the three months ended June 28, 2008, cost of services increased 28.2%to $94.5 million from $73.7 million for the three months ended June 30,2007.  This increase was attributable primarily to the increase in revenue.As a percentage of revenue, cost of services was 66.1% for the three monthsended June 28, 2008 as compared to 62.1% for the three months ended June 30,2007.  The increase in cost of services, as a percentage of revenue, isdue primarily to the Company increasing its use of subcontractors on programsfor which we are acting as the prime contractor and higher costs during thequarter related to certain fixed price contracts.

 

*Selling,general and administrative expenses.*  Selling, general and administrative expensesinclude facilities, selling, bid and proposal, indirect labor, fringe benefitsand other discretionary costs. For the three months ended June 28, 2008,indirect costs increased 13.4% to $38.1 million from $33.6 million for thethree months ended June 30, 2007.  This $4.5 million increase wasprimarily attributable to the expected growth of support functions necessary tofacilitate and administer the growth in direct costs, as well as theintegration of LOGTEC, Inc.  As a percentage of revenue, selling,general and administrative costs were 26.7% for the three months ended June 28,2008 as compared to 28.4% for the three months ended June 30, 2007.

 

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*Depreciationand amortization.*Depreciation and amortization includes the depreciation of computers, furnitureand other equipment, the amortization of third party software we useinternally, and the depreciation of leasehold improvements. *   *For the three months ended June 28, 2008, depreciation expense was $1.0million, an increase of 25.0% compared to $0.8 million for the three monthsended June 30, 2007.  As a percentage of revenue, depreciation expensewas 0.7% for both the three months ended June 28, 2008 and June 30,2007.

 

*Amortizationof intangible assets.* Amortization of intangible assets includes the amortization ofintangible assets acquired in connection with acquisitions.  Identifiableintangible assets are amortized over their estimated useful lives. Non-compete agreements are generally amortized straight-line over the term ofthe agreement, while contracts and related client relationships are amortizedusing an accelerated method over their estimated useful lives.  For thethree months ended June 28, 2008, amortization of intangible assets was$1.1 million, compared to $0.8 million for the three months ended June 30,2007.   As a percentage of revenue, amortization of intangible assetswas 0.8% for the three months ended June 28, 2008 compared to 0.6% for thethree months ended June 30, 2007, with the increase due to the acquisitionof LOGTEC, Inc.

 

*Incomefrom operations.* For the three months ended June 28, 2008, income from operations decreased17.3% to $8.1 million from $9.8 million for the three months ended June 30,2007.  This decrease was attributable primarily to increased costs ofservices, as described above.  As a percentage of revenue, income fromoperations was 5.7% for the three months ended June 28, 2008 compared to8.2% for the three months ended June 30, 2007.

 

*Interestexpense, net.* Interest expense, net remained at $1.6 million for the three months ended June 28,2008 when compared to the quarter ended June 30, 2007.  As a percentageof revenue, interest expense, net was 1.1% for the three months ended June 28,2008 as compared to 1.3% for the three months ended June 30, 2007.

 

*Provisionfor income taxes.* The provision for income taxes was $2.7 million in the three months ended June 28,2008, compared to $3.2 million for the three months ended June 30,2007.  Our second quarters of 2008 and 2007 tax provision, represent anestimated annual effective tax rate of 40.9%, and 39.1%, respectively. Ourestimated annual effective tax rate of 40.5% for 2008 is greater than thefederal statutory rate of 35% due primarily to state income taxes, the taximpact related to our non-qualified deferred compensation plan and certainnon-deductible stock compensation costs.

 

**Sixmonths ended June 28, 2008 compared with six months ended June 30,2007**

 

*Revenue.*  For the six months ended June 28,2008, our revenues increased 19.2% to $277.2 million from$232.5 million for the six months ended June 30, 2007.  Revenues from work under Federal Government contracts increased 20.2% to $274.9million for the six months ended June 28, 2008 from $228.7 million for thesix months ended June 30, 2007. This increase was primarily attributableto the acquisition of LOGTEC, Inc., along with new contract awards,successful re-competition wins on existing programs, new contracts from andgrowth within existing programs in our four focus areas: Federal ITModernization, Defense Transformation, Homeland Defense, and Mission-CriticalOutsourcing.  We continue to focus primarily on opportunities for theFederal Government.

 

*Costof services.* Cost of services include direct labor and other direct costs such as materialsand subcontractor costs, incurred to provide our services and solutions to ourcustomers.  Generally, changes in costs of services are correlated tochanges in revenue as resources are consumed in the production of that revenue.For the six months ended June 28, 2008, cost of services increased 26.3%to $182.7 million from $144.6 million for the six months ended June 30,2007.  This increase was attributable primarily to the increase inrevenue. As a percentage of revenue, cost of services was 65.9% for the sixmonths ended June 28, 2008 as compared to 62.2% for the six months ended June 30,2007.  The increase in cost of services, as a percentage of revenue, isdue primarily to the Company increasing its use of subcontractors on programsfor which we are acting as the prime contractor and higher costs during thequarter related to certain fixed price contracts.

 

*Selling,general and administrative expenses.*  Selling, general and administrative expensesinclude facilities, selling, bid and proposal, indirect labor, fringe benefitsand other discretionary costs. For the six months ended June 28, 2008,indirect costs increased 13.5% to $74.6 million from $65.7 million for thesix months ended June 30, 2007.  This $8.9 million increase wasprimarily attributable to the expected growth of support functions necessary tofacilitate and administer the growth in direct costs, as well as theintegration of LOGTEC, Inc.  As a percentage of revenue, selling,general and administrative costs were 26.9% for the six months ended June 28,2008 as compared to 28.3% for the six months ended June 30, 2007.

 

*Depreciationand amortization.*Depreciation and amortization includes the depreciation of computers, furnitureand other equipment, the amortization of third party software we useinternally, and the depreciation of leasehold improvements. **For the six months ended June 28, 2008,depreciation expense was $2.1 million, an increase of 31.3% compared to $1.6million for the six months ended June 30, 2007.  As a percentage ofrevenue, depreciation expense was 0.8% for the six months ended June 28,2008 compared to 0.7% for the six months ended June 30, 2007.

 

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*Amortizationof intangible assets.* Amortization of intangible assets includes the amortization ofintangible assets acquired in connection with acquisitions.  Identifiableintangible assets are amortized over their estimated useful lives. Non-compete agreements are generally amortized straight-line over the term ofthe agreement, while contracts and related client relationships are amortizedusing an accelerated method over their estimated useful lives.  For thesix months ended June 28, 2008, amortization of intangible assets was $2.2million, compared to $1.5 million for the six months ended June 30,2007.   As a percentage of revenue, amortization of intangible assetswas 0.8% for the six months ended June 28, 2008 compared to 0.6% for thesix months ended June 30, 2007, with the increase due to the acquisitionof LOGTEC, Inc.

 

*Incomefrom operations.* For the three months ended June 28, 2008, income from operations decreased17.9% to $15.6 million from $19.0 million for the six months ended June 30,2007.  This decrease was attributable primarily to increased costs ofservices, as described above.  As a percentage of revenue, income fromoperations was 5.6% for the six months ended June 28, 2008 compared to8.2% for the six months ended June 30, 2007.

 

*Interestexpense, net.* Interest expense, net increased 13.3% to $3.4 million for the six months ended June 28,2008 from $3.0 million for the six months ended June 30,2007. This increase was attributable primarily to an increase in debtresulting from our acquisition of LOGTEC, Inc.  The weighted averageborrowings under our credit facility for the six months ended June 28,2008 were $31.1 million higher than the weighted average borrowings under ourcredit facility for the six months ended June 30, 2007.  As apercentage of revenue, interest expense, net was 1.2% for the six months ended June 28,2008 as compared to 1.3% for the six months ended June 30, 2007.

 

*Provisionfor income taxes.*  The provision for income taxes was $4.9 million in the sixmonths ended June 28, 2008, compared to $6.3 million for the sixmonths ended June 30, 2007.  Our second quarters 2008 and 2007 taxprovision, represent an estimated annual effective tax rate of 40.5%, and39.2%, respectively. Our estimated annual effective tax rate is greater thanthe federal statutory rate of 35% due primarily to state income taxes, the taximpact related to our non-qualified deferred compensation plan, and certainnon-deductible stock compensation costs.

 

**Off-BalanceSheet Arrangements**

 

As of June 28, 2008,we have no off-balance sheet arrangements that are reasonably likely to have acurrent or future material effect on our financial condition, revenues, orexpenses, result of operations, liquidity, capital expenditures, or capitalresources.

 

**CriticalAccounting Policies and Estimates**

 

Our significantaccounting policies are described in Note 2 to our accompanyingconsolidated financial statements. We consider the accounting policies in thissection to be critical to the understanding of our results of operations. Ourcritical accounting policies include the areas where we have made what weconsider to be particularly difficult, subjective or complex judgments inmaking estimates, and where these estimates can significantly impact ourfinancial results under different assumptions and conditions. We prepare ourfinancial statements in conformity with U.S. generally accepted accountingprinciples. As such, we are required to make certain estimates, judgments andassumptions that we believe are reasonable based upon the informationavailable. These estimates, judgments and assumptions affect the reportedamounts of assets and liabilities at the date of the financial statements andthe reported amounts of revenue and expenses during the periods presented.Actual results could be different from these estimates.

 

*Revenue Recognition*

 

The Company recognizesrevenue when a contract has been executed, the contract price is fixed anddeterminable, delivery of services or products has occurred, and collectibilityof the contract price is considered probable and can be reasonably estimated. Revenue is earned under cost reimbursable, time and materials and fixed pricecontracts.

 

Under cost reimbursablecontracts, the Company is reimbursed for allowable costs, and paid a fee, whichmay be fixed or performance-based. Revenues on cost reimbursable contractsare recognized as costs are incurred plus an estimate of applicable feesearned. The Company considers fixed fees under cost reimbursable contracts tobe earned in proportion of the allowable costs incurred in performance of thecontract. For cost reimbursable contracts that include performance based feeincentives, the Company recognizes the relevant portion of the expected fee tobe awarded by the customer at the time such fee can be reasonably estimated,based on factors such as the Company’s prior award experience andcommunications with the customer regarding performance.  Other performancebased fees are recognized upon customer approval.

 

Revenues on time andmaterials contracts are recognized based on direct labor hours expended at contractbilling rates and adding other billable 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 in which the Company is paid a specificamount to provide a particular service for a stated period of time, revenue isrecognized ratably over the service period.

 

For fixed price contractsthat provide for the delivery of a specific product with related customeracceptance provisions, revenues are recognized upon product delivery andcustomer acceptance.  A significant portion of the Company’s fixedprice-completion 

 

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contracts involve thedesign and development of complex, client systems.  For those contractsthat are within scope of SOP 81-1,**revenueis recognized on the percentage-of-completion method using costs incurred inrelation to total estimated 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 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 revenuerecognition inherently involves estimation, including the contemplated level ofeffort to accomplish the tasks under contract, the cost of the effort, and anongoing assessment of progress toward completing the contract. From time totime, as part of the normal management processes, facts develop thatrequire revisions to estimated total costs or revenues expected. The cumulativeimpact of any revisions to estimates and the full impact of anticipated losseson contracts accounted for under SOP 81-1 are recognized in the period in whichthey become known.  Losses on all other contracts are recognized as theservices and materials are provided.

 

The allowability ofcertain costs under government contracts is subject to audit by thegovernment.  Certain indirect costs are charged to contracts usingprovisional or estimated indirect rates, which are subject to later revisionbased on government audits of those costs.  Management is of the opinionthat costs subsequently disallowed, if any, would not be significant.

 

*Stock Based Compensation*

 

Effective January 1,2006, the Company adopted the provisions of Statement of Financial AccountingStandards (SFAS) No. 123R,*Share BasedPayment*, using the modified prospective transition method.  Dueto the use of the modified prospective method, prior interim periods and fiscalyears do not reflect any restated amounts.  The Company accelerated thevesting of unvested stock options previously awarded to employees, officers anddirectors in December 2005; thus the Company had no unvested stock optionson January 1, 2006.  Since January 1, 2006, the Company hasissued 689,325 stock options and restricted stock awards through June 28,2008.  The total stock compensation expense recognized for stock optionsand restricted stock awards during the quarter ended June 28, 2008 was$0.5 million. The total remaining unrecognized compensation expense related tothe unvested options and restricted stock awards as of June 28, 2008 was$3.9 million and $3.3 million, respectively.

 

**Item 3.  Quantitative andQualitative Disclosures about Market Risk.**

 

We are exposed to certainfinancial market risks, the most predominant being fluctuations in interestrates for borrowings under our credit facility. Interest rate fluctuations aremonitored by our management as an integral part of our overall risk managementprogram, which recognizes the unpredictability of financial markets and seeksto reduce the potentially adverse effect on our results of operations. As partof this strategy, we may use interest rate swap arrangements to manage or hedgeour interest rate risk. We do not use derivative financial instruments forspeculative or trading purposes.

 

As of June 28, 2008,we had $101.8 million outstanding under our Second Amended Credit Agreement. A1% change in interest rates would have resulted in our interest expensefluctuating by approximately $255,000 for the three months ended June 28,2008.

 

Effective August 13,2007, an interest swap agreement came into effect which reduced our exposureassociated with the market volatility of floating LIBOR interest rates. Thisagreement has a notional principal amount of $60.0 million and, as of June 28,2008, had a fixed rate of 5.045%. This agreement is a hedge against term debt,which bears interest at LIBOR plus a margin which has a current rate of 3.94%.At stated monthly intervals the difference between the interest on the floatingLIBOR-based debt and the interest calculated in the swap agreement are settledin cash. The estimated value of the swap at June 28, 2008 was a currentliability of $2.1 million.

 

In addition,historically, our investment positions have been relatively small andshort-term in nature. We have typically made investments in a fund with aneffective average maturity of fewer than 40 days and a portfolio make-upconsisting primarily of commercial paper and notes, variable rate instruments,and, to a lesser degree, overnight securities and bank instruments.  Sinceour initial public offering, the Board of Directors approved an investment policythat requires us to invest in relatively short-term, high quality, and highliquidity obligations.

 

**Item4.  Controls and Procedures.**

 

*Evaluationof Disclosure Controls and Procedures.* The Company performed an evaluation under thesupervision and with the participation of management, including the Company’sChief Executive Officer and Chief Financial Officer, of the design andoperation of the Company’s disclosure controls and procedures as of June 28,2008.  Based upon the evaluation, the Company’s Chief Executive Officerand Chief Financial Officer have concluded that, as of June 28, 2008, theCompany’s disclosure controls and procedures were effective.

 

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*Changesin Internal Control Over Financial Reporting.* During the quarter ended June 28, 2008, therewere no changes in the Company’s internal control over financial reporting thathas materially affected, or is reasonably likely to materially affect, theCompany’s internal control for financial reporting.

 

**PART II: OTHER INFORMATION**

 

**Item1.  Legal Proceedings**

 

We are a party tolitigation and legal proceedings that we believe to be a part of the ordinarycourse of our business. While we cannot predict the ultimate outcome of thesematters, we currently believe that any ultimate liability arising out of theseproceedings will not have a material adverse effect on our financial position.We may become involved in other legal and governmental, administrative orcontractual proceedings in the future.

 

The Shenandoah ElectronicIntelligence, Inc. (SEI) acquisition agreement provides for a purchaseprice adjustment based upon the working capital of SEI as of the closing date.Subsequent to the closing date, we received a payment of $1.6 million inconnection with services performed prior to the closing date that SEI had notpreviously billed, and was not authorized to bill, its customer as of theclosing date. The SEI selling stockholders have asserted that they are entitledto a credit in connection with the calculation of working capital adjustment inan amount equal to the amount received by us for this post-closing payment. Webelieve that, in accordance with generally accepted accounting principles, theSEI selling stockholders should not receive the benefit of the post-closingpayment. In accordance with the terms of the SEI acquisition agreement, theparties have jointly submitted the issue to an independent accounting firm forresolution. We anticipate that this matter will be resolved before the end of2008.

 

**Item1A.  Risk Factors**

 

There are no materialupdates to the risk factors previously disclosed in our Form 10-K for theyear ended December 29, 2007.

 

**Item2.  Unregistered Sales of Equity Securities and Use of Proceeds**

 
| ** **                                                 | ** ** | **Shares**    | ** ** | **Average Price** | ** ** |
|------------------------------------------------------------|------------|---------------|------------|------------------------|------------|
| **Month**                                                  | ** ** | **Purchased** | ** ** | **per Share**     | ** ** |
|                                                       |       |          |       |                   |       |
| May 2008                                              |       | 26,300        |       | $                      | 23.92      |   |
| June 2008                                             |       | 82,964        |       | $                      | 22.90      |   |
| ** **                                                 | ** ** | ** **    | ** ** | ** **             | ** ** |
| Total for  quarter ended June 28, 2008                |       | 109,264       |       | $                      | 23.15      |   |
|                                                       |       |          |       |                   |       |
| Total shares  purchased under the trading plan             |       | 109,264       |       | $                      | 23.15      |   |
|                                                       |       |          |       |                   |       |
| Total shares  remaining to be purchased under trading plan |       | 890,736       |       |                   |       |

 

**Item3.  Defaults upon Senior Securities**

 

None.

 

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

 

Duringthe fiscal quarter ended June 28, 2008, we submitted certain matters to avote of our stockholders through the notice of annual meeting of stockholdersand the solicitation of proxies related thereto.  The proxy materials related to the Registrant’sSixth Annual Meeting of Stockholders were distributed on or about May 7,2008 and the annual meeting of stockholders was held on June 9, 2008 inVienna, Virginia.  As of the record dateprior to such meeting, 13,268,039 shares of our common stock were outstandingand entitled to vote at the meeting.  Atthe annual stockholders meeting of June 9, 2008, 12,813,394 shares of ourcommon stock were present in person or by proxy, representing 96.6% of ouroutstanding shares of common stock.

 

Thefollowing sets forth the matters presented for a vote by the stockholders andthe votes cast for, withheld, abstained, and broker non-votes:

 
| **Matter** | ** **                                                                                                                       | **Votes For** | ** ** | **Votes Withheld** | ** ** | **Abstentions** | ** ** | **Broker Non-  Votes** | ** ** |
|------------|----------------------------------------------------------------------------------------------------------------------------------|--------------------|------------|-------------------------|------------|-----------------|------------|-----------------------------|------------|
| ** ** | ** **                                                                                                                       | ** **         | ** ** | ** **              | ** ** | ** **      | ** ** | ** **                  | ** ** |
| (1)        | Election of Mr. S. Bradford Antle as a  Class III director with a term serving until the 2011 Annual Meeting           |               | 11,841,799 |                    | 971,595    |            |       |                        |       |   |
| (2)        | Election of Ms. Maureen A. Baginski as a  Class III director with a term serving until the 2011 Annual Meeting         |               | 11,843,360 |                    | 970,034    |            |       |                        |       |   |
| (3)        | Election of Mr. James E. Crawford, III as  a Class III director with a term serving until the 2011 Annual Meeting |               | 11,823,460 |                    | 989,934    |            |       |                        |       |   |
| (4)        | Ratification of the appointment of Ernst &  Young LLP as our independent auditors for the current fiscal year           |               | 12,748,088 |                    | 44,140     |            | 21,166     |                        |       |   |

 

**Item5.  Other Information**

 

None.

 

**Item6.  Exhibits**

 

The exhibits required bythis item are set forth on the Index to Exhibits attached hereto.

 

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SIGNATURES

 

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on 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: August 7,  2008 |                          |

 

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**INDEX TO EXHIBITS**

** **
| **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                  |       | Second Amended and Restated  Bylaws, as amended (filed as Exhibit 3.2 to the Company’s Current Report  on Form 8-K filed on October 2, 2007 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                 |       | Second Amended and  Restated Credit Agreement, dated as of February 13, 2008 (filed as  Exhibit 99.1 to the Company’s Current Report on Form 8-K filed  February 19, 2008 and incorporated herein by reference).                                                                                                                                                    |
| 10.8                 |       | Amended and Restated  Executive Employment Agreement with S. Bradford Antle (filed as  Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q filed  on August 8, 2007 and incorporated herein by reference).                                                                                                                                                      |
| 10.9                 |       | Amended and Restated  Executive Employment Agreement with Thomas E. Dunn (filed as  Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q filed  on August 8, 2007 and incorporated herein by reference).                                                                                                                                                         |
| 10.10                |       | Executive Employment  Agreement with Thomas E. Lloyd (filed as Exhibit 10.9 to the Third  Amendment and incorporated herein by reference).                                                                                                                                                                                                                                              |
| 10.11                |       | Amended and Restated  Executive Employment Agreement with Ray J. Oleson (filed as  Exhibit 10.13 to the Company’s Quarterly Report on Form 10-Q filed  August 8, 2007 and incorporated herein by reference).                                                                                                                                                             |
| 10.12                |       | 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).                                                                                                                                                                              |
| 10.13                |       | 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).                                                                                                                                                                              |
| 10.14                |       | 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).                                                                                                                                                                               |
| 10.15                |       | 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).                                                                                                                                                                            |
| 10.16                |       | Consulting Services  Agreement with Walter J. Culver (filed as Exhibit 10.12 to the 2004 10-K  and incorporated herein by reference).                                                                                                                                                                                                                                                   |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                  |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                             |
| 10.17                |       | 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 (*). |

 

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* Indicates filedherewith.

 

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