**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **(Mark One)**

  |                                           |                                                                                                    |
|-----------------------------|------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| **x**                       | ** **                                     | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                        | **FOR THE QUARTER ENDED  MARCH 29, 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 May 1,2008, we had 13,270,319 shares outstanding of the registrant’s common stock.

 

** **

----

** **

**SI INTERNATIONAL, INC.**

**FORM 10-Q**

# **INDEX**

** **
| ** **         | ** **                                                                                                                               | **Page**   |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **PART I.**   | **FINANCIAL INFORMATION**                                                                                                                | ** ** |
| ITEM 1             | Financial Statements                                                                                                                     | 3          |
|               | Consolidated Balance Sheets  (unaudited) at March 29, 2008 and December 29, 2007                                               | 3          |
|               | Consolidated  Statements of Operations (unaudited) for the three months ended  March 29, 2008 and March 31, 2007               | 4          |
|               | Consolidated  Statements of Cash Flows (unaudited) for the three months ended  March 29, 2008 and March 31, 2007          | 5          |
|               | Consolidated  Statements of Comprehensive Income (unaudited) for the three months ended  March 29, 2008 and for March 31, 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                                                                                     | 24         |
| ITEM 5             | Other Information                                                                                                                        | 24         |
| ITEM 6             | Exhibits                                                                                                                                 | 24         |
| Signatures         | 25                                                                                                                                       |
| Index  to Exhibits | 26                                                                                                                                       |

 

2

----

## ** **

## **PART I: FINANCIAL INFORMATION**

## ** **

### **Item 1.  Financial Statements**

### ** **

**SIInternational, Inc. and Subsidiaries**

**Consolidated Balance Sheets**

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

**Unaudited**

** **
| ** **                                                                                                                                                                                                   | ** ** | **March 29,  2008** | ** ** | **December 29,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                                                                                                   |       |                     |       |                        |       |
| **Current assets:**                                                                                                                                                                                          |       |                     |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                    |       | $                        | 21,030     |                        | $          | 13,129 |   |
| Accounts receivable, net                                                                                                                                                                                     |       | 117,124                  |       | 117,098                     |       |
| Other current assets                                                                                                                                                                                         |       | 13,471                   |       | 12,511                      |       |
| Total current assets                                                                                                                                                                                         |       | 151,625                  |       | 142,738                     |       |
| **Property and equipment, net**                                                                                                                                                                              |       | 15,186                   |       | 15,080                      |       |
| **Intangible assets, net**                                                                                                                                                                                   |       | 25,468                   |       | 26,583                      |       |
| **Other assets**                                                                                                                                                                                             |       | 11,974                   |       | 11,572                      |       |
| **Goodwill**                                                                                                                                                                                                 |       | 265,474                  |       | 265,474                     |       |
| Total assets                                                                                                                                                                                                 |       | $                        | 469,727    |                        | $          | 461,447 |   |
|                                                                                                                                                                                                         |       |                     |       |                        |       |   |   |
| **Liabilities and stockholders’ equity**                                                                                                                                                                |       |                     |       |                        |       |
| **Current liabilities:**                                                                                                                                                                                     |       |                     |       |                        |       |
| Accounts payable                                                                                                                                                                                             |       | 23,632                   |       | 26,000                      |       |
| Accrued expenses and other current liabilities                                                                                                                                                               |       | 41,548                   |       | 35,172                      |       |
| Note payable – line of credit                                                                                                                                                                           |       | —                   |       | 20,000                      |       |
| Current portion of long-term debt                                                                                                                                                                            |       | —                   |       | 1,004                       |       |
| Total current liabilities                                                                                                                                                                                    |       | 65,180                   |       | 82,176                      |       |
| **Long-term debt, net of current portion**                                                                                                                                                                   |       | 116,750                  |       | 93,261                      |       |
| **Deferred income tax, net**                                                                                                                                                                                 |       | 13,543                   |       | 14,241                      |       |
| **Other long-term liabilities**                                                                                                                                                                              |       | 10,518                   |       | 11,066                      |       |
| **Stockholders’ equity:**                                                                                                                                                                               |       |                     |       |                        |       |
| **Common stock—**$0.01 par value per share;  50,000,000 shares authorized; 13,103,086 and 13,087,164 shares issued and  outstanding as of March 29, 2008 and December 29, 2007,  respectively |       | 131                      |       | 131                         |       |
| Additional paid-in capital                                                                                                                                                                                   |       | 188,992                  |       | 188,308                     |       |
| Accumulated other comprehensive loss                                                                                                                                                                         |       | (2,176                   | )          | (1,094                      | )          |
| Retained earnings                                                                                                                                                                                            |       | 76,789                   |       | 73,358                      |       |
| Total stockholders’ equity                                                                                                                                                                              |       | 263,736                  |       | 260,703                     |       |
| Total liabilities and stockholders’ equity                                                                                                                                                              |       | $                        | 469,727    |                        | $          | 461,447 |   |

 

***See accompanying notes***

 

3

----

 

**SI International, Inc. and Subsidiaries**

**Consolidated Statements of Operations**

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

**Unaudited**

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **March 29,  2008**         | ** ** | **March 31,  2007** | ** ** |
| Revenue                                     |       | $                                | 134,357    |   | $ | 113,700 |   |
| Costs and expenses:                         |       |                             |       |   |   |
| Cost of services                            |       | 88,262                           |       | 70,892 |   |
| Selling, general and administrative         |       | 36,447                           |       | 32,068 |   |
| Depreciation and amortization               |       | 1,094                            |       | 794 |   |
| Amortization of intangible assets           |       | 1,115                            |       | 748 |   |
| Total operating expenses                    |       | 126,918                          |       | 104,502 |   |
| Income from operations                      |       | 7,439                            |       | 9,198 |   |
| Interest expense, net                       |       | (1,721                           | )          | (1,397 | ) |
| Income before provision for income taxes    |       | 5,718                            |       | 7,801 |   |
| Provision for income taxes                  |       | 2,287                            |       | 3,067 |   |
| Net income                                  |       | $                                | 3,431      |   | $ | 4,734 |   |
| Earnings per common share:                  |       |                             |       |   |   |
| Basic                                       |       | $                                | 0.26       |   | $ | 0.36 |   |
| Diluted                                     |       | $                                | 0.26       |   | $ | 0.36 |   |
| Basic weighted-average shares outstanding   |       | 13,101                           |       | 12,977 |   |
| Diluted weighted-average shares outstanding |       | 13,315                           |       | 13,252 |   |

 

***See accompanying notes***

 

4

----

 

**SI International, Inc. and Subsidiaries**

**Consolidated Statements of Cash Flows**

**(Amounts in thousands)**

**Unaudited**

** **
| ** **                                                                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                   | ** ** | **March 29,  2008**         | ** ** | **March 31,  2007** | ** ** |
| **Cash flows from operating activities:**                                                    |       |                             |       |   |   |
| Net income                                                                                   |       | $                                | 3,431      |   | $ | 4,734 |   |
| Adjustments to reconcile net income to net cash provided by (used in)  operating activities: |       |                             |       |   |   |
| Depreciation and amortization                                                                |       | 1,094                            |       | 794 |   |
| Amortization of intangible assets                                                            |       | 1,115                            |       | 748 |   |
| Stock-based compensation                                                                     |       | 388                              |       | 203 |   |
| Loss on disposal of fixed assets                                                             |       | —                           |       | 35 |   |
| Amortization of deferred financing costs                                                     |       | 181                              |       | 249 |   |
| Changes in operating assets and liabilities, net of effect of  acquisitions:                 |       |                             |       |   |   |
| Accounts receivable, net                                                                     |       | (26                              | )          | (5,525 | ) |
| Other current assets                                                                         |       | (919                             | )          | (2,590 | ) |
| Other assets                                                                                 |       | 311                              |       | (2,938 | ) |
| Accounts payable and accrued expenses                                                        |       | 2,240                            |       | (2,712 | ) |
| Other long term liabilities                                                                  |       | (531                             | )          | 153 |   |
| Net cash provided by (used in) operating activities                                          |       | 7,284                            |       | (6,849 | ) |
| **Cash flows from investing activities:**                                                    |       |                             |       |   |   |
| Purchase of property and equipment                                                           |       | (1,200                           | )          | (1,955 | ) |
| Proceeds from sale of marketable securities                                                  |       | —                           |       | 23,000 |   |
| Purchase of marketable securities                                                            |       | —                           |       | (28,000 | ) |
| Cash paid for business acquisitions, net of cash assumed                                     |       | —                           |       | (23 | ) |
| Net cash used in investing activities                                                        |       | (1,200                           | )          | (6,978 | ) |
| **Cash flows from financing activities:**                                                    |       |                             |       |   |   |
| Borrowings under line of credit                                                              |       | 56,750                           |       | — |   |
| Repayments under line of credit.                                                             |       | (20,000                          | )          | — |   |
| Proceeds from exercise of stock options                                                      |       | 229                              |       | 581 |   |
| Income tax benefit for stock option exercises                                                |       | 66                               |       | — |   |
| Proceeds from long-term debt                                                                 |       | 60,000                           |       | — |   |
| Repayments of long-term debt                                                                 |       | (94,265                          | )          | (188 | ) |
| Payments of debt issuance costs                                                              |       | (935                             | )          | — |   |
| Repayments of capital lease obligations                                                      |       | (28                              | )          | (23 | ) |
| Net cash provided by financing activities                                                    |       | 1,817                            |       | 370 |   |
| **Net change in cash and cash equivalents**                                                  |       | 7,901                            |       | (13,457 | ) |
| **Cash and cash equivalents, beginning of period**                                           |       | 13,129                           |       | 19,457 |   |
| **Cash and cash equivalents, end of period**                                                 |       | $                                | 21,030     |   | $ | 6,000 |   |
| **Supplemental disclosures of cash flow  information:**                                      |       |                             |       |   |   |
| Cash payments for interest                                                                   |       | $                                | 1,876      |   | $ | 1,454 |   |
| Cash payments for income taxes                                                               |       | $                                | 2,551      |   | $ | 2,369 |   |

 

***See accompanying notes***

 

5

----

 

**SI International, Inc. andSubsidiaries**

**ConsolidatedStatements of Comprehensive Income(Amounts in thousands)**

**Unaudited**

 
| ** **                                       | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|
| ** **                                       | ** ** | **March 29,  2008**         | ** ** | **March 31,  2007** | ** ** |
| Net income.                                      |       | $                                | 3,431      |   | $ | 4,734 |   |
| Unrealized loss on interest rate swap agreements |       | (1,082                           | )          | (41 | ) |
|                                             |       |                             |       |   |   |
| Comprehensive income                             |       | $                                | 2,349      |   | $ | 4,693 |   |

 

***Seeaccompanying notes***

 

6

----

 

**SI International, Inc. and Subsidiaries**

 

**Notes to consolidated financialstatements**

**(Unaudited)**

 

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

 

The accompanying unauditedconsolidated financial statements of SI International, Inc. and itssubsidiaries have been prepared in accordance with U.S. generally acceptedaccounting principles for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby U.S. generally accepted accounting principles for complete financialstatements. In the opinion of management, all adjustments (consisting of normalrecurring accruals) considered necessary for a fair presentation have beenincluded. Operating results for the quarter ended March 29, 2008 are notnecessarily indicative of the results that may be expected for the year ending December 27,2008.  For further information, refer tothe financial statements and footnotes included in SI International’s AnnualReport on Form 10-K for the year ended December 29, 2007.  References to the “Company,” “we,” “us” and “our”refer to SI International, Inc. and its subsidiaries.

 

**2.****                                     ****Summary of significant accounting policies:**

 

**Principles of consolidation**

 

The accompanying consolidated financial statements include the accountsof SI International, Inc. and its wholly-owned subsidiaries.   All significant intercompany transactionsand accounts have been eliminated in consolidation.

 

**Use of estimates**

 

The preparation of financial statements in conformity with U.S.generally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

 

**Reporting periods**

 

The Company’s fiscal year is based on the calendar year and ends eachyear on the Saturday nearest, but not falling after, December 31 of thatyear.  As a result, our fiscal year maybe comprised of 52 or 53 weeks. Typically, fiscal quarters also end on the Saturday nearest, but notfalling after, the end of the calendar quarter. However, we will end those fiscal quarters presented in our Forms 10-Q(the first three fiscal quarters) on the Saturday which provides us with a13-week quarter even if that Saturday falls after the end of the calendarquarter.  As a result, in the future, ifour fiscal year comprises 53 weeks, the first three quarters shall each becomprised of 13 weeks and the fourth quarter shall be comprised of 14 weeks.

 

Consistent with this policy, our first quarter ended March 29, 2008was a 13-week quarter.

 

**Cash and cash equivalents**

 

We consider cash on deposit and all highly liquid investments withoriginal maturities of three months or less to be cash and cash equivalents.

 

**Marketablesecurities**

 

During the fiscal quarterended March 29, 2008, the Company did not invest in auction ratesecurities.  During the fiscal quarterended March 31, 2007, the Company invested in municipal auction ratesecurities. The Company’s marketable securities were classified as availablefor sale and were recorded at quoted market prices that approximated cost.

 

7

----

 

**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 reasonablyestimated.  Revenue is earned under costreimbursable, time and materials and fixed price contracts.

 

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 include performance-basedfee incentives, the Company recognizes the relevant portion of the expected feeto be 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 performance-based fees are recognizedupon 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 fixed price contracts that are based onunit pricing or level of effort, the Company recognizes revenue for the numberof units delivered in any given fiscal period. For fixed price contracts in which the Company is paid a specific amountto 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.  However, asignificant portion of the Company’s fixed price-completion contracts involvethe design and development of complex client systems.  For those contracts that are within scope ofSOP 81-1, *Accounting for Performance of Construction-Type andCertain Production-Type Contracts*, revenue is recognized on thepercentage-of-completion method using costs incurred in relation to totalestimated costs.

 

The Company’s contractswith agencies of the government are subject to periodic funding by therespective contracting agency. Funding for a contract may be provided infull at inception of the contract or ratably throughout the contract as theservices are provided.  In evaluating theprobability of funding for purposes of assessing collectibility of the contractprice, the Company considers its previous experiences with its customers,communications with its customers regarding funding status, and the Company’sknowledge of available funding for the contract or program. If funding is notassessed as probable, revenue recognition is deferred until realization isdeemed probable.

 

Contract 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.  Projected losses onall other contracts are recognized as the services and materials are provided.

 

The allowability ofcertain costs under government contracts is subject to audit by thegovernment.  Certain indirect costs arecharged to contracts using provisional or estimated indirect rates, which aresubject to later revision based on government audits of those costs.  Management is of the opinion that costssubsequently disallowed, if any, would not be significant.

 

8

----

 

**Significant customers**

 

Revenue generated from contracts with the Federalgovernment, both directly and through other prime contractors, accounted for asignificant percent of revenues in the fiscal quarters ending March 29,2008 and March 31, 2007, as follows:

 
| ** **                | ** ** | **Three Months Ended** | ** ** |
|---------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **March 29,  2008**         | ** ** | **March 31,  2007** | ** ** |
|                      |       |                             |       |   |   |
| Department of Defense     |       | 42.0                             | %          | 44.9 | % |
| Federal civilian agencies |       | 57.1                             |       | 53.4 |   |
| Commercial entities       |       | 0.9                              |       | 1.7 |   |
| Total revenue             |       | 100.0                            | %          | 100.0 | % |

 

Forthe three months ended March 29, 2008 and March 31, 2007, we had onecontract vehicle that generated more than 10% of our revenue.  That contract is our Command, Control, Communications,Computer, Intelligence, Information, Technology, Surveillance, andReconnaissance contract vehicle, or C4I2TSR, which is an Indefinite Delivery-Indefinite Quantity, or ID/IQ, contractvehicle administered and primarily used by the U.S. Air Force Space Command,however, it is also available for use by different Federal Governmentagencies.  As there are projects issuedunder C4I2TSR for different customers, we assign and report revenue generatedfrom any task order to the appropriate Company business unit.  Under this approach, for the three monthsended March 29, 2008 and March 31, 2007, our C4I2TSR contract vehiclerepresented approximately 10.7% and 20.1% of our revenue, respectively.

 

**Deferred financing costs**

 

Costs incurred in raising debt are deferred and amortized as interestexpense over the term of the related debt using the effective interest method.These deferred costs are reflected as a component of other assets in theaccompanying consolidated balance sheets. The deferred financing costs consistof the following (in thousands):

 
| ** **                    | ** ** | **March 29,  2008** | ** ** | **December 29,  2007** | ** ** |
|-------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                          |       |                     |       |                        |       |
| Deferred loan costs           |       | $                        | 6,530      |                        | $          | 5,635 |   |
| Accumulated amortization      |       | (4,168                   | )          | (3,987                      | )          |
| Deferred financing costs, net |       | $                        | 2,362      |                        | $          | 1,648 |   |

 

The increase in deferredloan costs of approximately $0.9 million in the first quarter of fiscal year2008 was due to the Company’s execution of its Second Amended and RestatedCredit Agreement on February 13, 2008, as more fully described in Note 7.

 

**Fair value of financial instruments**

 

The Company’s financial instruments consist primarily of cash and cashequivalents, marketable securities, accounts receivable, accounts payable,credit facilities, and long-term debt. In management’s opinion, the carryingamounts of these financial instruments approximate their fair values at March 29,2008 and December 29, 2007.

 

**Stock-based compensation**

 

Effective January 1, 2006,the Company adopted the provisions of Statement of Financial AccountingStandards (SFAS) No. 123R, *Share Based Payment*,using the modified prospective transition method.  Due to the use of the modified prospectivemethod, prior interim periods and fiscal years do not reflect any restatedamounts.  The Company accelerated the vesting of unvested stockoptions previously awarded to employees, officers and directors in December 2005;thus the Company had no unvested stock options on January 1, 2006.  Since January 1, 2006, the Company hasissued 499,525 stock options through March 29, 2008.  The total stock compensation expense recognizedfor stock options during the quarters ended March 29, 2008 and March 31,2007 was $0.2 million and $0.1 million, respectively. The total remainingunrecognized compensation expense related to the unvested options as of March 29,2008 was $3.9 million.

 

9

----

 

From January 1, 2006through March 29, 2008, the Company has issued 179,725 shares ofrestricted stock to directors and employees under its 2002 Amended and RestatedOmnibus Stock 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 endedMarch 29, 2008 and March 31, 2007 was $0.2 million and$0.1 million, respectively. The total remaining unrecognized compensationexpense related to the unvested restricted stock awards as of March 29,2008 was $3.5 million.

 

Thefair value of each option is estimated on the date of grant using theBlack-Scholes option-pricing model with the following assumptions used forgrants during the fiscal periods ended March 29, 2008 and March 31,2007:

 
| ** **                      | ** ** | **Three Months Ended**       | ** ** |
|---------------------------------|------------|------------------------------|------------|
| ** **                      | ** ** | **March 29, 2008** | ** ** | **March 31, 2007** | ** ** |
| Risk-free interest rate         |       | 2.89                         | %          | 4.48 | % |
| Expected life of options        |       | 5  years                     |       | 5  years |   |
| Expected stock price volatility |       | 42                           | %          | 36 | % |
| Expected dividend yield         |       | 0                            | %          | 0 | % |

 

Therisk-free interest is based on U.S. Treasury yields in effect at the time ofgrant over the expected term of the option. The expected life of options isderived from the Company’s historical option exercise data. The expected stockprice volatility is based on the historical volatility of the Company’s commonstock.

 

Priorto the adoption of SFAS No. 123R, the Company presented all tax benefitsrelated to the exercise of stock options as operating cash flows in theconsolidated statement of cash flows. SFAS No. 123R requires the cash flows resulting from the taxbenefits generated from tax deductions in excess of the compensation costsrecognized for those options to be classified as financing cash flows.

 

**Earnings per share**

 

Basic earnings per share is computed by dividing reported earningsavailable to common stockholders by the weighted average number of sharesoutstanding without consideration of common stock equivalents or otherpotentially dilutive securities.  Dilutedearnings per share gives effect to common stock equivalents and otherpotentially dilutive securities outstanding during the period.

 

The following details the computation of netincome per common share (in thousands):

 
| ** **                                                  | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                  | ** ** | **March 28,  2008**         | ** ** | **March 31,  2007** | ** ** |
|                                                        |       |                             |       |   |   |
| Net Income – Basic and Diluted                         |       | $                                | 3,431      |   | $ | 4,734 |   |
|                                                        |       |                             |       |   |   |
| **Weighted-average share calculation:**                     |       |                             |       |   |   |
| Basic weighted-average shares outstanding                   |       | 13,101                           |       | 12,977 |   |
| Treasury stock effect of stock options and restricted stock |       | 214                              |       | 275 |   |
|                                                        |       |                             |       |   |   |
| Diluted weighted average shares outstanding                 |       | 13,315                           |       | 13,252 |   |
|                                                             |            |                                  |            |  |  |  |  |

 

**DerivativeInstrument and Hedging Activities**

 

The Company accounts forderivative instruments and hedging activities in accordance with SFAS No. 133,*Accounting for Derivative Instruments andHedging Activities*, as amended. Derivatives are recognized as eitherassets or liabilities in the 

 

10

----

 

consolidated balance sheet,and gains and losses are recognized based on changes in the fair values. Gainsand losses on derivatives designated as a hedge, or deemed to be an effectivehedge, are deferred in accumulated other comprehensive loss in the accompanyingconsolidated balance sheets. Gains and losses on derivatives that are notdesignated as a hedge, or that are not intended to be an effective hedge, arerecognized upon the changes in fair values and are recorded in the accompanyingconsolidated statements of operations. The classification of gains and lossesresulting from the changes in fair values is dependent on the intended use ofthe derivative and its resulting designation. The Company uses the change invariable cash flow method to 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 fortrading purposes, nor is it a party to leveraged derivatives.

 

**Nonqualified Deferred 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.

 

**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 year balances have been reclassifiedto conform to the presentation of the current year.

 

**New accounting pronouncements**

 

In the first quarter of2008, we adopted Statement of Financial Accounting Standards (SFAS) No. 157,*Fair Value Measurements*, whichdefines fair value, establishes a market-based hierarchy for measuring fairvalue and expands disclosures about fair value measurements. SFAS No. 157is applicable whenever another accounting pronouncement requires or permitsassets and liabilities to be measured at fair value, but does not require anynew fair value measurements. The SFAS No. 157 requirements for certainnon-financial assets and liabilities have been deferred until the first quarterof 2009 in accordance with Financial Accounting Standards Board Staff Position(FSP) 157-2. The adoption of SFAS No. 157 did not have a material impacton our results of operations, 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; |
|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------|

 

11

----

 
|   | · |   | 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 March 29, 2008 totaled$4.4 million and $8.6 million, respectively. The $4.4 million of financialassets, held in a rabbi trust, and $5.0 million of financial liabilities arerelated to our non-qualified deferred compensation plan.  We determined the value of the deferredcompensation plan assets and liabilities using Level 1 methodology.  The remaining $3.6 million of financialliabilities relates to an interest rate swap derivative financial instrumentwith the fair value measured using the Level 2 methodology.

 

In February 2007,the FASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities—Including anAmendment of FASB Statement No. 115* . SFAS No. 159 permitsentities to choose to measure certain financial instruments and other items atfair value. The fair value option generally may be applied instrument byinstrument, is irrevocable, and is applied only to entire instruments and notto portions of instruments. SFAS No. 159 is effective for financialstatements issued for fiscal years beginning after November 15, 2007. Theadoption of this statement did not have a material impact on its financialcondition, results of operations or cash flows, as we did not elect to measureany items at fair value under SFAS No. 159.

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), *Business Combinations*. SFAS No. 141R establishes principlesand requirements for how companies recognize and measure identifiable assetsacquired, liabilities assumed, and any non-controlling interest in connectionwith a business combination; recognize and measure the goodwill acquired in abusiness combination; and determine what information to disclose to enableusers of the financial statements to evaluate the nature and financial effectsof the business combination. SFAS No. 141R is effective for businesscombinations for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning on or after December 15, 2008. TheCompany has not yet evaluated what impact, if any, SFAS No. 141R will haveon its results of operations or financial position.

 

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

 

Accounts receivable consists of the following (inthousands):

 
| ** **                                                                                         | ** ** | **March 29,  2008** | ** ** | **December 29,  2007** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                                                                               |       |                     |       |                        |       |
| Billed accounts receivable                                                                         |       | $                        | 48,404     |                        | $          | 52,814 |   |
| Unbilled accounts receivable:                                                                      |       |                     |       |                        |       |
| Currently billable                                                                                 |       | 64,329                   |       | 58,700                      |       |
| Unbilled retainages and milestone payments expected to be billed  within the next 12 months        |       | 4,572                    |       | 5,837                       |       |
| Indirect costs incurred and charged to cost-plus contracts in excess  of provisional billing rates |       | 1,102                    |       | 1,030                       |       |
| Total unbilled accounts receivable                                                                 |       | 118,407                  |       | 65,567                      |       |
| Allowance for doubtful accounts                                                                    |       | (1,283                   | )          | (1,283                      | )          |
| Accounts receivable, net                                                                           |       | $                        | 117,124    |                        | $          | 117,098 |   |

 

The currently billable amounts included asunbilled accounts receivable as of March 29, 2008 and December 29, 2007represent amounts which are billed during the following quarter of the currentyear. They are billings for services rendered prior to quarter-end, which arebilled once necessary billing data has been collected and an invoice isproduced.

 

12

----

 

**4.****                                     ****Property and equipment:**

 

Property and equipment consist of the following(in thousands):

 
| ** **                                          | ** ** | **March 29,  2008** | ** ** | **December 29,  2007** | ** ** |
|-----------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Computers and equipment                             |       | $                        | 12,570     |                        | $          | 12,338 |   |
| Software                                            |       | 4,466                    |       | 4,628                       |       |
| Furniture and fixtures                              |       | 6,459                    |       | 6,382                       |       |
| Leasehold improvements                              |       | 8,069                    |       | 7,016                       |       |
| Total property and equipment                        |       | 31,564                   |       | 30,364                      |       |
| Less—Accumulated depreciation and amortization |       | (16,378                  | )          | (15,284                     | )          |
| Property and equipment, net                         |       | $                        | 15,186     |                        | $          | 15,080 |   |

 

Property and equipment includes assets financed under capital leaseobligations of approximately $195,000 and $221,000, net of accumulatedamortization, as of March 29, 2008 and December 29, 2007,respectively.

 

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

 

Intangibleassets consist of the following (in thousands):

 
| ** **                         | ** ** | **March 29,  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     |       | (11,229                  | )          | (10,114                     | )          |
| Intangible assets, net             |       | $                        | 25,468     |                        | $          | 26,583 |   |

 

Intangibleassets from acquisitions, which consist primarily of contractual customerrelationships, are amortized utilizing an accelerated method over 6 to 14years, based on their estimated useful lives. The weighted-average amortizationperiod of total intangible assets as of March 29, 2008, is 9.0 years.  Amortization expense is estimated to be $4.3million, $3.8 million, $3.4 million, $2.9 million, and $2.7 million for theyears 2008, 2009, 2010, 2011 and 2012, respectively.

 

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

 

Accrued expenses and other current liabilitiesconsist of the following (in thousands):

 
| ** **                                     | ** ** | **March 29,  2008** | ** ** | **December 29,  2007** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Accrued vacation                               |       | $                        | 8,549      |                        | $          | 7,740 |   |
| Accrued compensation                           |       | 8,787                    |       | 11,412                      |       |
| Accrued insurance                              |       | 2,974                    |       | 1,944                       |       |
| Accrued subcontractor costs                    |       | 10,313                   |       | 5,947                       |       |
| Fair value of interest rate swap               |       | 3,580                    |       | 1,799                       |       |
| Deferred revenue                               |       | 3,211                    |       | 2,338                       |       |
| Other accrued liabilities                      |       | 4,134                    |       | 3,992                       |       |
| Accrued expenses and other current liabilities |       | $                        | 41,548     |                        | $          | 35,172 |   |

 

13

----

 

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

 

Debtconsists of the following (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    |   |

 
| ** **                                                                                                                                                                                                                                       | ** ** | **March 29,  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 |       | $                        | 56,750     |   |
| 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                                                                                                                                                                                                                                       |       | $                        | 116,750    |   |

 

----

*As further discussed below, the total debt outstanding as of December29, 2007 was pursuant to the Amended and Restated Credit Agreement, whereas thetotal debt outstanding as of March 29, 2008 was pursuant to the Second AmendedCredit Agreement.

 

Since2002, the Company has maintained a credit facility with Wachovia Bank, NationalAssociation (“Wachovia Bank”) acting as Administration Agent for a consortiumof lenders.  The credit facility has beenamended from time to time since 2002. The credit facility is secured by a pledge of substantially all of ourcurrent and future tangible and intangible assets, as well as those of ourcurrent and future subsidiaries, including accounts receivable, inventory andcapital stock.

 

On February 9, 2005,we entered into our 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 or the Second Amendment, dated June 8, 2007.The Second 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 (the “SecondAmended Credit Agreement”).  The amendedand restated credit facility consists of a revolving line of credit of up to$140.0 million and a term loan of $60.0 million.  As of March 29, 2008, we had $60.0million in term debt and approximately $56.7 million of revolving credit debtoutstanding.  The Second Amended CreditAgreement also amended debt covenant thresholds and lowered the variable ratemargins that are be to be applied to LIBOR or an alternative base rate indetermining the periodic interest rate. In connection with the Second Amended Credit Agreement, the Company incurredcommitment fees of approximately $0.9 million.

 

 At the time the Company borrows funds fromeither of the loan facilities under the Second Amended Credit Agreement, it maychoose from two interest rate options. The Company may elect to have the borrowings bear interest at floatingrates equal to LIBOR plus a spread ranging from 87.5 to 150 basis points or analternative base rate plus a spread ranging from zero to 50 basis points. Undereither the LIBOR or an alternative base rate option, the exact interest ratespread will be determined based upon the Company’s leverage ratio as defined inthe Second Amended Credit Agreement.

 

Theterm loan facility requires final payment in full on the term loan maturitydate of February 13, 2013.  Theoutstanding balance under the revolving line of credit facility will accrueinterest at a variable rate, with interest only payments being required untilthe facility matures on February 13, 2013.   We may repay either or both of the term loanfacility and the revolving loan facility in whole or in part at anytime priorto their respective maturity dates without penalty.

 

14

----

 

**8.             Commitments andcontingencies:**

 

**Leases**

 

As of March 29, 2008, the Company hasnoncancelable operating leases, primarily for real estate, that expire over thenext ten years.   Rental expense duringthe quarter ended March 29, 2008 was approximately $2.5 million, comparedto rental expense of approximately $2.2 million during the quarter ended March 31,2007.

 

**Contract cost audits**

 

Payments to the Company on government costreimbursable contracts are based on provisional, or estimated indirect rates,which are subject to audit on an annual basis by the Defense Contract AuditAgency (DCAA). The cost audits result in the negotiation and determination ofthe final indirect cost rates that the Company may use for the period(s) audited.The final rates, if different from the provisional rates, may create anadditional receivable or liability for the Company. The Company’s revenuerecognition policy calls for revenue recognized on all cost reimbursablegovernment contracts to be recorded at actual rates unless collectibility isnot reasonably assured. To the extent the indirect rate differential creates aliability for the Company, the differential is recognized as a reduction torevenue when identified.

 

**Litigation and claims**

 

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

 

The SEI acquisition agreement provides for apurchase price adjustment based upon the working capital of SEI as of theclosing date. Subsequent to the closing date, we received a payment of $1.6million in connection with services performed prior to the closing date thatSEI had not previously billed, and was not authorized to bill, its customer asof the closing date. The SEI selling stockholders have asserted that they areentitled to a credit in connection with the calculation of working capitaladjustment in an amount equal to the amount received by us for thispost-closing payment. We believe that, in accordance with generally acceptedaccounting principles, the SEI selling stockholders should not receive thebenefit of the post-closing payment. In accordance with the terms of the SEIacquisition 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, the Board of Directors voted toadopt the 2002 Amended and Restated Omnibus Stock Incentive Plan (the “Amendedand Restated Plan”) and the Amended and Restated Plan was approved by ourstockholders at the annual meeting of stockholders held in June 2005. TheAmended and Restated Plan amends and restates the Plan by (i) increasingthe number of shares of common stock reserved and available under the Plan by1,000,000 shares to a total share allocation of 2,920,000, (ii) permittingthe grant of deferred shares, performance shares and performance units, (iii) prohibitingrepricing of options without prior stockholder approval, (iv) limiting thenumber of shares of common stock and performance units subject to awards aparticipant may receive in any calendar year to 300,000 and 500,000,respectively, and adding other administrative provisions to comply with theperformance-based compensation exception to the deduction limit of Section 162(m) ofthe Internal Revenue Code of 1986, as amended; (v) eliminating the provisionthat previously provided for an automatic increase in the number of sharesreserved for issuance under the Amended and Restated Plan each fiscal year by anumber equal to the lesser of 160,000 shares and an amount determined by theBoard of Directors, (vi) providing that non-qualified stock option grantswill be priced 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.

 

15

----

 

A summary of option activity under the plan as of March 29,2008 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                                |       | 196,100     |       |                     |       | $                                         | 23.58      |   |
|                                       |       |        |       |                     |       |                                      |       |
| 2008 exercises                             |       | (15,922     | )          |                     |       | $                                         | 13.74      |   |
|                                       |       |        |       |                     |       |                                      |       |
| 2008 forfeitures                           |       | (13,590     | )          |                     |       | $                                         | 27.65      |   |
|                                       |       |        |       |                     |       |                                      |       |
| Balance, March 29, 2008               |       | 1,657,749   |       |                     |       | $                                         | 23.12      |   |
|                                       |       |        |       |                     |       |                                      |       |
| Options exercisable at March 29, 2008 |       |        |       | 1,236,207                |       |                                      |       |

 

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

 

A summary of restricted awards activity under theplan as of March 29, 2008 is presented below:

 
| ** **                                               | ** ** | **Shares** | ** ** | **Weighted-average  fair value** | ** ** |
|----------------------------------------------------------|------------|------------|------------|---------------------------------------|------------|
|                                                     |       |       |       |                                  |       |
| Non-vested shares outstanding at  December 29, 2007 |       | 98,872     |       | $                                     | 28.98      |   |
|                                                     |       |       |       |                                  |       |
| 2008 grants                                              |       | 71,700     |       | $                                     | 23.61      |   |
|                                                     |       |       |       |                                  |       |
| 2008 vests                                               |       | (4,072     | )          | $                                     | 28.32      |   |
|                                                     |       |       |       |                                  |       |
| 2008 forfeitures                                         |       | (800       | )          | $                                     | 28.59      |   |
|                                                     |       |       |       |                                  |       |
| Non-vested shares outstanding at  March 29, 2008    |       | 165,700    |       | $                                     | 25.75      |   |

 

**Stock repurchase program**

 

During the Company’s Board of Directors meeting on December 6,2005, the Board authorized the repurchase of up to 300,000 shares of its commonstock.  On March 24, 2008, theCompany announced that its Board of Directors authorized the expansion of**the Company’s stock repurchase program for the repurchaseof up to an additional 700,000 shares of its common stock, which brings thetotal of shares of common stock authorized for repurchase to 1.0 million.  The Company had approximately 13.1 millionshares outstanding as of March 29, 2008.  The stock repurchaseprogram will be funded, up to an aggregate maximum dollar amount of $25million, from available cash and the Company’s existing credit facility.  The timing and volume of any purchases willbe guided by management’s assessment of market conditions, securities lawlimitations, the number of shares to common stock outstanding and alternativeuses for cash resources.  Shares may bepurchased in the open market, including through block purchases, or throughprivately negotiated transactions.  Thestock repurchase program may be suspended or discontinued at any time andwithout prior notice.

 

16

----

 

**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

*The following discussion and analysis should be read in conjunctionwith the consolidated financial statements and related notes included elsewherein this Form 10-Q. This discussion and analysis contains forward-lookingstatements that involve known and unknown risks, uncertainties, and otherfactors that may cause our actual results, level of activity, performance orachievements to be materially different from any future results, levels ofactivity, performance or achievements expressed or implied by suchforward-looking statements. In some cases, you can identify these statements byforward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,”“intend,” “may,” “plan,” “potential,” “should,” “will,” and “would” or similarwords. You should read statements that contain these words carefully becausethey discuss our future expectations, contain projections of our future resultsof operations or of our financial position, or state other forward-lookinginformation. We believe that it is important to communicate our futureexpectations to our investors. However, there may be events in the future thatwe are not able to predict accurately or control. In particular, statementsthat we make in this section relating to the sufficiency of anticipated sourcesof capital to meet our cash requirements are forward- looking statements. Ouractual results could differ materially from those anticipated in theseforward-looking statements for many reasons, including as a result of some ofthe factors described below, elsewhere in this Form 10-Q and in thesection entitled “Risk Factors” in our Form 10-K  for the fiscal year ended December 29,2007.   You should not place unduereliance on these forward-looking statements, which apply only as of the dateof the filing of this Form 10-Q.*

 

*The Company’s fiscal year is based on the calendar year and ends eachyear on the Saturday nearest, but not falling after, December 31 of thatyear.  Typically, fiscal quarters alsoend on the Saturday nearest, but not falling after, the end of the calendarquarter.  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 may be comprised of 52 or 53 weeks.*

 

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

 

**Overview**

 

We are, first and foremost, a provider ofinformation technology and network solutions (IT) to the Federal Government.Our clients include the U.S. Air Force, U.S. Army, U.S. Navy, Department ofState, Department of Homeland Security, Department of Energy, Department ofAgriculture, National Institutes of Health, Federal Retirement ThriftInvestment Board, National Guard Bureau, and the Intelligence community. Wecombine our technology and industry expertise to provide a full spectrum ofstate-of-the-practice solutions and services, from design and development toimplementation and operations, which assist our clients in achieving missionsuccess. We believe that our company is distinguishable from our peers withinthe federal IT sector in several important respects.

 

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

 

For the fiscal quarters ended March 29, 2008and March 31, 2007, we received 99.1% and 98.3%, respectively, of ourrevenues from services we provided to various departments and agencies of theFederal Government, both directly and through other prime contractors, and 0.9%and 1.7%, respectively, of our total revenues from work performed forcommercial entities. The following table shows our revenues from the clientgroups listed as a percentage of total revenue. Revenue data for the DoDincludes revenue generated from work performed under engagements for both theDoD and the Intelligence community.

 

17

----

 
| ** **                | ** ** | **Three Months Ended** | ** ** |
|---------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **March 29,  2008**         | ** ** | **March 31,  2007** | ** ** |
|                      |       |                             |       |   |   |
| Department of Defense     |       | 42.0                             | %          | 44.9 | % |
| Federal civilian agencies |       | 57.1                             | %          | 53.4 | % |
| Commercial entities       |       | 0.9                              | %          | 1.7 | % |
|                      |       |                             |       |   |   |
| Total revenue             |       | 100.0                            | %          | 100.0 | % |

 

We derived a substantial majority of our revenuesfrom governmental contracts under which we act as a prime contractor. We alsoprovide services indirectly as a subcontractor. The following table shows ourrevenues as prime contractor and as subcontractor as a percentage of our totalrevenue for the following periods:

 
| ** **             | ** ** | **Three Months Ended** | ** ** |
|------------------------|------------|----------------------------------|------------|
| ** **             | ** ** | **March 29,  2008**         | ** ** | **March 31,  2007** | ** ** |
|                   |       |                             |       |   |   |
| Prime contract revenue |       | 84.1                             | %          | 80.0 | % |
| Subcontract revenue    |       | 15.9                             | %          | 20.0 | % |
| Total revenue          |       | 100.0                            | %          | 100.0 | % |

 

Our services are provided to clients pursuant tothree types of contracts: cost reimbursable, time and materials and fixed pricecontracts. The following table shows our revenues from each of these types ofcontracts as a percentage of our total revenue for the following periods:

 
| ** **         | ** ** | **Three Months Ended** | ** ** |
|--------------------|------------|----------------------------------|------------|
| ** **         | ** ** | **March 29,  2008**         | ** ** | **March 31,  2007** | ** ** |
|               |       |                             |       |   |   |
| Cost reimbursable  |       | 23.4                             | %          | 31.9 | % |
| Time and materials |       | 38.6                             | %          | 33.2 | % |
| Fixed price        |       | 38.0                             | %          | 34.9 | % |
|               |       |                             |       |   |   |
| Total revenue      |       | 100.0                            | %          | 100.0 | % |

 

Our cost reimbursable revenues, as a percentage oftotal revenues decreased primarily due to lower equipment pass-through revenueon our C4I2TSR program.

 

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

 

Revenue on time and materials contracts arerecognized based on direct labor hours expended at contract billing rates andadding other billable direct costs.  Tothe extent 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 

 

18

----

 

we may suffer a loss underthe contract. We recognize revenues under time and materials contracts bymultiplying the number of direct labor hours expended by the contract billingrates and adding the effect of other billable direct costs.

 

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

 

The Company’s contracts withagencies of the government are subject to periodic funding by the respectivecontracting agency.  Funding for acontract may be provided in full at inception of the contract or ratablythroughout the contract as the services are provided.  In evaluating 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.  Iffunding is not assessed as probable, revenue recognition is deferred untilrealization is probable.

 

Contract revenue recognitioninherently involves estimation, including the contemplated level of effort toaccomplish the tasks under the contract, the cost of the effort, and an ongoingassessment of progress toward completing the contract.  From time to time, as part of the normalmanagement processes, facts develop that require revisions to estimated totalcosts or revenues expected.  Thecumulative impact of any revisions to estimates and the full impact ofanticipated losses on any type of contract are recognized in the period inwhich they become known.

 

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

 

**Liquidity and Capital Resources**

 

*General.*  Short-term liquidity requirementsare created by our use of funds for working capital, capital expenditures, andthe need to provide debt service. We expect to meet these requirements througha combination of cash flow from operations and borrowings under our SecondAmended Credit Agreement.

 

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

 

Under the terms of our Second Amended CreditAgreement, the Company is required to maintain compliance with financial andnon-financial covenants.  The Company isin compliance with all such covenants as of March 29, 2008.

 

*Cash and Cash Equivalents.*   We consider cash on deposit andall highly liquid investments with original maturities of three months or lessto be cash and cash equivalents. Cash and cash equivalents as of March 29,2008 and March 31, 2007 were $21.0 million and $6.0 million,respectively.

 

*Cash Flow.*   The following table sets forthour sources and uses of cash and cash equivalents for the three months ended March 29,2008 and March 31, 2007:

 
| ** **                                            | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **March 29,  2008**         | ** ** | **March 31,  2007** | ** ** |
| ** **                                            | ** ** | **(in thousands)**          | ** ** |
| Net cash provided by (used in) operations             |       | $                                | 7,284      |   | $ | (6,849 | ) |
| Net cash used in investing activities                 |       | (1,200                           | )          | (6,978 | ) |
| Net cash provided by financing activities             |       | 1,817                            |       | 370 |   |
| Net increase (decrease in) cash and cash  equivalents |       | $                                | 7,901      |   | $ | (13,457 | ) |

 

19

----

 

Our operating cash flow is primarily affected by theoverall profitability of our contracts, our ability to invoice and collect fromour clients in a timely manner, and our ability to manage our vendor payments.We bill most of our clients monthly after services are rendered. Cash providedby operations for the three months ended March 29, 2008 was attributableto net income of $3.4 million, plus depreciation, amortization and othernon-cash items of $2.8 million, and a decrease in working capital and otheroperating assets and liabilities of $1.1 million.  Cash used in operations in the three monthsended March 31, 2007 was attributable to net income of $4.7 million, plusdepreciation, amortization and other non-cash items of $2.0 million, offset byan increase in working capital and other operating assets and liabilities of$13.5 million.

 

Our cash flow used in investing activities consistsprimarily of capital expenditures, the purchase and sale of marketablesecurities, and acquisitions. In the three months ended March 29, 2008, wepurchased capital assets totaling $1.2 million. During the three months ended March 31, 2007, we purchased $28.0million of marketable securities and purchased capital assets totaling $2.0million. We partially offset the cash use with $23.0 million of proceeds fromthe sale of marketable securities.

 

Our cash flow provided by financing activitiesconsists primarily of borrowing under and payments on our credit facility andproceeds from the issuance and exercise of common stock. For the three monthsended March 29, 2008, cash flow provided by financing activities consistsof proceeds of $0.3 million from the exercise of stock options, plus proceedsof our credit facility refinancing of $116.8 million, partially offset by repaymentof the line of credit and term loan portions under our prior credit facility of$114.3 million plus payments of debt issuance costs of $0.9 million.    Cash provided by financing activities forthe three months ended March 31, 2007 consists of proceeds of $0.6 millionfrom the exercise of stock options, partially offset by the $0.2 millionrepayments of the term loan portion of our credit facility and capital lease.

 

**Results of Operations**

 

The following table sets forth certain itemsfrom our consolidated statements of operations as a percentage of revenues forthe periods indicated:

 
| ** **                               | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **March 29,  2008**         | ** ** | **March 31,  2007** | ** ** |
|                                     |       |                             |       |   |   |
| Revenue                                  |       | 100.0                            | %          | 100.0 | % |
| Costs and expenses:                      |       |                             |       |   |   |
| Direct costs                             |       | 65.7                             |       | 62.3 |   |
| Indirect costs                           |       | 27.1                             |       | 28.2 |   |
| Depreciation                             |       | 0.8                              |       | 0.7 |   |
| Amortization                             |       | 0.9                              |       | 0.7 |   |
| Total operating expenses                 |       | 94.5                             |       | 91.9 |   |
| Income from operations                   |       | 5.5                              |       | 8.1 |   |
| Interest expense, net                    |       | (1.3                             | )          | (1.2 | ) |
| Income before provision for income taxes |       | 4.3                              |       | 6.9 |   |
| Provision for income taxes               |       | 1.7                              |       | 2.7 |   |
|                                     |       |                             |       |   |   |
| Net income                               |       | 2.6                              | %          | 4.2 | % |

 

**Three months ended March 29, 2008compared with three months ended March 31, 2007**

 

*Revenue.*  For the three months ended March 29,2008, our revenues increased 18.2% to $134.4 million from$113.7 million for the three months ended March 31, 2007.   Revenues from work under Federal Governmentcontracts increased 19.1% to $133.0 million for the three months ended March 29,2008 from $111.7 million for the three months ended March 31, 2007. This increase was primarily attributable tothe acquisition 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.  We continue to focus primarily on opportunities for the Federal Government.

 

20

----

* *

*Cost of services.*  Cost of services include direct labor andother direct costs such as materials and subcontractor costs, incurred toprovide our services and solutions to our customers.  Generally, changes in costs of services arecorrelated to changes in revenue as resources are consumed in the production ofthat revenue. For the three months ended March 29, 2008, cost of servicesincreased 24.5% to $88.3 million from $70.9 million for the three monthsended March 31, 2007.  This increasewas attributable primarily to the increase in revenue. As a percentage ofrevenue, cost of services was 65.7% for the three months ended March 29,2008 as compared to 62.3% for the three months ended March 31, 2007.  The increase in cost of services, as apercentage of revenue, is due primarily to the Company increasing its use ofsubcontractors on programs for which we are acting as the prime contractor andhigher costs during the quarter 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 March 28, 2008,indirect costs increased 13.4% to $36.4 million from $32.1 million for thethree months ended March 31, 2007.  This $4.3 million increase was primarilyattributable to the expected growth of support functions necessary tofacilitate and administer the growth in direct costs, as well as theintegration of LOGTEC, Inc.  Asa percentage of revenue, selling, general and administrative costs were 27.1%for the three months ended March 29, 2008 as compared to 28.2% for thethree months ended March 31, 2007.

 

*Depreciation and amortization.*Depreciation and amortization includes thedepreciation of computers, furniture and other equipment, the amortization ofthird party software we use internally, and the depreciation of leaseholdimprovements.  * *For the threemonths ended March 29, 2008, depreciation expense was $1.1 million, anincrease****compared to $0.8 million for the threemonths ended March 31, 2007.  As apercentage of revenue, depreciation expense was 0.8% for the three months endedMarch 29, 2008 compared to 0.7% for the three months ended March 31,2007.

 

*Amortization of intangible assets.*Amortizationof intangible assets includes the amortization of intangible assets acquired inconnection with acquisitions in accordance with SFAS 142, Goodwill and OtherIntangible Assets.  Identifiableintangible assets are amortized over their estimated useful lives.  Non-compete agreements are generallyamortized straight-line over the term of the agreement, while contracts andrelated client relationships are amortized using an accelerated method overtheir estimated useful lives.  For thethree months ended March 29, 2008, amortization of intangible assets was$1.1 million, compared to $0.7 million for the three months ended March 31,2007.   As a percentage of revenueamortization of intangible assets was 0.8% for the three months ended March 29,2008 compared to 0.7% for the three months ended March 31, 2007,with the increase due to the acquisition of LOGTEC, Inc.

 

*Income from operations.*  For the three months ended March 29,2008, income from operations decreased 19.6% to $7.4 million from$9.2 million for the three months ended March 31, 2008.  This decrease was attributable primarily toincreased costs of services, as described above.  As a percentage of revenue, income fromoperations was 5.5% for the three months ended March 29, 2008 compared to8.1% for the three months ended March 31, 2007.

 

*Interest expense, net.*  Interest expense, net increased 21.4% to $1.7million for the three months ended March 29, 2008 from $1.4 millionfor the three months ended March 31, 2007. This increase was attributableprimarily to an increase in debt resulting from our acquisition of LOGTEC, Inc. The weighted average borrowings underour credit facility for the three  monthsended March 29, 2008 were $45.3 million higher than the weighted averageborrowings under our credit facility for the three months ended March 31,2007.  As a percentage of revenue,interest expense, net was 1.3% for the three months ended March 29, 2008as compared to 1.2% for the three months ended March 31, 2007.

 

*Provision for income taxes.* The provision for income taxes was $2.3 million in the three monthsended March 29, 2008, compared to $3.1 million for the three monthsended March 31, 2007.  Our first quarters of 2008 and 2007 taxprovision, represent an estimated annual effective tax rate of 40%, and 39%,respectively. Our estimated annual effective tax rate is greater than thefederal statutory rate of 35% due primarily to state income taxes.

 

**Off-Balance Sheet Arrangements**

 

As of March 29, 2008, we have no off-balance sheet arrangementsthat are reasonably likely to have a current or future material effect on ourfinancial condition, revenues, or expenses, result of operations, liquidity,capital expenditures, or capital resources.

 

21

----

 

**Critical Accounting Policies and Estimates**

 

Oursignificant accounting policies are described in Note 2 to ouraccompanying consolidated financial statements. We consider the accountingpolicies in this section to be critical to the understanding of our results ofoperations. Our critical accounting policies also include the areas where wehave made what we consider to be particularly difficult, subjective or complexjudgments in making estimates, and where these estimates can significantlyimpact our financial results under different assumptions and conditions. Weprepare our financial statements in conformity with U.S. generally acceptedaccounting principles. As such, we are required to make certain estimates, judgmentsand assumptions 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*

 

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

 

Undercost reimbursable contracts, the Company is reimbursed for allowable costs, andpaid a fee, which may be fixed or performance-based. Revenues on costreimbursable contracts are recognized as costs are incurred plus an estimate ofapplicable fees earned. The Company considers fixed fees under costreimbursable contracts to be earned in proportion of the allowable costsincurred in performance of the contract. For cost reimbursable contracts thatinclude performance based fee incentives, the Company recognizes the relevantportion of the expected fee to be awarded by the customer at the time such feecan be reasonably estimated, based on factors such as the Company’s prior awardexperience and communications with the customer regarding performance.  Other performance based fees are recognizedupon customer approval.

 

Revenueson time and materials contracts are recognized based on direct labor hoursexpended at contract billing rates and adding other billable direct costs.  For fixed price contracts that are based onunit pricing or level of effort, the Company recognizes revenue for the numberof units delivered in any given fiscal period. For fixed price contracts in which the Company is paid a specific amountto provide a particular service for a stated period of time, revenue isrecognized ratably over the service period.

 

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

 

TheCompany’s contracts with agencies of the government are subject to periodicfunding by the respective contracting agency. Funding for a contractmay be provided in full at inception of the contract or ratably throughoutthe contract as the services are provided. In evaluating 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 theCompany’s knowledge of available funding for the contract or program. Iffunding is not assessed as probable, revenue recognition is deferred untilrealization is deemed probable.

 

Contractrevenue recognition inherently involves estimation, including the contemplatedlevel of effort to accomplish the tasks under contract, the cost of the effort,and an ongoing assessment of progress toward completing the contract. From timeto time, 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.  Projected losses onall other contracts are recognized as the services and materials are provided.

 

Theallowability of certain costs under government contracts is subject to audit bythe government.  Certain indirect costsare charged to contracts using provisional or estimated indirect rates, whichare subject to later revision based on government audits of those costs.  Management is of the opinion that costssubsequently disallowed, if any, would not be significant.

 

22

----

 

*Stock Based Compensation*

 

EffectiveJanuary 1, 2006, the Company adopted the provisions of Statement ofFinancial Accounting Standards (SFAS) No. 123R, *Share BasedPayment*, using the modified prospective transition method.  Due to the use of the modified prospectivemethod, prior interim periods and fiscal years do not reflect any restatedamounts.  The Company accelerated the vestingof 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 has issued 679,250 stock options and restricted stock awardsthrough March 29, 2008.  The totalstock compensation expense recognized for stock options and restricted stockawards during the quarter ended March 29, 2008 was $0.4 million. The totalremaining unrecognized compensation expense related to the unvested options andrestricted stock awards as of March 29, 2008 was $3.9 million and $3.5million, respectively.

 

**Item 3.  Quantitative and Qualitative Disclosures AboutMarket Risk.**

 

Weare exposed to certain financial market risks, the most predominant beingfluctuations in interest rates for borrowings under our credit facility.Interest rate fluctuations are monitored by our management as an integral partof our overall risk management program, which recognizes the unpredictabilityof financial markets and seeks to reduce the potentially adverse effect on ourresults of operations. As part of this strategy, we may use interest rate swaparrangements to manage or hedge our interest rate risk. We do not usederivative financial instruments for speculative or trading purposes.

 

Asof March 29, 2008, we had $116.8 million outstanding under our SecondAmended Credit Agreement. A 1% change in interest rates would have resulted inour interest expense fluctuating by approximately $292,000 for the three monthsended March 29, 2008.

 

Effective August 13, 2007, an interest swapagreement came into effect which reduced our exposure associated with themarket volatility of floating LIBOR interest rates. This agreement has anotional principal amount of $60.0 million and, as of March 29, 2008,had a fixed rate of 5.045%. This agreement is a hedge against term debt, whichbears interest at LIBOR plus a margin which has a current rate of 4.32%. Atstated 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 March 29,2008 was a current liability of $3.6 million.

 

In addition, historically, our investment positionshave been relatively small and short-term in nature. We have typically madeinvestments in a fund with an effective average maturity of fewer than 40 daysand a portfolio make-up consisting primarily of commercial paper and notes,variable rate instruments, and, to a lesser degree, overnight securities andbank instruments.  Since our initialpublic offering, the Board of Directors approved an investment policy thatrequires us to invest in relatively short-term, high quality, and highliquidity obligations.

 

**Item 4.  Controls and Procedures.**

 

*Evaluation of Disclosure Controls and Procedures.* The Company performed an evaluation underthe supervision 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 March 29,2008.  Based upon the evaluation, theCompany’s Chief Executive Officer and Chief Financial Officer have concludedthat, as of March 29, 2008, the Company’s disclosure controls andprocedures were effective.

 

*Changes in Internal Control Over Financial Reporting.*During the three months ended March 29,2008, there were no changes in the Company’s internal control over financialreporting that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control for financial reporting.

 

23

----

 

**PART II:  OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

Weare a party to litigation and legal proceedings that we believe to be a part ofthe ordinary course of our business. While we cannot predict the ultimateoutcome of these matters, we currently believe that any ultimate liabilityarising out of these proceedings will not have a material adverse effect on ourfinancial position. We may become involved in other legal and governmental,administrative or contractual proceedings in the future.

 

TheSEI acquisition agreement provides for a purchase price adjustment based uponthe working capital of SEI as of the closing date. Subsequent to the closingdate, we received a payment of $1.6 million in connection with servicesperformed prior to the closing date that SEI had not previously billed, and wasnot authorized to bill, its customer as of the closing date. The SEI sellingstockholders have asserted that they are entitled to a credit in connectionwith the calculation of working capital adjustment in an amount equal to theamount received by us for this post-closing payment. We believe that, inaccordance with generally accepted accounting principles, the SEI sellingstockholders should not receive the benefit of the post-closing payment. Inaccordance with the terms of the SEI acquisition agreement, the parties havejointly submitted the issue to an independent accounting firm for resolution.We anticipate that this matter will be resolved before the end of 2008.

 

**Item1A.  Risk Factors**

 

Thereare no material updates to the risk factors previously disclosed in our Form 10-Kfor the year ended December 29, 2007.

 

**Item2.  Unregistered Sales of EquitySecurities and Use of Proceeds**

 

None.

 

**Item3.  Defaults Upon Senior Securities**

 

None.

 

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

 

None.

 

**Item 5. Other Information**

 

None.

 

**Item 6.  Exhibits**

 

Theexhibits required by this item are set forth on the Index to Exhibits attachedhereto.

 

24

----

 

SIGNATURES

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|               | SI  INTERNATIONAL, INC.       |
|--------------------|-------------------------------|
|               |                          |
|               |                          |
|               | /s/ Thomas E. Dunn            |
|               | Thomas  E. Dunn               |
|               | Executive  Vice President and |
|               | Chief  Financial Officer      |
|               |
|               |
| Date:  May 7, 2008 |

 

25

----

 

**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                 |       | Amended and  Restated Credit Agreement, dated as of February 9, 2005 (filed as  Exhibit 99.1 to the Company’s Current Report on Form 8-K filed  February 15, 2005 and incorporated herein by reference).                                                                                                                                                            |
| 10.8                 |       | First  Amendment to Amended and Restated Credit Agreement, dated February 27,  2006 (filed as Exhibit 10.1 to the Company’s Current Report on  Form 8-K filed March 3, 2006 and incorporated herein by reference).                                                                                                                                                  |
| 10.9                 |       | Second  Amendment to Amended and Restate Credit Agreement, dated June 8, 2007  (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K  filed June 8, 2007 and incorporated herein by reference).                                                                                                                                                        |
| 10.10                |       | 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).                                                                                                                                                    |
| 10.11                |       | 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).                                                                                                                                                      |
| 10.12                |       | 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).                                                                                                                                                         |
| 10.13                |       | Executive  Employment Agreement with Thomas E. Lloyd (filed as Exhibit 10.9 to the  Third                                                                                                                                                                                                                                                                                               |

 

26

----

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                  |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       | Amendment  and incorporated herein by reference).                                                                                                                                                                                |
| 10.14                |       | 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). |
| 10.15                |       | 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).                  |
| 10.16                |       | 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).                  |
| 10.17                |       | 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).                   |
| 10.18                |       | 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).                |
| 10.19                |       | Consulting  Services Agreement with Walter J. Culver (filed as Exhibit 10.12 to the  2004 10-K and incorporated herein by reference).                                                                                       |
| 10.20                |       | Form of  Indemnification Agreement (filed as Exhibit 10.11 to the Third Amendment  and incorporated herein by reference).                                                                                              |
| 31.1                 |       | Certifications  of Chief Executive Officer and Chief Financial Officer pursuant to  Rule 13a-14(a) as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 (*).                                     |
| 32.1                 |       | Certifications  of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes  Oxley Act of 2002 (*).                                 |

 

----

* Indicates filed herewith.

 

27

----