**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**(Mark One)**

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

**FORTHE QUARTER ENDED JULY 1, 2006**

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

**Commission File Number**

**000-50080**

**SI International, Inc.**

(Exact name of registrantas specified in its charter)

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

 

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

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

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct.)   o Yes  x No

As of August 1, 2006,12,881,715 shares outstanding of the registrant’s common stock.

 

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**SI INTERNATIONAL, INC.**

**FORM 10-Q**

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

 

2

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**PART I:  FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

**SI International, Inc.and Subsidiaries**

**Consolidated Balance Sheets**

**(Amounts in thousands, except share data)**
| ** **                                                                                                                                                                                                  | ** ** | **July 1,  2006** | ** ** | **December 31  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                                                  | ** ** | **(Unaudited)**        | ** ** | ** **                 | ** ** |
| **Assets**                                                                                                                                                                                                  | ** ** | ** **             | ** ** | ** **                 | ** ** |
| **Current  assets:**                                                                                                                                                                                        | ** ** | ** **             | ** ** | ** **                 | ** ** |
| Cash and cash equivalents                                                                                                                                                                                   |       | $                      | 6,283      |                       | $          | 26,160 |   |
| Marketable securities                                                                                                                                                                                       |       | —                 |       | 7,850                      |       |
| Accounts receivable, net                                                                                                                                                                                    |       | 99,027                 |       | 93,633                     |       |
| Deferred tax asset                                                                                                                                                                                          |       | 422                    |       | 422                        |       |
| Other current assets                                                                                                                                                                                        |       | 7,759                  |       | 6,276                      |       |
| Total current  assets                                                                                                                                                                                       |       | 113,491                |       | 134,341                    |       |
| **Property  and equipment, net**                                                                                                                                                                            |       | 10,423                 |       | 5,908                      |       |
| **Intangible assets, net**                                                                                                                                                                                  |       | 22,063                 |       | 16,483                     |       |
| **Other  assets**                                                                                                                                                                                           |       | 6,528                  |       | 5,655                      |       |
| **Goodwill**                                                                                                                                                                                                |       | 220,854                |       | 173,308                    |       |
| Total assets                                                                                                                                                                                                |       | $                      | 373,359    |                       | $          | 335,695 |   |
| **Liabilities and stockholders’ equity**                                                                                                                                                               | ** ** | ** **             | ** ** | ** **                 | ** ** |
| **Current  liabilities:**                                                                                                                                                                                   | ** ** | ** **             | ** ** | ** **                 | ** ** |
| Current portion of long-term debt                                                                                                                                                                           |       | $                      | 839        |                       | $          | 1,000 |   |
| Accounts payable                                                                                                                                                                                            |       | 17,450                 |       | 25,364                     |       |
| Accrued expenses and other current liabilities                                                                                                                                                              |       | 28,814                 |       | 29,674                     |       |
| Note payable – former owner of acquired business                                                                                                                                                       |       | 5,614                  |       | 2,280                      |       |
| Total current  liabilities                                                                                                                                                                                  |       | 52,717                 |       | 58,318                     |       |
| **Long-term debt, net of current portion**                                                                                                                                                                  |       | 82,555                 |       | 98,250                     |       |
| **Deferred income tax**                                                                                                                                                                                     |       | 6,214                  |       | 5,221                      |       |
| **Other  long-term liabilities**                                                                                                                                                                            |       | 7,650                  |       | 6,037                      |       |
| **Stockholders’  equity:**                                                                                                                                                                             | ** ** | ** **             | ** ** | ** **                 | ** ** |
| Common stock—$0.01 par value per share; 50,000,000  shares authorized;  12,854,939 and 11,341,222 shares issued and outstanding as of  July 1, 2006 and December 31, 2005, respectively |       | 129                    |       | 114                        |       |
| Additional paid-in capital                                                                                                                                                                                  |       | 181,101                |       | 133,843                    |       |
| Accumulated other comprehensive income                                                                                                                                                                      |       | 325                    |       | —                     |       |
| Retained earnings                                                                                                                                                                                           |       | 42,668                 |       | 33,912                     |       |
| Total stockholders’ equity                                                                                                                                                                             |       | 224,223                |       | 167,869                    |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                            |       | $                      | 373,359    |                       | $          | 335,695 |   |

 

***Seeaccompanying notes***

3

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**SI International, Inc. and Subsidiaries**

**Consolidated Statementsof Operations**

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

**Unaudited**
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **July 1,  2006**           | ** ** | **June 25,  2005**        | ** ** | **July 1,  2006** | ** ** | **June 25,  2005** | ** ** |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Revenue                                      |       | $                                | 119,233    |                           | $          | 95,983 |   | $ | 226,465 |   | $ | 179,700 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Operating costs  and expenses:               |       |                             |       |                           |       |   |   |   |   |
| Cost of services                             |       | 74,968                           |       | 58,598                         |       | 141,577 |   | 111,201 |   |
| Selling, general and administrative          |       | 32,632                           |       | 27,929                         |       | 63,178 |   | 51,509 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Depreciation and amortization                |       | 673                              |       | 531                            |       | 1,221 |   | 1,082 |   |
| Amortization of intangible assets            |       | 823                              |       | 611                            |       | 1,470 |   | 1,068 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Total operating  costs and expenses          |       | 109,096                          |       | 87,669                         |       | 207,446 |   | 164,860 |   |
| Income from  operations                      |       | 10,137                           |       | 8,314                          |       | 19,019 |   | 14,840 |   |
| Other income  (expense)                      |       | (101                             | )          | 14                             |       | (71 | ) | (85 | ) |
| Interest expense                             |       | (2,693                           | )          | (1,659                         | )          | (4,475 | ) | (2,756 | ) |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Income before  provision for income taxes    |       | 7,343                            |       | 6,669                          |       | 14,473 |   | 11,999 |   |
| Provision for  income taxes                  |       | 2,901                            |       | 2,633                          |       | 5,717 |   | 4,739 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Net income                                   |       | 4,442                            |       | $                              | 4,036      |   | 8,756 |   | $ | 7,260 |   |
|                                         |       |                                  |       |                                |       |   |   |   |   |
| Earnings per  common share:                  |       |                             |       |                           |       |   |   |   |   |
| Basic                                        |       | $                                | 0.35       |                           | $          | 0.36 |   | $ | 0.72 |   | $ | 0.65 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Diluted                                      |       | $                                | 0.34       |                           | $          | 0.35 |   | $ | 0.70 |   | $ | 0.62 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Basic weighted-average  shares outstanding   |       | 12,770                           |       | 11,131                         |       | 12,096 |   | 11,097 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Diluted weighted-average  shares outstanding |       | 13,171                           |       | 11,650                         |       | 12,532 |   | 11,638 |   |

 

***Seeaccompanying notes***

4

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**SIInternational, Inc. and Subsidiaries**

**Consolidated Statements of Cash Flows**

**(Amounts inthousands)**

**Unaudited**
| ** **                                                                         | ** ** | **           Six Months Ended           ** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **July 1,  2006**                                                                                                                                             | ** ** | **June 25,  2005** | ** ** |
| **Cash  flows from operating activities:**                                         |       |                                                                                                                                                               |       |   |   |
| Net income                                                                         |       | $                                                                                                                                                                  | 8,756      |   | $ | 7,260 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                                                                                                                                               |       |   |   |
| Depreciation and amortization                                                      |       | 1,221                                                                                                                                                              |       | 1,082 |   |
| Amortization of intangible assets                                                  |       | 1,470                                                                                                                                                              |       | 1,068 |   |
| Loss on disposal of fixed assets                                                   |       | 10                                                                                                                                                                 |       | 9 |   |
| Stock-based compensation                                                           |       | 12                                                                                                                                                                 |       | 62 |   |
| Change in fair value of interest rate swap                                         |       | 325                                                                                                                                                                |       | — |   |
| Amortization of deferred financing costs                                           |       | 1,366                                                                                                                                                              |       | 288 |   |
| Changes in operating assets and liabilities, net of  effect of acquisitions:       |       |                                                                                                                                                               |       |   |   |
| Accounts receivable, net                                                           |       | 5,326                                                                                                                                                              |       | 3,724 |   |
| Other current assets                                                               |       | (1,354                                                                                                                                                             | )          | (1,360 | ) |
| Other assets                                                                       |       | (1,586                                                                                                                                                             | )          | (658 | ) |
| Accounts payable and accrued expenses                                              |       | (13,228                                                                                                                                                            | )          | 1,863 |   |
| Other long term liabilities                                                        |       | 2,536                                                                                                                                                              |       | 934 |   |
| Net cash  provided by operating activities                                         |       | 4,854                                                                                                                                                              |       | 14,272 |   |
| **Cash  flows from investing activities:**                                         |       |                                                                                                                                                               |       |   |   |
| Purchase of property and equipment                                                 |       | (5,028                                                                                                                                                             | )          | (333 | ) |
| Proceeds from sale of marketable securities                                        |       | 13,850                                                                                                                                                             |       | 7,000 |   |
| Purchase of marketable securities                                                  |       | (6,000                                                                                                                                                             | )          | (5,000 | ) |
| Former owner payable                                                               |       | (10,322                                                                                                                                                            | )          | — |   |
| Cash paid for business acquisitions, net of cash  assumed                          |       | (47,992                                                                                                                                                            | )          | (73,973 | ) |
| Net cash used in  investing activities                                             |       | (55,492                                                                                                                                                            | )          | (72,306 | ) |
| **Cash  flows from financing activities:**                                         |       |                                                                                                                                                               |       |   |   |
| Proceeds from exercise of stock options                                            |       | 5,245                                                                                                                                                              |       | 1,389 |   |
| Proceeds from issuance of common stock                                             |       | 40,402                                                                                                                                                             |       | — |   |
| Income tax benefit from stock option exercises                                     |       | 1,614                                                                                                                                                              |       | — |   |
| Repayments under line of credit                                                    |       | —                                                                                                                                                             |       | (28,954 | ) |
| Proceeds from long-term debt                                                       |       | 30,000                                                                                                                                                             |       | 100,000 |   |
| Repayments of long-term debt                                                       |       | (45,856                                                                                                                                                            | )          | — |   |
| Payments of debt issuance costs                                                    |       | (552                                                                                                                                                               | )          | (3,170 | ) |
| Repayments of capital lease obligations                                            |       | (92                                                                                                                                                                | )          | (53 | ) |
| Net cash  provided by financing activities                                         |       | 30,761                                                                                                                                                             |       | 69,212 |   |
| **Net  change in cash and cash equivalents**                                       |       | (19,877                                                                                                                                                            | )          | 11,178 |   |
| **Cash  and cash equivalents, beginning of period**                                |       | 26,160                                                                                                                                                             |       | 3,754 |   |
| **Cash  and cash equivalents, end of period**                                      |       | 6,283                                                                                                                                                              |       | $ | 14,932 |   |
| ** **                                                                         |       |                                                                                                                                                               |       |   |   |
| **Supplemental  disclosures of cash flow information:**                            |       |                                                                                                                                                               |       |   |   |
| Cash payments for interest                                                         |       | $                                                                                                                                                                  | 3,809      |   | $ | 1,916 |   |
| Cash payments for income taxes                                                     |       | $                                                                                                                                                                  | 5,946      |   | $ | 2,458 |   |
| Cash payments for capital leases                                                   |       | $                                                                                                                                                                  | 232        |   | — |   |

 

*Seeaccompanying notes*

5

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**SI International, Inc. and Subsidiaries**

**Notes to consolidated financial statements**

**(Unaudited)**

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

The accompanying unauditedconsolidated financial statements of SI International, Inc. and itssubsidiaries have been prepared in accordance with accounting principlesgenerally accepted in the United States for interim financial information andwith the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the informationand Notes required by accounting principles generally accepted in the UnitedStates for complete financial statements. In the opinion of management, alladjustments (consisting of normal recurring accruals) considered necessary fora fair presentation have been included. Operating results for the quarter endedJuly 1, 2006 are not necessarily indicative of the results that may be expectedfor the year ending December 30, 2006. For further information, refer to thefinancial statements and Notes included in SI International’s Annual Report onForm 10-K/A for the year ended December 31, 2005.  References to the “Company,” “we,” “us” and “our”refer to SI International, Inc. and its subsidiaries.

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

**Principles of consolidation**

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

**Use of estimates**

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

**Reporting periods**

The Company’s fiscal year isbased on the calendar year and ends each year on the Saturday nearest, but notfalling after, December 31 of that year. As a result, our fiscal year may be comprised of 52 or 53 weeks.  Typically, fiscal quarters also end on theSaturday nearest, but not falling after, the end of the calendar quarter.  However, we will end those fiscal quarterspresented in our Forms 10-Q (the first three fiscal quarters) on the Saturdaywhich provides us with a 13 week quarter even if that Saturday falls after theend of the calendar quarter.  As aresult, in the future, if our fiscal year comprises 53 weeks, the first threequarters shall each be comprised of 13 weeks and the fourth quarter shall becomprised of 14 weeks.  Consistent withthis policy, our second quarter ended July 1, 2006 was a 13 week quarter.

**Cash and cash equivalents**

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

**Revenue Recognition**

Our accounting policy regarding revenue recognition complies with thefollowing criteria:  (1) a contract hasbeen executed; (2) the contract price is fixed and determinable; (3) deliveryof services or products has occurred; and (4) collectibility is consideredprobable and can be reasonably estimated. Compliance with these criteria may require us to make significantjudgments and estimates.

6

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**Significant customers**

Revenue generated from contractswith the Federal government or prime contractors doing business with theFederal government accounted for a significant percent of revenues in thefiscal quarters ending July 1, 2006 and June 25, 2005.

|                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                 | ** ** | **July 1, 2006**       | ** ** | **June 25, 2005**    | ** ** | **July 1, 2006** | ** ** | **June 25, 2005** | ** ** |
|                       |       |                             |       |                           |       |   |   |   |   |
| Department of Defense      |       | 47.3                             | %          | 44.2                           | %          | 47.6 | % | 46.2 | % |
| Federal civilian  agencies |       | 51.0                             |       | 54.3                           |       | 50.6 |   | 52.0 |   |
| Commercial entities        |       | 1.7                              |       | 1.5                            |       | 1.8 |   | 1.8 |   |
| Total revenue              |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |

 

For the quarter ended July 1,2006, we had one contract that generated in excess of 10% of our revenue;whereas, for the quarter ended June 25, 2005, we had two contracts that generatedin excess of 10% of our revenue. Our C4I2TSR contract with the U.S. Air ForceSpace Command is an ID/IQ contract which is utilized by different FederalGovernment agencies. Historically, we have reported revenue under the C4I2TSRcontract using revenue generated by task orders issued to our Network andTelecom Business Unit. In the future, however, we will be reporting revenuegenerated from any task order issued under the C4I2TSR contract to any Companybusiness unit. Under this approach, for the three and six months ended July 1,2006, revenue from the C4I2TSR contract represented approximately 20.1% and 21.1%of our revenue, respectively. For the three and six months ended June 25, 2005,our C4I2TSR contract represented approximately 18.1% and 18.8% of our revenue,respectively. Our SCOT contract with the Department of Homeland Securityrepresented approximately 10.4% of our revenue for the three months ended June25, 2005.

**Deferred financing costs**

Costs incurred in establishingour credit facility are deferred and amortized as interest expense over theterm of the related debt using the effective interest method. These deferredcosts are reflected as a component of other assets in the accompanyingconsolidated balance sheets. The deferred financing costs consist of thefollowing (in thousands):
|                           | ** ** | **July 1,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------|------------|------------------------|------------|-----------------------------|------------|
| Deferred loan  costs      |       | $                      | 5,527      |                        | $          | 4,975 |   |
| Accumulated  amortization |       | (2,812                 | )          | (1,542                      | )          |
|                      |       | $                      | 2,715      |                        | $          | 3,433 |   |

 

**Intangible assets**

Intangible assets from acquisitions, which consistprimarily of contractual customer relationships, are amortized utilizing anaccelerated method over 6 to 14 years, based on their estimated useful lives.The accumulated amortization of intangible assets is $4.4 million and $3.0million, respectively, as of July 1, 2006 and December 31, 2005. Amortizationexpense is estimated to be $3.1 million, $2.8 million, $2.5 million, $2.2million and $2.2 million for the years 2006, 2007, 2008, 2009 and 2010,respectively.

**Fair value of financialinstruments**

The Company’s financialinstruments consist primarily of cash and cash equivalents, accountsreceivable, accounts payable, credit facilities, and notes payable. Inmanagement’s opinion, the carrying amounts of these financial instrumentsapproximate their fair values at July 1, 2006 and December 31, 2005.

**Stock-based compensation**

Effective January 1, 2006, the Company adopted the provisions of SFASNo. 123R using the modified prospective transition method. Due to theuse of the modified prospective method, prior interim periods and fiscal yearswill not reflect any restated amounts. As disclosed in the stock option plansin Note 9, the Company accelerated the vesting of unvested stock optionspreviously awarded to employees, officers and directors in December 2005. TheCompany had no unvested stock options on January 1, 2006. The Company issuedinsignificant stock options in the quarters ended April 1, 2006 and July 1,2006. Accordingly, no significant stock compensation expense was recognizedduring the first and second quarters.

7

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Prior to the adoption of SFAS No.123R, the Company accounted for stock-based compensation using the intrinsicvalue method prescribed in APB Opinion No. 25 and related interpretations.  Accordingly, compensation expense for stockoptions was measured as the excess, if any, of the fair market value of theCompany’s stock at the date of the grant over the exercise price of the relatedoption.  The following table illustratesthe effect on net income and earnings per share if the compensationcosts for the Company’s stock options had been determined based on SFASNo. 123.
| ** **                                                                                                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                              | ** ** | **July 1,**                 | ** ** | **June 25,**              | ** ** | **July 1,** | ** ** | **June 25,** | ** ** |
| ** **                                                                                                                              | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Net income - as  reported                                                                                                               |       | $                                | 4,442      |                           | $          | 4,036 |   | $ | 8,756 |   | $ | 7,260 |   |
|                                                                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Add: total stock-based  employee compensation expense as reported under intrinsic value method (APB  No. 25) for all awards, net of tax |       | —                           |       | 19                             |       | — |   | 38 |   |
|                                                                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Deduct: Total  stock-based compensation expense determined under fair value based method  (SFAS No. 123) for all awards, net of tax     |       | —                           |       | (734                           | )          | — |   | (1,376 | ) |
|                                                                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Net income - pro forma                                                                                                                  |       | 4,442                            |       | 3,321                          |       | 8,756 |   | $ | 5,922 |   |
|                                                                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Basic earnings per  share - as reported                                                                                                 |       | $                                | 0.35       |                           | $          | 0.36 |   | $ | 0.72 |   | $ | 0.65 |   |
|                                                                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Diluted earnings per  share - as reported                                                                                               |       | $                                | 0.34       |                           | $          | 0.35 |   | $ | 0.70 |   | $ | 0.62 |   |
|                                                                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Basic earnings per  share - pro forma                                                                                                   |       | $                                | 0.35       |                           | $          | 0.30 |   | $ | 0.72 |   | $ | 0.53 |   |
|                                                                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Diluted earnings per share - pro forma                                                                                                  |       | $                                | 0.34       |                           | $          | 0.29 |   | $ | 0.70 |   | $ | 0.51 |   |

 

The fair value of eachoption is estimated on the date of grant using the Black-Scholes option-pricingmodel with the following assumptions used for grants during the fiscal periodsended July 1, 2006 and June 25, 2005:

|                                 | ** ** | **Fiscal Year**       | ** ** |
|---------------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | **July 1, 2006** | ** ** | **June 25, 2005** | ** ** |
| Risk-free interest rate         |       | 5.07                       | %          | 3.99 | % |
| Expected life of  options       |       | 5 years                    |       | 6 years |   |
| Expected stock price volatility |       | 42.3                       | %          | 50.0 | % |
| Expected dividend yield         |       | 0                          | %          | 0 | % |

 

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

As of July 1, 2006, the total remaining unrecognizedcompensation expense related to unvested options was $0.2 million which will berecognized over the weighted average period of 3 years.

Prior to the adoption ofSFAS No. 123R, the Company presented all tax benefits related to the exerciseof stock options as operating cash flows in the consolidated statement of cashflows. SFAS No. 123R requires the cash flows resulting from the tax benefitsgenerated from tax deductions in excess of the compensation costs recognizedfor those options to be classified as financing cash flows.

8

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**Earnings per share**

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

The following details thecomputation of net income per common share (in 000s):

|                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **July 1,  2006**           | ** ** | **June 25,**

**2005**    | ** ** | **July 1,  2006** | ** ** | **June 25,  2005** | ** ** |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Net Income –  Basic and Diluted         |       | $                                | 4,442      |                           | $          | 4,036 |   | $ | 8,756 |   | $ | 7,260 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| **Weighted  average share calculation:**     |       |                             |       |                           |       |   |   |   |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Basic  weighted-average shares outstanding   |       | 12,770                           |       | 11,131                         |       | 12,096 |   | 11,097 |   |
| Treasury stock  effect of stock options      |       | 401                              |       | 519                            |       | 436 |   | 541 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Diluted  weighted-average shares outstanding |       | 13,171                           |       | 11,650                         |       | 12,532 |   | 11,638 |   |
|                                              |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

**Reclassifications**

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

**New accounting pronouncements**

In December 2004,the FASB issued FASB Statement No. 123(R) (revised 2004), *Share Based Payment.* Statement 123(R) addresses theaccounting for share-based payment transactions in which an enterprise receivesemployee services in exchange for (a) equity instruments of the enterpriseor (b) liabilities that are based on the fair value of the enterprise’sequity instruments or that may be settled by the issuance of such equityinstruments. Statement 123(R) requires an entity to recognize thegrant-date fair-value of stock options and other equity-based compensationissued to employees in the income statement. The revised Statement generallyrequires an entity to account for those transactions using the fair-value-basedmethod, and eliminates the intrinsic value method of accounting in APB OpinionNo. 25, *Accounting for Stock Issued to Employees*,which was permitted under Statement 123, as originally issued. The revisedStatement requires entities to disclose information about the nature of theshare-based payment transactions and the effects of those transactions on thefinancial statements. Statement 123(R) is effective for the Company as ofits fiscal year beginning January 1, 2006. All public companies must use eitherthe modified prospective or the modified retrospective transition method.

Effective January1, 2006, the Company adopted the provisions of SFAS No. 123R using the modifiedprospective transition method. Due to the use of the modified prospectivemethod, prior interim periods and fiscal years will not reflect any restatedamounts. As disclosed in the stock option plans in Note 9, the Companyaccelerated the vesting of unvested stock options previously awarded toemployees, officers and directors in December 2005. The Company had no unvestedstock options on January 1, 2006. The Company issued insignificant stockoptions in the quarters ended April 1, 2006 and July 1, 2006. Accordingly, nosignificant stock compensation expense was recognized during the first andsecond quarters. However, had we adopted Statement 123(R) in prior periods, theimpact of that standard would have approximated the impact of Statement 123 asdescribed in the disclosure of pro forma net income and pro forma earnings pershare in the Stock-Based Compensation section of this note to our consolidatedfinancial statements. Statement 123(R) also requires the benefits of taxdeductions in excess of recognized compensation cost to be reported as afinancing cash flow, rather than as an operating cash flow as required underAPB No. 25. The adoption of this requirement reduced net operating cash flowsand increased net financing cash flows in periods after adoption.

9

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

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

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

Approximately $47.8 million of the purchaseconsideration has been allocated to goodwill based primarily on the excess ofthe purchase price over the estimated fair value of net assets acquired andapproximately $6.9 million and $0.2 million of the purchase price has beenassigned to identifiable intangible assets of contractual customerrelationships and non-compete agreements, respectively. Each customerrelationship, which includes each customer’s contract, is being amortized on anaccelerated basis over their remaining useful life of 9 years. The non-competeagreements are amortized on a straight-line basis over a 3-year period.

The total purchase pricepaid, including transaction costs of $0.8 million, has been preliminarilyallocated as follows (in thousands):

| Cash and cash equivalents              |   | $       | 2,542  |   |
|----------------------------------------|--------|---------|--------|--------|
| Accounts receivable                    |   | 10,720  |   |
| Other current assets                   |   | 129     |   |
| Property and equipment                 |   | 491     |   |
| Accounts payable and  accrued expenses |   | (12,485 | )      |
| Other long term  liabilities           |   | (41     | )      |
| Intangible assets                      |   | 7,050   |   |
| Goodwill                               |   | 47,847  |   |
| Total consideration                    |   | $       | 56,253 |   |

 

Similarly, in the firstquarter of 2005, we completed the purchase of Shenandoah ElectronicIntelligence, Inc. (SEI). SEI provides critical business processoutsourcing primarily for the Department of Homeland Security (DHS), includingservices such as: data and records management; applications processing; fileand mail management; analytical support services; and secure optical cardprocessing.  On February 9, 2005, theacquisition of SEI closed pursuant to the terms of the definitive stock purchaseagreement.  The purchase price was $75million in cash, subject to certain adjustments totaling approximately $0.6million.

Approximately $52.6million of the purchase consideration has been allocated to goodwill basedprimarily on the excess of the purchase price over the estimated fair value ofnet assets acquired, and approximately $12.2 million of the purchase price hasbeen assigned to identifiable intangible assets on the basis of contractualcustomer relationships. The contractual customer relationships are beingamortized using an accelerated method over their estimated useful life of 14years.

The following unaudited proforma combined condensedstatements of operations (in thousands, except per share) set forth theconsolidated results of operations of the Company for the six months endedJuly 1, 2006 and June 25, 2005 as if the above described acquisitionshad occurred at the beginning of each period presented. This unaudited proformainformation does not purport to be indicative of the actual financial positionor the results that would actually have occurred if the combination had been ineffect for the six months ended July 1, 2006 and June 25, 2005.

10

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|                            | ** ** | **Six Months Ended** | ** ** |
|----------------------------|------------|--------------------------------|------------|
| ** **                 | ** ** | **July 1, 2006**     | ** ** | **June 25, 2005** | ** ** |
| Revenue                    |       | $                              | 234,007    |   | $ | 206,194 |   |
| Net income                 |       | $                              | 9,044      |   | $ | 8,412 |   |
| Diluted earnings per share |       | $                              | 0.72       |   | $ | 0.72 |   |

 

In accordance with thepurchase accounting method, the operations of Zen and SEI have been included inthe Company’s statement of operations since their respective dates ofacquisition.

**4.             Accountsreceivable:**

Accounts receivable consists ofthe following (in thousands):
|                                                                                                     | ** ** | **July 1, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------|------------|---------------------------------|------------|
|                                                                                                |       |                       |       |                            |       |
| Billed accounts  receivable                                                                         |       | $                          | 41,723     |                            | $          | 47,939 |   |
| Unbilled accounts  receivable:                                                                      |       |                       |       |                            |       |
| Currently  billable                                                                                 |       | 49,605                     |       | 40,094                          |       |
| Unbilled  retainages and milestone payments expected to be billed within the next  12 months   |       | 8,153                      |       | 5,546                           |       |
| Indirect costs  incurred and charged to cost-plus contracts in excess of provisional  billing rates |       | 994                        |       | 1,563                           |       |
| Total unbilled accounts  receivable                                                                 |       | 58,752                     |       | 47,203                          |       |
| Allowance for doubtful  accounts                                                                    |       | (1,448                     | )          | (1,509                          | )          |
|                                                                                                |       |                       |       |                            |       |
| Accounts receivable,  net                                                                           |       | $                          | 99,027     |                            | $          | 93,633 |   |

 

The currently billable amountsincluded as unbilled accounts receivable as of July 1, 2006 represent amountsthat are billed during the following quarter of the current year. They arebillings for services rendered prior to quarter-end, which are billed oncenecessary billing data has been collected and an invoice is produced.

**5.****             Property and equipment:**

Property and equipment consist ofthe following (in thousands):
|                                                      | ** ** | **July 1, 2006** | ** ** | **December 31, 2005** | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|---------------------------------|------------|
| Computers and equipment                              |       | $                          | 9,635      |                            | $          | 8,691 |   |
| Software                                             |       | 2,793                      |       | 2,623                           |       |
| Furniture and fixtures                               |       | 4,783                      |       | 2,356                           |       |
| Leasehold improvements                               |       | 3,682                      |       | 1,581                           |       |
|                                                 |       | 20,893                     |       | 15,251                          |       |
| Less—Accumulated  depreciation and amortization |       | (10,470                    | )          | (9,343                          | )          |
|                                                 |       |                       |       |                            |       |
| Property and equipment,  net                         |       | $                          | 10,423     |                            | $          | 5,908 |   |

 

Property and equipment includes assets financed under capital leaseobligations of approximately $404,000 and $273,000, net of accumulatedamortization, as of July 1, 2006 and December 31, 2005, respectively.  The increase in the value of Property andEquipment is primarily related to the furnishings in our new Colorado SpringsCampus – a 123,000 square foot facility that replaces two other locationsnearby.

11

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

Accrued expenses and othercurrent liabilities consist of the following (in thousands):
|                                                | ** ** | **July 1,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| Accrued vacation                               |       | $                      | 7,879      |                        | $          | 6,183 |   |
| Accrued compensation                           |       | 11,099                 |       | 9,638                       |       |
| Accrued bonus                                  |       | 1,924                  |       | 6,755                       |       |
| Other accrued  liabilities                     |       | 7,912                  |       | 7,098                       |       |
| Accrued expenses and other current liabilities |       | $                      | 28,814     |                        | $          | 29,674 |   |

 

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

Debt consists of thefollowing (in thousands):
|                                                                                                                                                                                                                                                                                                                                                                            | ** ** | **July 1,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| Credit facilities:                                                                                                                                                                                                                                                                                                                                                         |       |                   |       |                        |       |
| Line of credit  bears interest at LIBOR plus 200 to 275 base points or a specified base rate  plus 100 to 175 basis points, interest due monthly, principal due  February 9, 2010                                                                                                                                                                                     |       | $                      | —     |                        | $          | — |   |
| Term loan,  pursuant to the First Amendment, as of July 1, 2006 bears interest at LIBOR  plus 200 basis points or a specified base rate plus 100 basis points, with nineteen  consecutive quarterly principal and interest payments of $209,816 starting on  June 30, 2006, with the unpaid principal and interest of approximately $79.6  million due on February 9, 2011 |       | 83,394                 |       | 99,250                      |       |
| Total debt*                                                                                                                                                                                                                                                                                                                                                                |       | $                      | 83,394     |                        | $          | 99,250 |   |

----

*                    Excludesapproximately $6.0 million (including imputed interest) and $2.3 million notepayable in connection with the Zen and Bridge acquisitions as July 1, 2006 andDecember 31, 2005, respectively.

On February 9, 2005, contemporaneously with theclosing of our acquisition of SEI, the Company entered into an Amended andRestated Credit Agreement (the “Credit Agreement”) which increased itsborrowing capacity to $160 million, which is comprised of a $60 millionfive-year revolving credit facility and a $100 million six-year term loanfacility. Additionally, the Credit Agreement provides that up to an additional$75 million in uncommitted incremental term loan funds are available to theCompany upon its request at any time for up to two years from one or more ofthe lenders under the Credit Agreement. The annual maturity of long-term debt under the Credit Agreement was$1.0 million for each of the five fiscal years subsequent toDecember 31, 2005 and approximately $94.3 million thereafter.

On February 27, 2006, contemporaneously with theclosing of our acquisition of Zen, we entered into a First Amendment to theCredit Agreement (the “First Amendment”). The Credit Agreement, as amended by the First Amendment, is referred toherein as the “Amended Credit Agreement”. The funds borrowed under the First Amendment were used to (i) refinancethe approximately $99.3 million in principal outstanding under the thenexisting term loan under the Credit Agreement and to pay any and all fees andexpenses related thereto; (ii) to finance the acquisition of Zen and pay anyand all fees and expenses related thereto; and (iii) to provide for workingcapital expenditures, and other general corporate uses.

The Company hadapproximately $129.3 million of outstanding debt under our First Amendment onFebruary 27, 2006 following the closing of our acquisition of Zen. As withthe previous credit facilities, we are required to maintain compliance withfinancial and non-financial covenants including, maintaining certain leverageand fixed charge ratios, as well as certain annual limits on our capitalexpenditures.  The First Amendmentamended the leverage ratio that requires us to maintain a ratio of funded debtto consolidated EBITDA for such period as follows:

12

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

 

Theseratios will be calculated in accordance with the definitions and termscontained in the Amended Credit Agreement, which may be different thancalculations pursuant to GAAP.

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

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

  During the quarter ended July 1, 2006, theCompany used the net proceeds from its April 2006 common stock offering asdescribed under Note 9 below, combined with cash on hand to pay downapproximately $45.0 million of outstanding term debt under the First Amendment,after which the remaining principal balance as of July 1, 2006, wasapproximately $83.4 million. As a result of the pay down of principal, theCompany’s quarterly payment was reduced from $323,125 to $209,816 inconsecutive quarterly payments starting from June 30, 2006 throughDecember 30, 2010, and a final payment of approximately $79.6 million onFebruary 9, 2011.  The amount of deferredloan origination fees written off in connection with the pay down in thequarter ended July 1, 2006 was $0.9 million.

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

**8.****             Commitments and contingencies:**

**Leases**

As of July 1, 2006, the Company has noncancelableoperating leases, primarily for real estate, that expire over the next tenyears.   Rental expense during the quarter ended July 1, 2006 was approximately$2.3 million, compared to rental expense of approximately $1.9 million duringthe quarter ended June 25, 2005.

**Contract cost audits**

Payments to the Company on government costreimbursable contracts are based on provisional, or estimated indirect rates,which are subject to audit on an annual basis by the Defense Contract AuditAgency (DCAA). The cost audits result in the negotiation and determination ofthe final indirect cost rates that the Company may use for theperiod(s) audited. The final rates, if different from the provisionalrates, may create an additional receivable or liability for the Company. TheCompany’s revenue recognition policy calls for revenue recognized on all costreimbursable government contracts to be recorded at actual rates unlesscollectibility is not reasonably assured. To the extent the indirect ratedifferential creates a liability for the Company, the differential isrecognized as a reduction to revenue when identified.

**Litigation and claims**

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 acquisitionagreement provides for a purchase price adjustment based upon the workingcapital of SEI as of the closing date.  Subsequent to the closing date, wereceived a payment of $1.6 million in connection with services performed priorto the closing date that SEI had not previously billed, and was not authorizedto bill, its customer as of the closing date.

13

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The SEIselling stockholders have asserted that they are entitled to a credit inconnection with the calculation of working capital adjustment in an amountequal to the amount received by us for this post-closing payment.  Webelieve that, in accordance with GAAP, the SEI selling stockholders should notreceive the benefit of the post-closing payment.  In accordance with theterms of the SEI acquisition agreement, the parties have jointly submitted theissue to an independent accounting firm for resolution.  We anticipate thatthis matter will be resolved before the end of 2006.

In June 2006, the Company, through one of itssubsidiaries, was awarded a judgment in a lawsuit filed in the Circuit Court ofFairfax County, Virginia against National Technologies Associates, Inc. (“NTA”)in the amount of $841,612. The Company’s claims arose out of the Company’sallegation that NTA breached a contract which obligated NTA to subcontractcertain work to the Company’s subsidiary.  The Company has not recordedthe judgment because the judgment is presently subject to NTA’s motion forreconsideration before the trial court and, in the event that NTA does notsucceed in its motion for reconsideration, the Company anticipates that NTAwill seek to appeal the judgment to the Virginia Supreme Court.  While theCompany cannot presently determine the ultimate outcome of this matter,management believes that it will prevail on NTA’s motion to reconsider thematter and that the judgment in its favor will be upheld or affirmed.

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

**April 2006 common stock offering**

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

**Stock option plans**

In April 2005, the Board of Directors voted toadopt the 2002 Amended and Restated Omnibus Stock Incentive Plan (the “Amendedand Restated Plan”), and the Amended and Restated Plan was approved by ourstockholders at the annual meeting of stockholders held in June 2005. TheAmended and Restated Plan amends and restates the Company’s prior 2002 StockIncentive Plan, or the “Plan”, by (i) increasing the number of shares ofcommon stock reserved and available under the Plan by 1,000,000 shares to atotal share allocation of 2,920,000, (ii) permitting the grant of deferredshares, performance shares and performance units, (iii) prohibiting repricingof options without prior stockholder approval, (iv) limiting the number ofshares of common stock and performance units subject to awards a participantmay receive in any calendar year to 300,000 and 500,000, respectively, andadding other administrative provisions to comply with the performance-basedcompensation exception to the deduction limit of Section 162(m) ofthe Internal Revenue Code of 1986, as amended; (v) eliminating theprovision that 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 or 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) providing for minimum vesting periods of stock bonus awards,restricted common stock awards, stock appreciation rights, deferred shares, andother stock awards subject to the possible acceleration of the vesting scheduleat the discretion of the administrator; (viii) providing that futureamendments to the Amended and Restated Plan that increase the number of sharesallocated, modify participation requirements, or materially increase benefitsaccruing to the participants under the Plan will be subject to stockholderapproval; and (ix) making other technical changes to the Plan.

On December 13,2005, the Board of Directors announced the accelerated vesting of unvestedstock options previously awarded to employees, officers and directors as ofDecember 7, 2005 in light of a new accounting regulation that came intoeffect on January 1, 2006. Based on the Statement of Financial AccountingStandards No. 123R, “Share-Based Payment” (SFAS 123R), the Board took theaction to accelerate the unvested stock with the belief that it was in the bestinterest of stockholders, as it will reduce the Company’s reported compensationexpense in future periods.

14

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A summary of optionactivity under the plan as of July 1, 2006, is presented below:
|                                      | ** ** | **Options** | ** ** | **Shares  exercisable** | ** ** | **Weighted-average  exercise price** | ** ** |
|--------------------------------------|------------|-------------|------------|-------------------------|------------|-------------------------------------------|------------|
| Outstanding at  December 31, 2005    |       | 1,750,937   |       |                    |       | $                                         | 20.29      |   |
|                                 |       |        |       |                    |       |                                      |       |
| 2006 grants                          |       | 13,900      |       |                    |       | 32.38                                     |       |
|                                 |       |        |       |                    |       |                                      |       |
| 2006 exercises                       |       | (313,717    | )          |                    |       | 16.66                                     |       |
|                                 |       |        |       |                    |       |                                      |       |
| 2006 forfeitures                     |       | (15,263     | )          |                    |       | 26.34                                     |       |
|                                 |       |        |       |                    |       |                                      |       |
| Balance, July 1,  2006               |       | 1,435,857   |       |                    |       | $                                         | 21.42      |   |
|                                 |       |        |       |                    |       |                                      |       |
| Options exercisable at  July 1, 2006 |       |        |       | 1,424,457               |       | $                                         | 21.33      |   |

 

The following table showsthe number of options outstanding, the weighted average exercise price, theweighted average remaining life, and the options exercisable for each range ofexercise prices of options outstanding at July 1, 2006.

|       | ** ** | **Number of  Options  Outstanding** | ** ** | **Range of  Exercise  Price** | ** **                    | **Weighted  Avg. Exercise  Price** | ** ** | **Weighted  Average  Remaining Life** | ** ** | **Options  Exercisable** | ** ** | **Weighted  Avg. Exercise  Price** | ** ** |
|-------|------------|------------------------------------------|------------|------------------------------------|-------------------------------|-----------------------------------------|------------|--------------------------------------------|------------|--------------------------|------------|-----------------------------------------|------------|
|       |       | 66,730                                   |       | $                                  | 1.58 –    9.27 |                                    | $          | 9.06                                       |       | 2.6                      |       | 66,730                                  |       | $ | 9.06 |   |
|       |       | 350,933                                  |       | $                                  | 10.81 – 14.00            |                                    | $          | 13.80                                      |       | 6.4                      |       | 350,933                                 |       | $ | 13.80 |   |
|       |       | 318,229                                  |       | $                                  | 16.40 – 19.26            |                                    | $          | 16.68                                      |       | 7.1                      |       | 318,229                                 |       | $ | 16.68 |   |
|       |       | 197,639                                  |       | $                                  | 20.55 – 26.60            |                                    | $          | 25.71                                      |       | 8.1                      |       | 197,639                                 |       | $ | 25.71 |   |
|       |       | 332,478                                  |       | $                                  | 26.80 – 29.87            |                                    | $          | 28.14                                      |       | 8.8                      |       | 332,478                                 |       | $ | 28.14 |   |
|       |       | 169,300                                  |       | $                                  | 30.46 – 32.83            |                                    | $          | 31.02                                      |       | 9.3                      |       | 157,900                                 |       | $ | 30.92 |   |
|       |       | 548                                      |       | $                                  | 556.26                        |                                    | $          | 556.26                                     |       | 1.5                      |       | 548                                     |       | $ | 556.26 |   |
| Total |       | 1,435,857                                |       |                               |                          | $                                       | 21.42      |                                       | 7.5        |                     | 1,424,457  |                                    | $          | 21.33 |   |

 

Each stock option grant establishes the vestingschedule applicable to the grant. The weighted-average remaining contractuallife of the stock options outstanding and exercisable as of July 1, 2006was 7.5 years with the maximum contractual term of 10 years.

The weighted-average grant-date fair value of optionsgranted during the quarters ended July 1, 2006 and June 25, 2005 were $14.24and $14.10, respectively. The total intrinsic value of options exercised duringthe quarters ended July 1, 2006, and June 25, 2005 was $1.1 million and $1.0million, respectively. The total intrinsic value of options outstanding andexercisable as of July 1, 2006 was $13.6 million.

**Stock repurchase program**

In December 2005 the Company’s Board of Directorsauthorized the repurchase of up to 300,000 shares of its common stock up to anaggregate maximum dollar amount of $8 million.  The Company had 12,881,715shares outstanding as of August 1, 2006.  Timing and volume of anypurchases will be guided by management’s assessment of market conditions,securities law limitations, the number of shares of common stock outstanding,and alternative, potentially higher value uses for cash resources.  Therepurchase plan may be suspended or discontinued at any time without priornotice.

**Item 2.   Management’s Discussion and Analysis ofFinancial 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, andother factors that may cause our actual results, level of activity, performanceor achievements 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*

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*“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, statements that we make in this section relating to thesufficiency of anticipated sources of capital to meet our cash requirements areforward- looking statements. Our actual results could differ materiallyfrom those anticipated in these forward-looking statements for manyreasons, including as a result of some of the factors described below,elsewhere in this Form 10-Q and in the section entitled “Risk Factors” in ourForm 10-K/A  for the fiscal year endedDecember 31, 2005.   You should not placeundue reliance on these forward-looking statements, which apply only asof the date of the filing of this Form 10-Q.*

*The Company’s fiscal year isbased on the calendar year and ends each year on the Saturday nearest, but notfalling after, December 31 of that year. Typically, fiscal quarters also end on the Saturday nearest, but notfalling after, the end of the calendar quarter. However, in order to ensure that the fiscal quarters presented in thisForm 10-Q include 13 weeks, we ended the second quarter on Saturday, July 1,2006.   Similarly, we will end futurefiscal quarters on the Saturday which provides us with a 13 week quarter tocompare with the previous year’s quarterly results even if that Saturday fallsafter the end of the calendar quarter. As a result, our fiscal year may be comprised of 52 or 53 weeks.*

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

**Overview**

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

We employ a Rapid Response • Rapid Deployment®methodology that enables the rapid standing up of innovative solutions and theincorporation of additional capabilities in rapid succession. This capabilityallows us to respond to urgent IT imperatives quickly, often in a matter ofmonths, and within a well defined budget. We can, therefore, provide solutionsfor current IT needs, while establishing a platform for advancing long-termtransformational objectives. We possess a proven ability to respond to highpriority information technology and network needs through innovation, and anenviable reputation for timely delivery of robust solutions on assignmentswhere failure is not an option. Our “Mission Critical • Mission AccomplishedTM”solutions enable clients to respond to new mandates, expand the scope of theirmissions, and reengineer underlying business processes. We have a demonstratedability of turning troubled IT projects into winning outcomes and realizedexceptional growth from high-quality client engagements. We also utilize matureand proven processes to manage and market large-scale ID/IQ contracts, such asC4I2TSR. We employ a diverse, innovative team that effectively utilizes smallbusiness partners’ unique skills and expertise for mission critical ITprojects.

For the fiscal quartersended July 1, 2006 and June 25, 2005, we received 98.3% and 98.5%,respectively, of our revenues from services we provided to various departmentsand agencies of the Federal Government, both directly and through other primecontractors.  Additionally,  for the fiscal quarters ended July 1, 2006and June 25, 2005, 1.7% and 1.5%, respectively, of our total revenues from workperformed for commercial entities. The following table shows our revenues fromthe client groups listed as a percentage of total revenue. Revenue data for theDoD includes revenue generated from work performed under engagements for boththe DoD and the Intelligence community.

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|                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                 | ** ** | **July 1,  2006**           | ** ** | **June 25,  2005**        | ** ** | **July 1,  2006** | ** ** | **June 25,  2005** | ** ** |
|                       |       |                             |       |                           |       |   |   |   |   |
| Department of  Defense     |       | 47.3                             | %          | 44.2                           | %          | 47.6 | % | 46.2 | % |
| Federal civilian  agencies |       | 51.0                             | %          | 54.3                           | %          | 50.6 | % | 52.0 | % |
| Commercial  entities       |       | 1.7                              | %          | 1.5                            | %          | 1.8 | % | 1.8 | % |
| Total revenue              |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |

 

We have derived asubstantial majority of our revenues from governmental contracts under which weact as a prime contractor. We also provide services indirectly as asubcontractor. The following table shows our revenues as prime contractor andas subcontractor as a percentage of our total revenue for the followingperiods:
|                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **July 1,  2006**           | ** ** | **June 25,  2005**        | ** ** | **July 1,  2006** | ** ** | **June 25,  2005** | ** ** |
|                    |       |                             |       |                           |       |   |   |   |   |
| Prime contract  revenue |       | 77.9                             | %          | 73.6                           | %          | 77.8 | % | 74.9 | % |
| Subcontract  revenue    |       | 22.1                             | %          | 26.4                           | %          | 22.2 | % | 25.1 | % |
| Total revenue           |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |

 

Our services are providedto clients pursuant to three types of contracts: cost reimbursable, time andmaterials and fixed price contracts. The following table shows our revenuesfrom each of these types of contracts as a percentage of our total revenue forthe following periods:
|                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **          | ** ** | **July 1,  2006**           | ** ** | **June 25,  2005**        | ** ** | **July 1,  2006** | ** ** | **June 25,  2005** | ** ** |
|                |       |                             |       |                           |       |   |   |   |   |
| Cost  reimbursable  |       | 29.6                             | %          | 27.0                           | %          | 30.7 | % | 27.9 | % |
| Time and  materials |       | 40.0                             | %          | 45.2                           | %          | 40.4 | % | 45.6 | % |
| Fixed price         |       | 30.4                             | %          | 27.8                           | %          | 28.9 | % | 26.5 | % |
| Total               |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |

 

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

Under time and materialscontracts, we are reimbursed for labor at fixed hourly rates and generallyreimbursed separately for allowable materials, costs and expenses. To theextent that our actual labor costs under a time and materials contract arehigher or lower than the billing rates under the contract, our profit under thecontract may either be greater or less

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than weanticipated or we may suffer a loss under the contract. We recognize revenuesunder time and materials contracts by multiplying the number of direct laborhours expended by the contract billing rates and adding the effect of otherbillable direct costs. In general, we realize a higher profit margin on workperformed under time and materials contracts than cost reimbursable contracts.

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

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

Our most significant expense is direct cost, whichconsists primarily of direct labor costs for program personnel and directexpenses incurred to complete contracts, including cost of materials and subcontractefforts. Our ability to predict accurately the number and types of personnel,their salaries, and other costs, can have a significant impact on our directcost.

The allowance of certain direct and indirect costs infederal contracts is subject to audit by the client, usually through the DCAA.Certain indirect costs are charged to contracts and paid by the client usingprovisional, or estimated, indirect rates, which are subject to later revision,based on the government audits of those costs.

**Recent Events**

*Stock Issuance. *On April 7, 2006, we issued 1,200,000 sharesof common stock in an underwritten public offering at an initial price of$34.00 per share under our shelf registration statement on Form S-3 (No.333-113928) declared effective by the SEC on May 31, 2004.  Net sale proceeds to the Company, afterdeducting underwriting discounts and commissions, but before other expensesrelating to the sale, totaled approximately $40.5 million.  The Company used the net proceeds from thesale to pay down outstanding term debt under the First Amendment, afterwhich the remaining principal balance is approximately $83.4 million.

**Liquidity and Capital Resources**

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

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

Under the terms of our Amended Credit Agreement, theCompany is required to maintain compliance with financial and non-financialcovenants.  The Company is in compliancewith all such covenants as of July 1, 2006.

*Cashand Cash Equivalents.*   We consider cash on depositand all highly liquid investments with original maturities of three monthsor less to be cash and cash equivalents. Cash and cash equivalents, includingmarketable securities, as of the end of three months ending July 1, 2006and June 25, 2005 was $6.3 million and $14.9 million, respectively.

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*CashFlow.*   The following table sets forth our sourcesand uses of cash for the six months ended July 1, 2006 and June 25, 2005.
|                                            | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|
| ** **                                 | ** ** | **July 1, 2006**     | ** ** | **June 25, 2005** | ** ** |
| ** **                                 | ** ** | **(in thousands)**        | ** ** |
| Net cash provided by  operations           |       | $                              | 4,854      |   | $ | 14,272 |   |
| Net cash used in  investing activities     |       | (55,492                        | )          | (72,306 | ) |
| Net cash provided by  financing activities |       | 30,761                         |       | 69,212 |   |
| Net (decrease) increase in cash            |       | $                              | (19,877    | ) | $ | 11,178 |   |

 

Our operating cash flow is primarily affected by theoverall profitability of our contracts, our ability to invoice and collect fromour clients in a timely manner, and our ability to manage our vendor payments.We bill most of our clients monthly after services are rendered. Cash providedby operations in the six months ended July 1, 2006 was attributable to netincome of $8.8 million, plus depreciation, amortization and other non-cashitems of $4.4 million, net of  anincrease in working capital and other operating assets and liabilities of $8.3million.  Cash provided by operations in the six months ended June 25, 2005 wasattributable to net income of $7.3 million, depreciation, amortization,and other non-cash items of $2.5 million, and a decrease in workingcapital and other operating assets and liabilities of $4.5 million.

Our cash flow used in investing activities consistsprimarily of capital expenditures, the purchase and sale of marketablesecurities, and acquisitions. In the six months ended July 1, 2006, we paid$48.0 million for business acquisitions, net of cash assumed, repaid a contractsettlement to a former owner for $10.3 million, and purchased capital assetstotaling $5.0 million. We partially offset the cash use with $7.9 million ofproceeds from the sale of marketable securities, net of purchases. During the six months ended June 25, 2005, wepaid $74.0 million for business acquisitions, net of cash assumed, invested$0.3 million in capital assets, and we partially offset the cash use with $2.0million of proceeds from the sale of marketable securities, net of purchases.

For the six months ended July 1, 2006, cash flowprovided by financing activities was attributed to proceeds of $40.4 millionfrom the sale of common stock, $30 million of proceeds from the issuance ofterm debt, $5.2 million of proceeds from the exercise of stock options and$1.1 million from other sources, net of $45.9 million repayment of termdebt.  For the six months ended June 25, 2005, cash flow provided byfinancing activities was attributed to proceeds of $100 million from the issuanceof term debt and $1.4 million of proceeds from the exercise of stock options,net of a $29 million repayment of revolving debt and a $3.2 million payment ofdebt issuance fees and other items.

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**Results of Operations**

The following table sets forthcertain items from our consolidated statements of operations as a percentage ofrevenues for the periods indicated.
|                                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                           | ** ** | **July 1,  2006**           | ** ** | **June 25,  2005**        | ** ** | **July 1,  2006** | ** ** | **June 25,  2005** | ** ** |
|                                                 |       |                             |       |                           |       |   |   |   |   |
| Revenue                                              |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |
| Operating costs  and expenses:                       |       |                             |       |                           |       |   |   |   |   |
| Cost of services                                     |       | 62.9                             |       | 61.1                           |       | 62.5 |   | 61.9 |   |
| Selling, general and administrative                  |       | 27.4                             |       | 29.1                           |       | 27.9 |   | 28.7 |   |
| Depreciation and amortization                        |       | 0.5                              |       | 0.6                            |       | 0.5 |   | 0.6 |   |
| Amortization of intangible assets                    |       | 0.7                              |       | 0.6                            |       | 0.7 |   | 0.6 |   |
| Total operating costs and expenses                   |       | 91.5                             |       | 91.4                           |       | 91.6 |   | 91.8 |   |
| Income from  operations                              |       | 8.5                              |       | 8.6                            |       | 8.4 |   | 8.2 |   |
|  Other income (expense)                         |       | —                           |       | —                         |       | — |   | — |   |
| Interest expense                                     |       | (2.3                             | )          | (1.7                           | )          | (2.0 | ) | (1.5 | ) |
|                                                 |       |                             |       |                           |       |   |   |   |   |
| Income  before provision for  income taxes |       | 6.2                              |       | 6.9                            |       | 6.4 |   | 6.7 |   |
| Provision  for  income taxes                    |       | 2.4                              |       | 2.7                            |       | 2.5 |   | 2.7 |   |
|                                                 |       |                             |       |                           |       |   |   |   |   |
| Net income                                           |       | 3.8                              | %          | 4.2                            | %          | 3.9 | % | 4.0 | % |

 

**Three months ended July 1, 2006 comparedwith three months ended June 25, 2005**

*Revenue.*  Substantiallyall of our revenue is derived from services and solutions provided to theFederal Government, primarily by our employees and, to a lesser extent, oursubcontractors.  For the three monthsended July 1, 2006, our revenues increased 24.2% to $119.2 million from$96.0 million for the three months ended June 25, 2005. Revenues from workunder Federal Government contracts increased 24.0% to $117.2 million forthe three months ended July 1, 2006 from $94.5 million for the three monthsended June 25, 2005. This increase was attributable to the acquisition andintegration of Zen in the first quarter of 2006, new contract awards,successful recompetition wins on existing programs, new contracts from andgrowth within existing programs in our four focus areas: Federal ITModernization, Defense Transformation, Homeland Defense, and Mission-CriticalOutsourcing.  Commercial revenuesincreased  to $2.1million in the threemonths ended July 1, 2006 from $1.5 million in the three months ended June 25,2005.  We continue to focus primarily onopportunities for the Federal government.

*Cost ofservices.*  Cost of services includes direct labor andother direct costs such as materials and subcontracts, incurred to provide ourservices and solutions to our customers. Generally, changes in cost of servicesare correlated to changes in revenue as resources are consumed in theproduction of that revenue. Please note that in prior period financialstatements, we referred to cost of services as “direct costs”.  We expect to use the term cost of services inall future periods.  For the three monthsended July 1, 2006, cost of services increased 27.9% to $75.0 million from$58.6 million for the three months ended June 25, 2005. This increase wasattributable primarily to the increase in revenue. As a percentage of revenue,cost of services were 62.9% for the three months ended July 1, 2006 as comparedto 61.1% for the three months ended June 25, 2005.

*Selling, general and administrative expenses.* Selling, general and administrative expensesinclude facilities, selling, bid and proposal, indirect labor, fringe benefitsand other discretionary costs. Please note that in prior period financialstatements, we referred to selling, general and administrative expenses as “indirectcosts”.  We expect to use the termselling, general and administrative expenses in all future periods.  For the three months ended July 1, 2006,selling, general and administrative expenses increased 16.8% to$32.6 million from $27.9 million for the three months ended June 25,2005.  This $4.7 million increasewas primarily attributable to the expected growth of support functionsnecessary to facilitate and administer the growth in cost of services as wellas the integration of Zen.  As apercentage of revenue, selling, general and administrative expenses were 27.4%for the three months ended July 1, 2006 as compared to 29.1% for the threemonths ended June 25, 2005.

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*Depreciationand amortization.*Depreciation and amortization includes thedepreciation of computers, furniture and other equipment, the amortization ofthird party software we use internally, and leasehold improvements.  Forthe three months ended July 1, 2006, depreciation and amortization expensewas $0.7 million, a slight increase compared to $0.5 million for the threemonths ended June 25, 2005.  However, asa percentage of revenue, depreciation and amortization expense was 0.5% for thethree months ended July 1, 2006 compared to 0.6% for the three months endedJune 25, 2005.

*Amortization of intangibleassets.*Amortization ofintangible assets includes the amortization of intangible assets acquired inconnection with acquisitions in accordance with SFAS 142, Goodwill and OtherIntangible Assets.  We discontinued theamortization of goodwill effective December 30, 2001.  Identifiable intangible assets are amortizedover their estimated useful lives. Non-compete agreements are generally amortized straight-line over the termof the agreement, while contracts and related client relationships are amortizedusing an accelerated method over their estimated remaining lives. For the threemonths ended July 1, 2006, amortization of intangible assets was $0.8 million,compared to $0.6 million for the three months ended June 25, 2005.  This increase was attributed primarily to theZen acquisition.    As a percentage ofrevenue amortization of intangible assets was 0.7% for the three months endedJuly 1, 2006 compared to 0.6 % for the three months ended June 25, 2005.

*Income fromoperations.*  For the three months ended July 1, 2006,income from operations increased 21.9% to $10.1 million from$8.3 million for the three months ended June 25, 2005. This increase wasattributable primarily to increased revenues. As a percentage of revenue, income from operations was 8.5% for thethree months ended July 1, 2006 compared to 8.7% for the three months endedJune 25, 2005.

*Interestexpense.*  Interest expense increased 62.3% to$2.7 million for the three months ended July 1, 2006 from$1.7 million for the three months ended June 25, 2005. This increase wasattributable primarily to the $0.9 million write off of loan origination feesdue to the prepayment of term debt.   Asa percentage of revenue, interest expense was 2.3% for the three months endedJuly 1, 2006 as compared to 1.7% for the three months ended June 25, 2005.  We anticipate interest expense to remain atthe same levels throughout the rest of fiscal year 2006 as compared to the sameperiods in 2005.

*Provision forincome taxes.*  The provision for income taxes was$2.9 million in the three months ended July 1, 2006, compared to$2.6 million for the three months ended June 25, 2005.   Our second quarters of 2006 and 2005 taxprovision, represents an estimated annual effective tax rate of 39.5%. Ourestimated annual effective tax rate is greater than the federal statutory rateof 34% due primarily to state income taxes.

**Six months ended July 1, 2006 comparedwith six months ended June 25, 2005**

*Revenue.* Substantially all of our revenue is derived from services and solutionsprovided to the Federal Government, primarily by our employees and, to a lesserextent, our subcontractors.  For the sixmonths ended July 1, 2006, our revenues increased 26.0% to $226.5 millionfrom $179.7 million for the six months ended June 25, 2005. Revenues fromwork under Federal Government contracts increased 26.1% to $222.5 millionfor the six months ended July 1, 2006 from $176.4 million for the six monthsended June 25, 2005. This increase was attributable to the acquisition of Zenand SEI in the first quarters of 2006 and 2005, respectively, new contractawards, successful recompetition wins on existing programs, new contracts fromand growth within existing programs in our four focus areas: Federal ITModernization, Defense Transformation, Homeland Defense, and Mission-CriticalOutsourcing.  Commercial revenuesincreased 21.2% to $4.0 million in the six months ended July 1, 2006 from $3.3million in the six months ended June 25, 2005. We continue to focus primarily on opportunities for the Federalgovernment.

*Cost ofservices.* Cost of servicesincludes direct labor and other direct costs such as materials andsubcontracts, incurred to provide our services and solutions to our customers.Generally, changes in costs of services are correlated to changes in revenue asresources are consumed in the production of that revenue. Please note that inprior period financial statements, we referred to cost of services as “directcosts”.  We expect to use the term costof services in all future periods.  Forthe six months ended July 1, 2006, costs of services increased 27.3% to$141.6 million from $111.2 million for the six months ended June 25,2005. This increase was attributable primarily to the increase in revenue. As apercentage of revenue, costs of services were 62.5% for the six months endedJuly 1, 2006 as compared to 61.9% for the six months ended June 25, 2005.

*Selling, general and administrative expenses.*  Selling,general and administrative expenses include facilities, selling, bid and proposal,indirect labor, fringe benefits and other discretionary costs. Please note thatin the prior period financial statements, we referred to selling, general andadministrative expenses as “indirect costs”. We expect to use the term selling, general and

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administrative expenses in all future periods.  For the six months ended July 1, 2006,selling, general and administrative expenses increased 22.7% to$63.2 million from $51.5 million for the six months ended June 25,2005.  This $11.7 million increasewas primarily attributable to the expected growth of support functionsnecessary to facilitate and administer the growth in costs of services as wellas the integration of Zen.  As apercentage of revenue, selling, general and administrative expenses were 27.9%for the six months ended July 1, 2006 as compared to 28.7% for the sixmonths ended June 25, 2005.

*Depreciationand amortization.*Depreciation and amortization includes thedepreciation of computers, furniture and other equipment, the amortization ofthird party software we use internally, and leasehold improvements.  Forthe six months ended July 1, 2006, depreciation expense was $1.2 million, aslight increase compared to $1.1 million for the six months ended June 25,2005.  However, as a percentage ofrevenue, depreciation expense was 0.7% for the six months ended July 1, 2006compared to 0.6% for the six months ended June 25, 2005.

*Amortization of intangibleassets.*Amortization ofintangible assets includes the amortization of intangible assets acquired inconnection with acquisitions in accordance with SFAS 142, Goodwill and OtherIntangible Assets.  We discontinued theamortization of goodwill effective December 30, 2001.  Identifiable intangible assets are amortizedover their estimated useful lives. Non-compete agreements are generally amortized straight-line over theterm of the agreement, while contracts and related client relationships areamortized using an accelerated method over their estimated remaining lives. Forthe six months ended July 1, 2006, amortization of intangible assets was $1.5million, compared to $1.1 million for the six months ended June 25, 2005.  This increase was attributed primarily to theZen acquisition.  As a percentage ofrevenue amortization of intangible assets was 0.6% for the six months endedJuly 1, 2006 compared to 0.6 % for the six months ended June 25, 2005.

*Income fromoperations.*  For the six months ended July 1, 2006, incomefrom operations increased 28.2% to $19.0 million from $14.8 millionfor the six months ended June 25, 2005. This increase was attributableprimarily to increased revenues.  As apercentage of revenue, income from operations was 8.4% for the six months endedJuly 1, 2006 compared to 8.3% for the six months ended June 25, 2005.

*Interestexpense.*  Interest expense increased 62.4% to$4.5 million for the six months ended July 1, 2006 from $2.8 millionfor the six months ended June 25, 2005. This increase was attributableprimarily to the $0.9 million write off of loan origination fees due to theprepayment of term debt. As a percentage of revenue, interest expense was 2.0%for the six months ended July 1, 2006 as compared to 1.5% for the six monthsended June 25, 2005.  We anticipateinterest expense to remain at the same levels throughout the rest of fiscalyear 2006 as compared to the same periods in 2005.

*Provision forincome taxes.*  The provision for income taxes was$5.7 million in the six months ended July 1, 2006, compared to$4.7 million for the six months ended June 25, 2005.   Our second quarters of 2006 and 2005 taxprovision, represents an estimated annual effective tax rate of 39.5%. Ourestimated annual effective tax rate is greater than the federal statutory rateof 34% due primarily to state income taxes.

**Off-Balance Sheet Arrangements**

As of July 1, 2006, we have nooff-balance sheet arrangements that are reasonably likely to have a current orfuture material effect on our financial condition, revenues, or expenses,result of operations, liquidity, capital expenditures, or capital resources.

**Critical Accounting Policies andEstimates**

Our significantaccounting policies are described in Note 2 to our accompanyingconsolidated financial statements. We consider the accounting policies relatedto revenue recognition 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 accounting principlesgenerally accepted in the United States. As such, we are required to makecertain estimates, judgments and assumptions that we believe are reasonablebased upon the information available. These estimates, judgments andassumptions affect the reported amounts of assets and liabilities at the dateof the financial statements and the reported amounts of revenue and expensesduring the periods presented. Actual results could be different from theseestimates.

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*Revenue Recognition*

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

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

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

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

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

Contract revenue recognition inherently involvesestimation, including the contemplated level of effort to accomplish the tasksunder contract, the cost of the effort, and an ongoing assessment of progresstoward completing the contract. From time to time, as part of the normalmanagement processes, new information comes to light that require revisions toestimated total costs or revenues expected. The cumulative impact of any revisionsto estimates and the full impact of anticipated losses on any type of contractare recognized in the period in which they become known.

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

*Stock Based Compensation*

In December 2004, the FASB issued FASB StatementNo. 123(R) (revised 2004), *ShareBased Payment.* Statement 123(R) addresses the accounting forshare-based payment transactions in which an enterprise receives employeeservices in exchange for (a) equity instruments of the enterprise or(b) liabilities that are based on the fair value of the enterprise’sequity instruments or that may be settled by the issuance of such equityinstruments. Statement 123(R) requires an entity to recognize thegrant-date fair-value of stock options and other equity-based compensationissued to employees in the income statement. The revised Statement generallyrequires that an entity account for those transactions using thefair-value-based method, and eliminates the intrinsic value method ofaccounting in APB Opinion No. 25, *Accountingfor Stock Issued to Employees*, which was permitted under Statement123, as originally issued. The revised Statement requires entities to discloseinformation about the nature of the share-based payment transactions and theeffects of those transactions on the financial statements. All public companiesmust use either the modified prospective or the modified retrospectivetransition method.

Effective January 1, 2006, the Company adopted the provisions of SFASNo. 123R using the modified prospective transition method. Due to theuse of the modified prospective method, prior interim periods and fiscal yearswill not reflect any restated amounts. As disclosed in the stock option plansin Note 9, the Company accelerated the vesting of unvested stock

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optionspreviously awarded to employees, officers and directors in December 2005. TheCompany had no unvested stock options on January 1, 2006. The Company issued aninsignificant number of stock options in the quarters ended April 1, 2006 andJuly 1, 2006. Accordingly, no significant stock compensation expense wasrecognized during the first and second quarters.

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

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

As of July 1, 2006, we had $83.4 millionoutstanding under our Amended Credit Agreement. A 1% change in interest rateswould have resulted in our interest expense fluctuating by approximately$208,500 for the three months ended July 1, 2006.

Effective February 14, 2006, an interest swapagreement came into effect which reduced our exposure associated with themarket volatility of floating LIBOR interest rates. This agreement has anotional principal amount of $30.0 million and, as of July 1, 2006,had a rate ranging from 4.05% to 4.74%. This agreement is a hedge against termdebt, which bears interest at LIBOR plus a margin which has a current overallrate of 6.97%. At stated monthly intervals the difference between the intereston the floating LIBOR-based debt and the interest calculated in the swapagreement are settled in cash. The estimated value of the swap at July 1, 2006was $0.5 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, variablerate instruments, and, to a lesser degree, overnight securities and bankinstruments.  Since our initial publicoffering, the Board of Directors approved an investment policy that requires usto invest in relatively short-term, high quality, and high liquidityobligations.

**Item 4.    Controls and Procedures.**

*Evaluation of Disclosure Controls and Procedures.*The Company performed an evaluation under the supervision and with theparticipation of management, including the Company’s Chief Executive Officerand Chief Financial Officer, of the design and operation of the Company’sdisclosure controls and procedures as of July 1, 2006.  Based upon the evaluation, the Company’sChief Executive Officer and Chief Financial Officer have concluded that, as ofJuly 1, 2006, the Company’s disclosure controls and procedures were effective.

*Changes in Internal Control Over FinancialReporting.*During the three months ended July 1, 2006, therewere no significant changes in the Company’s internal control over financial reportingthat have materially affected, or are reasonably likely to materially affect,the Company’s internal control for financial reporting.

**PART II: OTHER INFORMATION**

**Item1.   Legal Proceedings**

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

The SEI acquisitionagreement provides for a purchase price adjustment based upon the workingcapital of SEI as of the closing date.  Subsequent to the closing date, wereceived a payment of $1.6 million in connection with services performed priorto the closing date that SEI had not previously billed, and was not authorizedto bill its customer as of the closing date.  The SEI selling stockholdershave asserted that they are entitled to a credit in connection with thecalculation of working capital adjustment in an amount equal to the amountreceived by us for this post-closing payment.  We believe that, inaccordance with GAAP, the SEI selling stockholders should not receive thebenefit of the post-closing payment.  In accordance with the terms of theSEI acquisition agreement, the parties have jointly submitted the issue to anindependent accounting firm for resolution.  We anticipate that thismatter will be resolved before the end of 2006.

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In June 2006, the Company, through one of itssubsidiaries, was awarded a judgment in a lawsuit filed in the Circuit Court ofFairfax County, Virginia against National Technologies Associates, Inc. (“NTA”)in the amount of $841,612. The Company’s claims arose out of the Company’sallegation that NTA breached a contract which obligated NTA to subcontractcertain work to the Company’s subsidiary.  The Company has not recordedthe judgment because the judgment is presently subject to NTA’s motion forreconsideration before the trial court and, in the event that NTA does notsucceed in its motion for reconsideration, the Company anticipates that NTAwill seek to appeal the judgment to the Virginia Supreme Court.  While theCompany cannot presently determine the ultimate outcome of this matter,management believes that it will prevail on NTA’s motion to reconsider thematter and that the judgment in its favor will be upheld or affirmed.

**Item 1A.  Risk Factors**

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

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

None.

**Item 3.  Defaults Upon Senior Securities**

None.

**Item 4.  Submission of Matters To a Vote of Security Holders**

During the fiscal quarter ended July 1, 2006, we submitted certainmatters to a vote of our stockholders through the notice of annual meeting ofstockholders and the solicitation of proxies related thereto.  The proxy materials related to the Registrant’sThird Annual Meeting of Stockholders were distributed on or about May 22, 2006and the annual meeting of stockholders was held on June 28, 2006, inColorado Springs, Colorado.  As of therecord date prior to such meeting, 12,833,232 shares of our common stock wereoutstanding and entitled to vote at the meeting.  At the annual stockholders meeting of June28, 2006, 12,267,189 shares of our common stock were present on person or byproxy, representing 95.59% of our outstanding shares of common stock.

The following sets forth the matters presented for avote by the stockholders and the votes cast for, withheld, abstained, andbroker non-votes:
| **Matter** | ** **                                                                                                         | ** ** | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** | **Abstentions** | ** ** | **Broker Non-  Votes** | ** ** |
|------------|--------------------------------------------------------------------------------------------------------------------|------------|------------|--------------------|------------|-------------------------|------------|-----------------|------------|-----------------------------|------------|
| (1)        | Election  of Mr. Charles A. Bowsher as a Class I director with a term serving until the  2009 Annual Meeting       |       | 11,961,081 |               | 306,108    |                    |       |            |       |                        |
| (2)        | Election  of Mr. Walter J. Culver, Ph.D. as a Class I director with a term serving  until the 2009 Annual Meeting  |       | 11,898,008 |               | 369,181    |                    |       |            |       |                        |
| (3)        | Election  of General Dennis J. Reimer as a Class I director with a term serving until  the 2009 Annual Meeting     |       | 11,960,391 |               | 306,798    |                    |       |            |       |                        |
| (4)        | Election  of Mr. Edward H. Sproat as a Class I director with a term serving until the  2009 Annual Meeting         |       | 11,624,813 |               | 642,376    |                    |       |            |       |                        |
| (5)        | Ratification  of the appointment of Ernst & Young LLP as our independent auditors for  the current fiscal year |       | 12,110,552 |               | 147,247    |                    | 9,390      |            |       |                        |
|            |                                                                                                                    |            |            |                    |            |                         |            |                 |            |                             |            |  |

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**Item5.  Other Information**

None.

**Item 6.  Exhibits**

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

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SIGNATURES

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

 

Date:  August 9, 2006

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**INDEX TO EXHIBITS**
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1         |       | Underwriting Agreement with Wachovia Capital  Markets, LLC dated April 4, 2006 (filed as Exhibit 1.1 to the Company’s  Current Report on Form 8-K filed April 7, 2006 and incorporated by  reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 2.1         |       | Stock Purchase Agreement  among the Company, Shenandoah Electronic Intelligence, Inc. (“SEI”), and the  stockholders of SEI dated January 12, 2005 (filed as Exhibit 99.1  to the Company’s Current Report on Form 8-K filed March 1, 2005  and incorporated by reference). (The appendices and exhibits have been  omitted pursuant to Item 601(b)(2) of Regulation S-K. SI  International, Inc. hereby undertakes to furnish supplementally to the  Securities and Exchange Commission copies of any omitted appendices and  exhibits upon request by the Securities and Exchange Commission).                 |
| 2.2         |       | Stock Purchase  Agreement among the Company, Zen Technology, Inc., and the stockholders of  Zen Technology, Inc. dated February 8, 2006 (filed as Exhibit 2.2 to the  Company’s Annual Report on Form 10-K/A for the fiscal year ended  December 31, 2005 and filed May 12, 2006 and incorporated herein by  reference). (The appendices and exhibits have been omitted pursuant to Item  601(b)(2) of Regulation S-K. SI International, Inc., hereby undertakes to  furnish supplementally to the Securities and Exchange Commission copies of  any omitted appendices and exhibits upon request by the Securities and  Exchange Commission). |
| 3.1         |       | Second Restated  Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s  Registration Statement on Form S-1/A (File No. 333-87964)  filed on October 25, 2002 (the “Third Amendment”) and incorporated  herein by reference).                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.2         |       | Amended and Restated  Bylaws, as amended (filed as Exhibit 3.2 to the Company’s Current Report  on Form 8-K filed October 11, 2005 and incorporated herein by  reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.1         |       | Registration Rights  Agreement, as amended (filed as Exhibit 4.1 to the Third Amendment and  incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.2         |       | Specimen Certificate of  our common stock (filed as Exhibit 4.2 to the Company’s Registration  Statement on Form S-1/A (File No. 333-87964) filed on  November 5, 2002 (the “Fourth Amendment) and incorporated herein by  reference).                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.3         |       | Stock Purchase  Agreement, as amended (filed as Exhibit 4.3 to the 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        |       | Notice of Stock Option  Acceleration of Vesting (filed as Exhibit 10.1 to the Company’s Current  Report on Form 8-K filed on December 13, 2005 and incorporated herein by  reference).                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.8        |       | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

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| 10.9  |   | 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).                                                                                   |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.10 |   | Executive Employment  Agreement with S. Bradford Antle (filed as Exhibit 10.6 to the Third  Amendment and incorporated herein by reference) with updated information  included in the Company’s Current Report on Form 8-K filed on June 21, 2006.                                                        |
| 10.11 |   | Executive Employment  Agreement with Thomas E. Dunn (filed as Exhibit 10.8 to the Third  Amendment and incorporated herein by reference) with updated information  included in the Company’s Current Report on Form 8-K filed on June 21, 2006..                                                          |
| 10.12 |   | Executive Employment  Agreement with Thomas E. Lloyd (filed as Exhibit 10.9 to the Third  Amendment and incorporated herein by reference) with updated information  included in the Company’s Current Report on Form 8-K filed on June 21, 2006..                                                         |
| 10.13 |   | Executive Employment  Agreement with Ray J. Oleson (filed as Exhibit 10.10 to the Third  Amendment and incorporated herein by reference) with updated information  included in the Company’s Current Report on Form 8-K filed on June 21, 2006..                                                          |
| 10.14 |   | Executive Employment  Agreement with Harry D. Gatanas (filed as Exhibit 10.1 to the Company’s  Current Report on Form 8-K/A filed November 15, 2005 and incorporated herein  by reference) with updated information included in the Company’s Current  Report on Form 8-K filed on June 21, 2006..   |
| 10.15 |   | Executive Employment  Agreement with Marylynn Stowers (filed as Exhibit 10.1 to the Company’s  Current Report on Form 8-K/A filed February 2, 2006 and incorporated herein  by reference with updated information included in the Company’s Current  Report on Form 8-K filed on June 21, 2006.).    |
| 10.16 |   | Executive Employment  Agreement with P. Michael Becraft (filed as Exhibit 10.1 to the  Company’s Current Report on Form 8-K/A filed February 24, 2006 and  incorporated herein by reference) with updated information included in the  Company’s Current Report on Form 8-K filed on June 21, 2006.. |
| 10.17 |   | Form of  Indemnification Agreement (filed as Exhibit 10.11 to the Third Amendment  and incorporated herein by reference).                                                                                                                                                                                 |
| 10.18 |   | Consulting Services  Agreement with Walter J. Culver (filed as Exhibit 10.12 to the 2004 10-K and  incorporated herein by reference).                                                                                                                                                                               |
| 31.1  |   | Certifications of Chief  Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  (*).                                                                                                                        |
| 32.1  |   | Certifications of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes  Oxley Act of 2002 (*).                                                                                                                    |

 

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* Indicates filedherewith.

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