Tableof Contents

 

 

 

**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**x****                ****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**Forthe three months ended June 28, 2008**

 

**o****                   ****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**CommissionFile Number 333-145355**

 

 

**VANGENT,INC.**

 

| **Delaware**                       | ** ** | **20-1961427**      |
|------------------------------------|------------|---------------------|
| (State or other jurisdiction of    |       | (IRS Employer       |
| incorporation or organization**)** |       | Identification No.) |

 

**4250North Fairfax Drive**

**Suite 1200**

**Arlington,Virginia 22203**

**(703)284-5600**

 

 Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days.

 YES   x               NO   o

 

 Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller reporting company.  See thedefinitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):
|  Large accelerated filer o | Accelerated filer o | Non-accelerated  filer x | Smaller reporting  company o |
|---------------------------------|--------------------------|-------------------------------|------------------------------|

 

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

 YES   o               NO   x

 

There were 100 shares ofcommon stock of Vangent, Inc. issued and outstanding at June 28,2008.

 

 

 

----

Table of Contents

 

**VANGENT,INC.**

(formerly Pearson Government Solutions Business)

**Tableof Contents**

 
| ** **                                    | ** **                                                                                                                                                                                                                                                                                                                 | **Page**   | ** ** |
|-----------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| **PART I  – FINANCIAL INFORMATION** |                                                                                                                                                                                                                                                                                                                       |       |       |
|                                          |                                                                                                                                                                                                                                                                                                                       |       |       |
| Item 1:                                       | Financial Statements                                                                                                                                                                                                                                                                                                       |       |       |   |
|                                          | Condensed  Consolidated Balance Sheets as of December 31, 2007 and June 28,  2008 (successor entity)                                                                                                                                                                                                             |       | 3          |   |
|                                          |                                                                                                                                                                                                                                                                                                                       |       |       |   |
|                                          | Condensed  Consolidated Statements of Operations for the period January 1 to  February 14, 2007 (predecessor entity) and for the period February 15 to  June 30, 2007, for the three months ended June 30, 2007, and for  the three and six months ended June 28, 2008 (successor entity)         |       | 4          |   |
|                                          |                                                                                                                                                                                                                                                                                                                       |       |       |   |
|                                          | Condensed  Consolidated Statements of Owner’s/Stockholder’s Equity and Comprehensive  Income (Loss) for the period January 1 to February 14, 2007  (predecessor entity) and for the period February 15 to June 30,  2007, and for the six months ended June 28, 2008 (successor entity) |       | 5          |   |
|                                          |                                                                                                                                                                                                                                                                                                                       |       |       |   |
|                                          | Condensed  Consolidated Statement of Cash Flows for the period January 1 to  February 14, 2007 (predecessor entity) and for the period February 15 to  June 30, 2007, and for the six months ended June 28, 2008  (successor entity)                                                                   |       | 6          |   |
|                                          |                                                                                                                                                                                                                                                                                                                       |       |       |   |
|                                          | Notes to Condensed Consolidated Financial Statements                                                                                                                                                                                                                                                                       |       | 7          |   |
|                                          |                                                                                                                                                                                                                                                                                                                       |       |       |   |
| Item 2.                                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                                                                                                                                                                |       | 20         |   |
| Item 3.                                       | Quantitative  and Qualitative Disclosures about Market Risk                                                                                                                                                                                                                                                                |       | 31         |   |
| Item 4T.                                      | Controls and  Procedures                                                                                                                                                                                                                                                                                                   |       | 31         |   |
|                                          |                                                                                                                                                                                                                                                                                                                       |       |       |
| **PART II  – OTHER INFORMATION**    | ** **                                                                                                                                                                                                                                                                                                                 | ** ** | ** ** |
|                                          |                                                                                                                                                                                                                                                                                                                       |       |       |
| Item 1.                                       | Legal Proceedings                                                                                                                                                                                                                                                                                                          |       | 32         |   |
| Item 1A.                                      | Risk Factors                                                                                                                                                                                                                                                                                                               |       | 33         |   |
| Item 2.                                       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                                                                                                                                                               |       | 33         |   |
| Item 3.                                       | Defaults Upon  Senior Securities                                                                                                                                                                                                                                                                                           |       | 33         |   |
| Item 4.                                       | Submission  of Matters to a Vote of Security Holders                                                                                                                                                                                                                                                                       |       | 33         |   |
| Item 5.                                       | Other Information                                                                                                                                                                                                                                                                                                          |       | 33         |   |
| Item 6.                                       | Exhibits                                                                                                                                                                                                                                                                                                                   |       | 33         |   |
| Signature                                     |                                                                                                                                                                                                                                                                                                                       |       | 33         |   |

 

**Forward-Looking Statements**

 

This quarterly report on Form 10-Q containsvarious forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended (“Securities Act”), and Section 21Eof the Securities Exchange Act of 1934, as expectation or belief concerningfuture events.  Forward-lookingstatements involve risks and uncertainties. Without limiting the foregoing, the words “believes,” “thinks,” “anticipates,”“plans,” “expects,” “could,” “estimates,” “intends,” “may,” and similarexpressions, or the negative thereof, are intended to identify forward-lookingstatements.  The Company cautions thatthese statements are further qualified by important economic, competitive,governmental and technological factors that could cause our business, strategyor actual results of operations or events to differ materially from those inthe forward-looking statements, including, without limitation, changes in thedemand for services that the Company provides; pursuit of new business in theUnited States and abroad; activities of competitors; bid protests; changes inoperating expenses; our substantial debt; changes the in availability ofcapital; and general economic and business conditions.  Accordingly, such forward-looking statementsdo not purport to be predictions of future events or circumstances, and therecan be no assurance that any forward-looking statement contained herein willprove to be accurate.  The Companyassumes no obligation to update the forward-looking statements.

 

2

----

Table of Contents

 

**PART I. FINANCIAL INFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

**Vangent, Inc.**

(formerly Pearson Government Solutions Business)

**Condensed Consolidated Balance Sheets**

(in thousands, except share and per-share amounts)

(unaudited)

 
| ** **                                                                                      | ** ** | **December 31,  2007** | ** ** | **June 28,  2008** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| **Assets**                                                                                      | ** ** | ** **                  | ** ** | ** **              | ** ** |
| Current assets:                                                                                 |       |                        |       |                    |       |
| Cash and cash  equivalents                                                                      |       | $                           | 26,093     |                    | $          | 30,426 |   |
| Trade  receivables, net                                                                         |       | 112,292                     |       | 98,799                  |       |
| Other  receivables and prepaid items                                                            |       | 15,470                      |       | 20,355                  |       |
| Total current  assets                                                                           |       | 153,855                     |       | 149,580                 |       |
|                                                                                            |       |                        |       |                    |       |
| Property and  equipment, net                                                                    |       | 27,579                      |       | 32,678                  |       |
| Intangible  assets, net                                                                         |       | 198,027                     |       | 188,662                 |       |
| Goodwill                                                                                        |       | 301,873                     |       | 304,197                 |       |
| Deferred debt  financing costs, net                                                             |       | 12,448                      |       | 11,311                  |       |
| Other assets                                                                                    |       | 286                         |       | 625                     |       |
| Total assets                                                                                    |       | $                           | 694,068    |                    | $          | 687,053 |   |
|                                                                                            |       |                        |       |                    |       |
| **Liabilities  and Stockholder’s Equity**                                                  |       |                        |       |                    |       |
| Current  liabilities:                                                                           |       |                        |       |                    |       |
| Current portion  of long-term debt                                                              |       | $                           | 7,325      |                    | $          | — |   |
| Accounts payable                                                                                |       | 36,981                      |       | 36,856                  |       |
| Accrued expenses                                                                                |       | 26,267                      |       | 32,515                  |       |
| Accrued interest                                                                                |       | 8,547                       |       | 8,007                   |       |
| Deferred tax  liability                                                                         |       | 852                         |       | —                  |       |
| Advance payments  on contracts                                                                  |       | 4,444                       |       | 4,103                   |       |
| Total current  liabilities                                                                      |       | 84,416                      |       | 81,481                  |       |
|                                                                                            |       |                        |       |                    |       |
| Long-term debt,  net of current portion                                                         |       | 420,875                     |       | 420,366                 |       |
| Other long-term  liabilities                                                                    |       | 3,863                       |       | 5,168                   |       |
| Deferred tax  liability                                                                         |       | 4,625                       |       | 8,487                   |       |
| Total  liabilities                                                                              |       | 513,779                     |       | 515,502                 |       |
|                                                                                            |       |                        |       |                    |       |
| Commitments and  contingencies (Note 7)                                                         |       |                        |       |                    |       |
|                                                                                            |       |                        |       |                    |       |
| Stockholder’s  equity:                                                                     |       |                        |       |                    |       |
| Common stock,  $0.01 par value, 1,000 shares authorized, and 100 shares issued and  outstanding |       | —                      |       | —                  |       |
| Additional  paid-in capital                                                                     |       | 205,275                     |       | 205,867                 |       |
| Accumulated  other comprehensive loss                                                           |       | (2,937                      | )          | (1,290                  | )          |
| Accumulated  deficit                                                                            |       | (22,049                     | )          | (33,026                 | )          |
| Total  stockholder’s equity                                                                |       | 180,289                     |       | 171,551                 |       |
| Total  liabilities and stockholder’s equity                                                |       | $                           | 694,068    |                    | $          | 687,053 |   |

 

See notes tocondensed consolidated financial statements.

 

3

----

Table of Contents

 

**Vangent, Inc.**

(formerly Pearson Government Solutions Business)

**Condensed Consolidated Statements ofOperations**

(in thousands)

(unaudited)

 
| ** **                            | ** ** | **Successor Entity** | ** ** | ** **            | **Predecessor Entity** | ** ** | ** **                 | **Successor Entity** | ** ** |
|---------------------------------------|------------|---------------------------|------------|-----------------------|-----------------------------|------------|----------------------------|---------------------------|------------|
| ** **                            | ** ** | **Three Months**     | ** ** | **Three Months** | ** **                  | ** ** | **Period**                 | ** **                | ** ** | **Period** | ** ** | **Six Months** | ** ** |
| ** **                            | ** ** | **Ended**                 | ** ** | **Ended**             | ** **                  | ** ** | **January 1 to** | ** **                | ** ** | **February 15 to** | ** ** | **Ended** | ** ** |
| ** **                            | ** ** | **June 30,**         | ** ** | **June 28,**     | ** **                  | ** ** | **February 14,**      | ** **                | ** ** | **June 30,** | ** ** | **June 28,** | ** ** |
| ** **                            | ** ** | **2007**                  | ** ** | **2008**              | ** **                  | ** ** | **2007**                   | ** **                | ** ** | **2007** | ** ** | **2008** | ** ** |
| Revenue                               |       | $                         | 121,584    |                  | $                           | 123,934    |                       |                      | $          | 58,833 |   |   | $ | 174,046 |   | $ | 267,409 |   |
| Cost of revenue                       |       | 102,712                   |       | 105,934               |                        |       | 48,187                     |                      |       | 150,113 |   | 223,100 |   |
| Gross profit                          |       | 18,872                    |       | 18,000                |                        |       | 10,646                     |                      |       | 23,933 |   | 44,309 |   |
| General and  administrative expenses  |       | 12,944                    |       | 12,473                |                        |       | 9,383                      |                      |       | 18,438 |   | 26,257 |   |
| Selling and  marketing expenses       |       | 4,544                     |       | 4,075                 |                        |       | 1,940                      |                      |       | 6,849 |   | 8,206 |   |
| Operating income  (loss)              |       | 1,384                     |       | 1,452                 |                        |       | (677                       | )                         |       | (1,354 | ) | 9,846 |   |
| Interest expense                      |       | 9,795                     |       | 8,958                 |                        |       | 34                         |                      |       | 14,560 |   | 18,176 |   |
| Interest income                       |       | (201                      | )          | (181                  | )                           |       | (44                        | )                         |       | (201 | ) | (449 | ) |
| Loss before  income taxes             |       | (8,210                    | )          | (7,325                | )                           |       | (667                       | )                         |       | (15,713 | ) | (7,881 | ) |
| Provision  (benefit) for income taxes |       | 1,984                     |       | 1,228                 |                        |       | (292                       | )                         |       | 2,936 |   | 3,096 |   |
| Net loss                              |       | $                         | (10,194    | )                     | $                           | (8,553     | )                          |                      | $          | (375 | ) |   | $ | (18,649 | ) | $ | (10,977 | ) |

 

See notes tocondensed consolidated financial statements.

 

4

----

Table ofContents

 

**Vangent, Inc.**

(formerly Pearson Government Solutions Business)

**Condensed Consolidated Statements ofOwner’s/Stockholder’s Equity and Comprehensive Income (Loss)**

(in thousands,****except shareamounts)

(unaudited)

 
| ** **                                | ** ** | ** **            | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** **       | ** ** | ** **             | ** ** | **Total**         | ** ** |
|-------------------------------------------|------------|-----------------------|------------|-------------|------------|-------------------|------------|------------------------|------------|------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**    | ** ** | **Other**              | ** ** | **Intercompany** | ** ** | **Accum-**             | ** ** | **Owner’s/** | ** ** |
| ** **                                | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Comprehensive** | ** ** | **Investment in** | ** ** | **ulated**       | ** ** | **Stockholder’s** | ** ** |
| ** **                                | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**       | ** ** | **Income (Loss)** | ** ** | **Subsidiary**   | ** ** | **Deficit**            | ** ** | **Equity**        | ** ** |
|                                      |       |                  |       |        |       |              |       |                   |       |             |       |                   |       |              |       |
| **Predecessor  Entity**                   |       |                  |       |        |       |              |       |                   |       |             |       |                   |       |              |       |
| **Balance,  December 31, 2006**      |       | —                |       | $           | —     |              | $          | —                 |       | $                | (5,502     | )                      | $          | 534,586           |       | $ | — |   | $ | 529,084 |   |
| Foreign currency  translation adjustment  |       | —                |       | —      |       | —            |       | (166                   | )          | —           |       | —                 |       | (166              | )          |
| Net loss                                  |       | —                |       | —      |       | —            |       | —                 |       | (375             | )          | —                 |       | (375              | )          |
| Total  comprehensive loss                 |       |                  |       |        |       |              |       |                   |       |             |       |                   |       | (541              | )          |
| Equity transfers  and investment          |       | —                |       | —      |       | —            |       | —                 |       | 13,310           |       | —                 |       | 13,310            |       |
| **Balance,  February 14, 2007**      |       | —                |       | $           | —     |              | $          | —                 |       | $                | (5,668     | )                      | $          | 547,521           |       | $ | — |   | $ | 541,853 |   |
|                                      |       |                  |       |        |       |              |       |                   |       |             |       |                   |       |              |       |
| ** **                                |       |                  |       |        |       |              |       |                   |       |             |       |                   |       |              |       |
| **Successor  Entity**                     |       |                  |       |        |       |              |       |                   |       |             |       |                   |       |              |       |
| **Balance,  February 15, 2007**      |       | —                |       | $           | —     |              | $          | —                 |       | $                | —     |                   | $          | —            |       | $ | — |   | $ | — |   |
| Effect of  hedging activities, net of tax |       | —                |       | —      |       | —            |       | 195                    |       | —           |       | —                 |       | 195               |       |
| Foreign currency  translation adjustment  |       | —                |       | —      |       | —            |       | 389                    |       | —           |       | —                 |       | 389               |       |
| Net loss                                  |       | —                |       | —      |       | —            |       | —                 |       | —           |       | (18,649                | )          | (18,649           | )          |
| Total  comprehensive loss                 |       |                  |       |        |       |              |       |                   |       |             |       |                   |       | (18,065           | )          |
| Issuance of  common stock                 |       | 100                   |       | —      |       | 203,466           |       | —                 |       | —           |       | —                 |       | 203,466           |       |
| **Balance,  June 30, 2007**          |       | 100                   |       | $           | —     |              | $          | 203,466                |       | $                | 584        |                   | $          | —            |       | $ | (18,649 | ) | $ | 185,401 |   |
|                                      |       |                  |       |        |       |              |       |                   |       |             |       |                   |       |              |       |
| **Balance  December 31, 2007**       |       | 100                   |       | $           | —     |              | $          | 205,275                |       | $                | (2,937     | )                      | $          | —            |       | $ | (22,049 | ) | $ | 180,289 |   |
| Effect of  hedging activities, net of tax |       | —                |       | —      |       | —            |       | 1,334                  |       | —           |       | —                 |       | 1,334             |       |
| Foreign currency  translation adjustment  |       | —                |       | —      |       | —            |       | 313                    |       | —           |       | —                 |       | 313               |       |
| Net loss                                  |       | —                |       | —      |       | —            |       | —                 |       | —           |       | (10,977                | )          | (10,977           | )          |
| Total  comprehensive loss                 |       |                  |       |        |       |              |       |                   |       |             |       |                   |       | (9,330            | )          |
| Equity-based  compensation                |       | —                |       | —      |       | 592               |       | —                 |       | —           |       | —                 |       | 592               |       |
| **Balance,  June 28, 2008**          |       | 100                   |       | $           | —     |              | $          | 205,867                |       | $                | (1,290     | )                      | $          | —            |       | $ | (33,026 | ) | $ | 171,551 |   |

 

See notes to condensed consolidated financialstatements.

 

5

----

Table of Contents

 

**Vangent, Inc.**

(formerly PearsonGovernment Solutions Business)

**Condensed Consolidated Statements ofCash Flows**

(in thousands)

(unaudited)

 
| ** **                                                                                 | ** ** | **Predecessor  Entity**                                     | ** ** | ** ** | **Successor Entity**                                 | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **Period  January 1 to  February 14,  2007** | ** ** | ** ** | **Period  February 15 to  June 30,  2007** | ** ** | **Six Months  Ended  June 28,  2008** | ** ** |
| **Cash  flows from operating activities**                                                  |       |                                                        |       |       |                                                      |       |   |   |
| Net loss                                                                                   |       | $                                                           | (375       | )          |                                                      | $          | (18,649 | ) | $ | (10,977 | ) |
| Adjustments to  reconcile net loss to net cash (used in) provided by operating activities: |       |                                                        |       |       |                                                      |       |   |   |
| Amortization of  intangibles                                                               |       | 132                                                         |       |       | 8,585                                                     |       | 10,519 |   |
| Depreciation and  amortization                                                             |       | 2,237                                                       |       |       | 4,768                                                     |       | 6,846 |   |
| Equity-based  compensation expense                                                         |       | 1,477                                                       |       |       | —                                                    |       | 592 |   |
| Deferred income  taxes                                                                     |       | (19                                                         | )          |       | 2,337                                                     |       | 2,913 |   |
| Changes in  operating assets and liabilities, net of effect of acquisition:                |       |                                                        |       |       |                                                      |       |   |   |
| Trade  receivables                                                                         |       | (16,445                                                     | )          |       | 5,857                                                     |       | 13,493 |   |
| Other  receivables and assets                                                              |       | 350                                                         |       |       | (7,801                                                    | )          | (3,856 | ) |
| Accounts payable  and accrued expenses                                                     |       | (5,172                                                      | )          |       | 19,961                                                    |       | 1,336 |   |
| Accrued interest  payable                                                                  |       | —                                                      |       |       | 9,221                                                     |       | (540 | ) |
| Advance payments  on contracts                                                             |       | (1,206                                                      | )          |       | (2,028                                                    | )          | (341 | ) |
| Other                                                                                      |       | 125                                                         |       |       | 906                                                       |       | 1,191 |   |
| Net cash (used  in) provided by operating activities                                       |       | (18,896                                                     | )          |       | 23,157                                                    |       | 21,176 |   |
|                                                                                       |       |                                                        |       |       |                                                      |       |   |   |
| **Cash  flows from investing activities**                                                  |       |                                                        |       |       |                                                      |       |   |   |
| Acquisition, net  of cash acquired                                                         |       | —                                                      |       |       | (615,206                                                  | )          | (3,936 | ) |
| Capital expenditures                                                                       |       | (3,727                                                      | )          |       | (2,082                                                    | )          | (5,041 | ) |
| Net cash used in  investing activities                                                     |       | (3,727                                                      | )          |       | (617,288                                                  | )          | (8,977 | ) |
|                                                                                       |       |                                                        |       |       |                                                      |       |   |   |
| **Cash  flows from financing activities**                                                  |       |                                                        |       |       |                                                      |       |   |   |
| Proceeds from  issuance of common stock                                                    |       | —                                                      |       |       | 203,466                                                   |       | — |   |
| Borrowings under  revolving credit facility                                                |       | —                                                      |       |       | 15,000                                                    |       | — |   |
| Repayment of  borrowing under revolving credit facility                                    |       | —                                                      |       |       | (15,000                                                   | )          | — |   |
| Proceeds from  issuance of senior secured term loan                                        |       | —                                                      |       |       | 240,000                                                   |       | — |   |
| Repayment of  senior secured term loan                                                     |       | —                                                      |       |       | (600                                                      | )          | (7,834 | ) |
| Proceeds from  issuance of senior subordinated notes                                       |       | —                                                      |       |       | 190,000                                                   |       | — |   |
| Debt financing  costs                                                                      |       | —                                                      |       |       | (14,013                                                   | )          | — |   |
| Investment from  parent                                                                    |       | 13,310                                                      |       |       | —                                                    |       | — |   |
| Capital lease  payments                                                                    |       | (39                                                         | )          |       | (110                                                      | )          | (138 | ) |
| Net cash  provided by (used in) financing activities                                       |       | 13,271                                                      |       |       | 618,743                                                   |       | (7,972 | ) |
| Effect of  exchange rate changes on cash equivalents                                       |       | (166                                                        | )          |       | 389                                                       |       | 106 |   |
| Net (decrease)  increase in cash and cash equivalents                                      |       | (9,518                                                      | )          |       | 25,001                                                    |       | 4,333 |   |
| Cash and cash  equivalents, beginning of period                                            |       | 11,713                                                      |       |       | —                                                    |       | 26,093 |   |
| Cash and cash  equivalents, end of period                                                  |       | $                                                           | 2,195      |       |                                                      | $          | 25,001 |   | $ | 30,426 |   |
| **Supplemental  noncash investing and financing activities:**                              |       |                                                        |       |       |                                                      |       |   |   |
| Leasehold  improvements provided under operating lease                                     |       | $                                                           | —     |       |                                                      | $          | — |   | $ | 2,503 |   |
| **Supplemental  cash flow information**                                                    |       |                                                        |       |       |                                                      |       |   |   |
| Interest paid                                                                              |       | $                                                           | —     |       |                                                      | $          | 4,666 |   | $ | 17,553 |   |
| Income taxes  paid                                                                         |       | 35                                                          |       |       | 521                                                       |       | 337 |   |

 

See notes tocondensed consolidated financial statements.

 

6

----

Tableof Contents

 

**Vangent, Inc.**

(formerly Pearson Government Solutions Business)

**Notes to Condensed ConsolidatedFinancial Statements**

(in thousands)

(unaudited)

 

**1.  Organization and Basis of Presentation**

 

*Basis of Presentation*

 

Vangent, Inc. (“Vangent” or “Company” or “Successor Entity”)(formerly Pearson Government Solutions Business) is a 100%-owned subsidiary ofVangent Holding Corp.  Vangent HoldingLLC (formerly PGS Holding LLC) is the majority shareholder in Vangent HoldingCorp.  Vangent Holding LLC is 90% ownedby The Veritas Capital Fund III, L.P. and 10% owned by Pearson plc (“Pearson”).

 

On February 14,2007, The Veritas Capital Fund III, L.P., Vangent Holding LLC (“Buyer Parent”)and Vangent Holding Corp. (“Buyer”) consummated a stock purchase agreement withPearson and certain other seller entities under which the Buyer acquired all ofthe equity interests of Pearson Government Solutions (“Predecessor Entity”).

 

The condensedconsolidated financial statements for the Predecessor Entity were prepared fromPearson’s accounting records and are presented on a carve-out basis to includethe results of operations applicable to the managed group of entities underPearson known as Pearson Government Solutions Business.  Owner’s equity is presented for thePredecessor Entity in lieu of stockholder’s equity.  Unaudited consolidated financial statementsfor the Predecessor Entity are presented for the period January 1, to February 14,2007. As a result of the application of the purchase accounting method and thevaluation of assets and liabilities at fair value as of the date of theacquisition, the consolidated financial statements of the Successor Entity arenot comparable with the Predecessor Entity.

 

The unaudited condensed consolidated financialstatements include the accounts of the Company and its domestic and foreignsubsidiaries and have been prepared in accordance with generally acceptedaccounting principles for interim financial information and the instructions toForm 10-Q and Article 10 of Regulation S-X. Certain information andfootnote disclosures normally included in complete financial statements have been condensed or omittedpursuant to the applicable rules and regulations. The Company believesthat all disclosures are adequate to make the information presented notmisleading. The condensed consolidated financial statements should be read inconjunction with the consolidated financial statements and the related notes theretoincluded in the Company’s annual report on Form 10-K for the year ended December 31,2007.

 

In the opinion of management, all normal and recurring adjustmentsnecessary to fairly present the financial position and results of operations asof and for the periods presented have been included. The results of operationspresented are not necessarily indicative of the results to be expected for thefull fiscal year or for any future periods. The Company uses estimates andassumptions in the preparation of its financial statements. The estimates areprimarily based on historical experience and business knowledge and are revisedas circumstances change. Actual results could differ materially from thoseestimates.

 

*Nature of Operations*

 

Vangent servescustomers in the U.S. government, international governments, higher education,and the commercial human resource management sector. The Company’s primarycustomer focus is U.S. and international governmental agencies which utilizethird-party providers to design build and operate technologically advancedsystems. The organizational structure focuses on public health care and othercivilian government agencies, as well as the defense, intelligence, andhomeland security government agencies. The Department of Health and HumanServices (“HHS”) represented 46% and the Department of Education (“DoED”)represented 17% of revenue for the six months ended June 28, 2008.

 

7

----

Table ofContents

 

*FiscalYear and Quarterly Periods*

 

The Company’sfiscal year begins on January 1 and ends on December 31.  Quarterly periods are based on a four-week,four-week, five-week methodology ending on the Saturday nearest to the end ofthe quarter to align with the Company’s business processes.

 

**2. Acquisitions**

 

*Acquisitionof Aptiv Technology Partners*

 

In May 2008,Vangent purchased the government health integration group assets of AptivTechnology Partners for cash consideration of $3,936, including acquisitionfees.  In accordance with SFAS No. 141,*Business Combinations*, and the purchasemethod of accounting, the assets and liabilities acquired were recorded attheir estimated fair values at the date of the acquisition, and the results ofoperations of the acquired business has been included in Vangent’s consolidatedfinancial statements from the date of the acquisition.  The acquired business is part of thegovernment business segment. The allocation of the purchase considerationresulted in intangible assets of $1,154 scheduled to be amortized over athree-year period and goodwill of $2,747 that is expected to be tax deductible.The pro forma effect on results of operations for the six months ended June 28,2008, giving effect to the acquisition as if it occurred on January 1,2008, was not material.

 

*VangentAcquisition Transaction (“Acquisition”)*

 

On February 14,2007, The Veritas Capital Fund III, L.P. (“Veritas Capital”) and the Buyerconsummated a stock purchase agreement with Pearson and certain other sellerentities under which the Buyer acquired all of the equity interests of (i) PearsonGovernment Solutions, Inc. and (ii) the domestic and internationalaffiliates of Pearson Government Solutions, Inc.

 

The Acquisitionwas accounted for under Emerging Issues Task Force Issue No. 88-16,*Basis in Leveraged Buyout Transactions* (“EITF 88-16”).In accordance with EITF 88-16, the portion of Pearson’s (“continuingstockholder”) basis in Vangent represented by its 10% residual interest wasassigned to the assets and liabilities acquired. The remainder of theinvestment in the assets and liabilities acquired by the Buyer (the remaining90%) was recorded at fair value. As a result, the assets and liabilities wereassigned new values which include part carryover basis and part fair valuebasis.

 

A summary of thepurchase consideration and related allocation follows:

 

8

----

Table of Contents

 
| **Purchase  Consideration**                                      |   |    |    |
|------------------------------------------------------------------|--------|---------|---------|
| Cash paid to  Pearson                                            |   | $       | 560,000 |   |
| 10% of  Class A interests in Buyer Parent issued to Pearson |   | 54,185  |    |
| Less: deemed  dividend                                           |   | (47,697 | )       |
| Series A  preferred stock of Buyer issued to Pearson        |   | 35,020  |    |
| Series B  preferred stock of Buyer issued to Pearson        |   | 4,958   |    |
| Transaction  costs                                               |   | 32,000  |    |
|                                                             |   | $       | 638,466 |   |
| **Allocation  of Purchase Consideration**                        |   |    |    |
| Cash                                                             |   | $       | 2,195   |   |
| Accounts  receivable                                             |   | 113,881 |    |
| Property and  equipment                                          |   | 31,007  |    |
| Deferred debt  financing costs                                   |   | 14,013  |    |
| Other assets                                                     |   | 7,863   |    |
| Identifiable  intangible assets                                  |   | 216,406 |    |
| Goodwill                                                         |   | 301,873 |    |
| Less:  liabilities assumed                                       |   | (55,824 | )       |
| Net assets  acquired                                             |   | 631,414 |    |
| Additional cash  received from Buyer                             |   | 7,052   |    |
| Net assets                                                       |   | $       | 638,466 |   |
|                                                             |   |    |    |
| **Allocation  of Intangible Assets Acquired**                    |   |    |    |
| Customer  relationships (10.8 years weighted average life)       |   | $       | 204,570 |   |
| Intellectual  property (indefinite life)                         |   | 11,178  |    |
| Other                                                            |   | 658     |    |
|                                                             |   | $       | 216,406 |   |

 

**3.   RecentAccounting Pronouncements**

 

In September 2006, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 157,*Fair Value Measurements* (“SFAS 157”).  SFAS 157 defines fair value, establishes aframework for measuring fair value, and expands disclosures about fair valuemeasurements.  The Company adopted SFAS157 for financial assets and financial liabilities on January 1, 2008, andthere was no material effect on the consolidated financial statements.  The FASB deferred the effective date as itrelates to fair value measurement requirements for non-financial assets andnon-financial liabilities to January 1, 2009. The Company is evaluatingthe impact of adopting SFAS 157 for non-financial assets and liabilities on itsresults of operations and financial position.

 

In February 2007, theFASB issued SFAS No. 159,*The FairValue Option for Financial Assets and Financial Liabilities - Including anamendment of SFAS No.115* (“SFAS 159”). SFAS 159 permits entities tochoose to measure eligible financial assets and liabilities that are nototherwise required to be measured at fair value.  The Company adopted SFAS 159 on January 1,2008, and there was no effect on the consolidated financial statements sincethe Company did not elect the fair value option for assets and liabilities withinthe scope.

 

In December 2007the FASB issued SFAS No.141 (revised 2007), **Business Combinations****,**and SFAS No. 160, **Noncontrolling Interests in Consolidated Financial****Statements,****anamendment of ARB No. 51.** The new standards willsignificantly change how business acquisitions are accounted for and willimpact financial statements both on the acquisition date and in subsequentperiods. Some of the changes, such as the accounting for contingentconsideration, will introduce more volatility into earnings and may impact acompany’s acquisition strategy. Key changes include: transaction costs andrestructuring charges will be charged to expense; accounting for certain assetsacquired and liabilities assumed in an acquisition will change significantly;certain contingent assets and liabilities will be recognized at fair value;earn-out arrangements will be measured at fair value until settled; in partialacquisitions, when control is obtained, the acquiring company will recognizeand measure at fair value 100% of the assets and liabilities, includinggoodwill, as if the entire target company had been acquired; and minorityinterests will be recharacterized as noncontrolling interests and classified asa component of equity.  The new standardsbecome effective for Vangent beginning January 1, 2009, and will beapplied prospectively.

 

9

----

Table of Contents

 

In March 2008, the FASB issued SFAS No. 161,*Disclosures about Derivative Instruments andHedging**Activities,* torequire expanded disclosures about how and why a company engages in derivativeand hedging activities, how derivative instruments and related hedged items areaccounted for, and their effect on financial position and results of operationsfor each major type of derivative instrument, including interest rates,foreign exchange, equity, commodity, and credit contracts. The new standardsbecome effective January 1, 2009. The Company is evaluating the additionaldisclosure requirements with respect to interest rate swaps that are designedto hedge interest expense on a portion of the variable-rate term loan, the onlyderivative instruments the Company engages in.

 

In April 2008, the FASB issued FASBStaff Position No. 142-3, *Determination of theUseful life of Intangible Assets*, to amend the factors that shouldbe considered in developing renewal or extension assumptions used to determinethe useful life of an intangible asset and to improve the consistency betweenthe useful life of an intangible asset and the period of expected cash flowsused to measure the fair value of the asset. The new standards become effectivefor Vangent beginning on January 1, 2009, and will be applied prospectivelyonly to intangible assets acquired after the effective date.

 

In May 2008, the FASB issued SFAS No.162, *The Hierarchy of Generally Accepted Accounting Principles*.The new standard is intended to improve financial reporting by identifying aconsistent framework, or hierarchy, for selecting accounting principles to beused in preparing financial statements that are presented in conformity withU.S. generally accepted accounting principles.

 

**4.  Long-TermDebt and Interest Rate Swap**

 

A summary of long-term debt follows:

 
| ** **                                                                                             | ** ** | **December 31,  2007** | ** ** | **June 28,  2008** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Senior secured  credit facility:                                                                       |       |                        |       |                    |       |
| Term loan, due  February 14, 2013, with interest at variable rates (4.89% at  June 30, 2008) |       | $                           | 238,200    |                    | $          | 230,366 |   |
|                                                                                                   |       |                        |       |                    |       |
| 9 5/8% Senior  subordinated fixed rate notes, due February 15, 2015                               |       | 190,000                     |       | 190,000                 |       |
|                                                                                                   |       | 428,200                     |       | 420,366                 |       |
| Less: current  portion                                                                                 |       | (7,325                      | )          | —                  |       |
| Long-term debt,  less current portion                                                                  |       | $                           | 420,875    |                    | $          | 420,366 |   |

 

Scheduled maturities of long-term debt as ofJune 28, 2008, follow:

 
| 2010   |   |   |   | $       | 1,781   |   |
|--------|--------|--------|--------|---------|---------|--------|
| 2011   |   |   |   | 2,375   |    |
| 2012   |   |   |   | 2,375   |    |
| 2013   |   |   |   | 223,835 |    |
| 2014   |   |   |   | —  |    |
| 2015   |   |   |   | 190,000 |    |
|   |   |   |   | $       | 420,366 |   |

 

*Senior Secured Credit Facility*

 

At June 28,2008, the senior secured credit facility consisted of a term loan of $230,366due February 14, 2013, an available revolving credit facility of up to$49,590 that expires February 14, 2012, and a letter of credit of$410.  There were no borrowingsoutstanding under the revolving credit facility at June 28, 2008 or December 31,2007.  A commitment fee of .50% per yearis paid on the available unused portion of the revolving credit facility.

 

Borrowings under the**seniorsecured credit facility bear interest at a rate equal to, at the Company’soption, either: (i) the base rate, as defined, plus an applicable marginof 1.25-1.50%, or (ii) the adjusted LIBOR rate, as defined, plus anapplicable margin of 2.25-2.50%. The term loan is scheduled to be repaid in 11quarterly

 

10

----

Table of Contents

 

installments of $594beginning June 2010 with the balance due February 14, 2013.  Borrowings are subject to mandatoryprepayment with (i) 100% of the net cash proceeds of certain asset sales; (ii) 50%of the net cash proceeds of equity offerings or capital contributions subjectto certain exceptions; (iii) 100% of the net cash proceeds of additionaldebt; and (iv) a percentage of annual excess cash flow, as defined.Payments resulting from the annual excess cash flow requirement are due 90 daysfollowing the year end. Repayments of $7,834, primarily a mandatory prepayment,were made in the six months ended June 28, 2008.  Since the excess cash flow requirement isbased on annual cash flow, it is not possible to estimate the amount, if any,that would become payable in March 2009 or subsequent years.

 

Borrowings are secured by accounts receivable, cash, intellectualproperty and other assets and are guaranteed jointly and severally, by allexisting and future domestic subsidiaries. Foreign subsidiaries do not guarantee the borrowings.  The senior secured credit facility containsvarious customary affirmative and negative covenants and events of default,including, but not limited to, restrictions on the disposal of assets, incurringadditional indebtedness or guarantee obligations, paying dividends, creatingliens on assets, making investments, loans or advances, and compliance with amaximum total leverage ratio.  As of June 28,2008, the Company was in compliance with the covenants.

 

*9 5/8%Senior Subordinated Notes*

 

In February 2007, the Company completed an offering of $190,000principal amount of 9 5/8 % senior subordinated notes due February 15,2015. Interest accrues at the fixed rate of 9 5/8% and is paid semi-annually. Proceedsof the offering were used to fund the Acquisition.  The notes are general unsecured obligationsof the Company and are subordinated to all existing and future senior loansincluding borrowings under the senior secured credit facility.  The notes are guaranteed, jointly andseverally, by all existing and future domestic subsidiaries. Foreignsubsidiaries do not guarantee the notes.

 

In the event of an equity offering on or prior to February 15,2010, the Company may redeem the notes with the net cash proceeds of one ormore equity offerings at 109.625% of the principal amount, provided that atleast 65% of the principal amount of the notes originally issued remainsoutstanding immediately following such redemption.

 

With respect to a redemption not related to an equity offering at anytime prior to February 15, 2011, the Company may redeem all or part of thenotes at a redemption price of 100% of the principal amount plus an applicablepremium, as defined, and additional interest, as defined.  The notes are redeemable at the option of theCompany at the redemption price of 104.8125% of the principal amount on orafter February 15, 2011, 102.4063% on or after February 15, 2012, and100% on or after February 15, 2013.

 

*Interest Rate Swaps on Variable-Rate Term Loan under Senior SecuredCredit Facility*

 

The Company hasentered into interest rate swap agreements to hedge fluctuations in LIBORinterest rates on a portion of the term-loan borrowing under the senior securedcredit facility.  The Company exchangedits variable LIBOR interest rate for a fixed interest rate, as follows:

 
| **Date Entered** | ** ** | **Notional  Amount** | ** ** | **Fixed  Interest Rate  to be Paid** | ** ** | **Variable  Interest Rate  to be Received** | ** ** | **Period Covered**                  | ** **                               |
|-----------------------|------------|----------------------|------------|-----------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------|------------------------------------------|
| February 2007    |       | $                    | 140,000    |                                                | 5.215      | %                                                          | LIBOR      |                                     | February 2007 to February 2008 |   |
|                  |       | 120,000              |       | 5.215                                               | %          | LIBOR                                                      |       | February 2008 to February 2009 |                                     |
|                  |       | 110,000              |       | 5.215                                               | %          | LIBOR                                                      |       | February 2009 to February 2010 |                                     |
| April 2008       |       | $                    | 75,000     |                                                | 3.280      | %                                                          | LIBOR      |                                     | April 2008 to February 2010    |   |
|                  |       | 150,000              |       | 3.280                                               | %          | LIBOR                                                      |       | February 2010 to February 2011 |                                     |

 

The Companydocumented its risk management objective and nature of the risks being hedgedand has designated the interest rate swaps as cash flow hedges at inception ofthe agreements.  The Company performs aquarterly analysis of the effectiveness of the hedge and has concluded that thehedging relationship is highly effective due to the consistency ofcritical terms of the interest rate swap and related term loan under the senior

 

11

----

Table of Contents

 

secured creditfacility. The fair value of the net interest rate swap liability was$2,191 at June 28, 2008, resulting in an unrealized loss of $2,028reported in accumulated other comprehensive loss in the consolidated statementof stockholder’s equity and a realized loss of $163 for the ineffective portionreported as interest expense.

 

In the unlikelyevent that the counterparty fails to meet the terms, the Company’s exposure islimited to the interest rate differential on the notional amount at eachquarterly settlement period over the life of the agreement. We do notanticipate non-performance by the counterparty. The use of derivative financialinstruments is limited to interest rate swaps, the purpose of which is to hedgeinterest expense on a portion of the variable-rate term loan. The Company doesnot hold or issue derivative financial instruments for speculative purposes.

 

**5. Fair Value Measurements**

 

The Company adopted SFAS 157,*Fair Value Measurements*, on January 1,2008, for financial assets and financial liabilities. SFAS 157 defines fairvalue, establishes a framework for measuring fair value, and expandsdisclosures about fair value measurements.  SFAS 157 utilizes a fairvalue hierarchy that prioritizes the inputs to valuation techniques used tomeasure fair value into three broad levels, summarized as follows:

 
| · | Level 1 | Observable inputs such  as quoted prices (unadjusted) in active markets for identical assets or liabilities.                                                                                                                                                                                         |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | Level 2 | Inputs, other than  quoted prices that are observable for the asset or liability, either directly  or indirectly. These include quoted prices for similar assets or liabilities  in active markets and quoted prices for identical or similar assets or  liabilities in markets that are not active. |
| · | Level 3 | Unobservable inputs  that reflect the reporting entity’s own assumptions.                                                                                                                                                                                                                       |

 

A summary of the basesused to measure certain financial assets and financial liabilities reported atfair value on a recurring basis in the consolidated balance sheet follows:

 
| ** **                                              | ** ** | ** **                       | ** ** | **Basis of Fair Value Measurements**                                   | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **Balance  June 28,  2008** | ** ** | **Quoted Prices  in Active  Markets for  Identical  Items  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
|                                                    |       |                             |       |                                                                                       |       |   |   |   |   |
| Interest rate  swaps reported as a long-term asset      |       | $                                | 509        |                                                                                       | $          | — |   | $ | 509 |   | $ | — |   |
| Interest rate  swaps reported as a short-term liability |       | 2,700                            |       | —                                                                                     |       | 2,700 |   | — |   |
| Net liability  for interest rate swaps                  |       | $                                | 2,191      |                                                                                       | $          | — |   | $ | 2,191 |   | $ | — |   |

 

**6.  Income Taxes**

 

For the six monthsended June 28, 2008, the Company recorded an income tax provision of$3,096 composed of U.S., state and local and foreign income taxes whichincludes a charge of $4,718 for a tax valuation allowance against U.S. deferredtax assets.

 

The deferred taxliability of $8,487 at June 28, 2008, relates to an indefinite livedintangible asset (goodwill) that is amortized and deducted for income taxpurposes in the United States, but is not amortized under U.S. generallyaccepted accounting principles.  TheCompany continues to believe, based on available evidence at June 28,2008, it is more likely than not the U.S. federal and state and local deferredtax assets will not be realizable. Therefore, a valuation allowance has been providedagainst U.S. deferred tax assets.

 

FASBInterpretation No. 48, *Accounting for Uncertaintyin Income Taxes—an Interpretation of FASB Statement No. 109* (“FIN48”), prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of tax positions taken, orexpected to be taken, in a tax return. Pursuant to the Acquisition agreement,Vangent is indemnified and is not liable for any income taxes that relate tothe pre-Acquisition periods prior to February 15, 2007. There was noliability for unrecognized tax benefits at June 28, 2008.  Vangent does not expect changes inunrecognized tax benefits, if any, within the next 12 months to have a materialimpact on the provision for income taxes or the effective tax rate.

 

12

----

Table ofContents

 

Vangent and itssubsidiaries conduct business and are subject to income taxes in the UnitedStates and certain foreign countries. Vangent expects to file its initial income tax returns beginning withthe period February 15 to December 31, 2007, which will be subject toexamination by federal, state, local, or foreign tax authorities.  Interest and penalties relating to incometaxes are charged to the provision for income taxes.

 

**7.  Commitments and Contingencies**

 

*University of California Contract*

 

In July 2007,the Company received a notice from the University of California that it deemedthe Company to be in breach of one of the contracts and directing the Companyto stop work on that contract.  In July 2008, the Company andThe Regents of the University of California executed a definitive settlementagreement under which the Company subsequently paid $4,995 to the University ofCalifornia. The Company has made a claim for coverage under its professionalliability policy with respect to this matter. The insurance carrierpreviously denied the initial request for coverage, which denial was disputedby the Company.  In August 2008, the carrier contributed $1,998 tofund the settlement with the University of California pursuant to a mutualreservation of rights and reimbursement agreement entered into on May 8,2008. To the extent the carrier seeks reimbursement of all or a portion of itscontribution and is successful in such action, the Company would be required toreimburse up to the amount paid plus interest. As a result of the settlementwith the University of California and the reservation of rights andreimbursement agreement with the insurance carrier, the Company recorded acharge of $3,995 to general and administrative expense for the six months endedJune 28, 2008, increasing its settlement liability to $4,995 at June 28,2008, and recorded a reduction of $1,998 in general and administrative expenseand recorded a receivable in the same amount from the insurance carrier at June 28,2008.

 

*Loss of Data*

 

In September 2007,the Company became aware of an event which could lead to the loss of thirdparty confidential information. The Company believes that it is adequatelyinsured with respect to this exposure under its professional liabilityinsurance beyond a $500 retention; however there can be no assurances that thiswill be the case.

 

*Transportation Security Administration*

 

In February 2002,the Transportation Security Administration (“TSA”) awarded the PredecessorEntity a contract to assess and recruit passenger screeners for airports by November 19,2002, the date mandated by Congress. The contract expired on December 31,2002, and the Predecessor Entity was not awarded the subsequent contract.During the term of the agreement, the contract was modified multiple times andthe contract value increased from an original bid of $100,000 to $742,000. Thisamount was eventually fully funded by TSA. As of December 31, 2002,Predecessor Entity had earned the maximum allowed under the core contractfunding level of $731,000 together with an additional $11,000 in connectionwith the pilot program. The pilot program contract ended in 2003.

 

The Department ofHomeland Security Inspector General is investigating the contract inconjunction with the U.S. Department of Justice to determine whether thePredecessor Entity or its subcontractors violated the Civil False Claims Act.Monetary liability under the Civil False Claims Act includes treble damagesplus civil penalties of $5.5 to $11.0 per false claim. The Acquisitionagreement provides that Pearson will indemnify Vangent, the Buyer and its otheraffiliates without regard to any time limitation for 50% of any losses incurredin connection with the investigation up to the aggregate amount of $20,000 andfor 100% of any losses in excess of $20,000.

 

As of February 14, 2007, the remaining balance of the accruedliability established by the Predecessor Entity was $5,959 for settlementnegotiations with respect to the ongoing investigation of its performance andbillings under the TSA contract, including an expense of $1,000 recorded forthe period January 1 to February 14, 2007, as settlement negotiationsbetween the parties continued. The balance of the accrued liability was $5,648at June 28, 2008.  In connectionwith the Acquisition and related cost-sharing provisions, a receivable of$2,824 from Pearson representing 50% of the expected accrued losses is includedin other receivables at June 28, 2008. There are continuing discussionsbetween the parties with regard to a settlement.

 

13

----

Tableof Contents

 

*Insurance and Third-Party Recoveries*

 

In connection with the recognition of liabilities for losscontingencies, the Company records related receivables for insurance andthird-party recoveries that are deemed probable. In assessing the probabilityof recovery, judgments are made concerning insurance and third-party coveragethat we believe are reasonable and consistent based on our experience, ourknowledge of the relevant issues and various judicial determinations, andconsideration of the impact of any likely settlements.

 

*Other*

 

The Company is subject to legal proceedings, investigations and claimsarising out of the ordinary course of business and accrues a liability if anunfavorable outcome is probable. In the opinion of management, resolution ofsuch matters is not expected to have a material effect on the Company’s resultsof operations or financial position.

 

**8.  Equity-Based Compensation**

 

*Successor Entity*

 

No stock options areauthorized and no stock options have been granted by Vangent.

 

Beginning in June 2007,certain members of management of Vangent and certain outside directors ofVangent Holding Corp. were granted Class B interests in Vangent HoldingLLC, the majority shareholder of Vangent Holding Corp. which in turn owns allof Vangent’s common stock.   At June 28,2008, the aggregate individual grants of Class B interests represented5.4% of the profit interests in Vangent Holding LLC. The Class B interestsare subject to a vesting schedule which vests 20% on each February 14until February 14, 2012, when such ownership becomes fully vested or oneach anniversary of the date on which a Class B member became a full-timeemployee or outside director after February 14, 2007 until fully vested.The unvested portion of Class B interests reverts to the holders of Class Ainterests in the event they are forfeited or reduced in accordance with theterms of the operating agreement governing Vangent Holding LLC. Class Binterests are granted with no exercise price or expiration date. Pursuant tothe terms of the operating agreement governing Vangent Holding LLC, the holdersof Class B interests are entitled to receive their respective proportionalinterest of all distributions made by Vangent Holding LLC provided the holdersof the Class A interests have received an 8% per annum internal rate ofreturn on their invested capital. Additionally, the Vangent Holding LLCoperating agreement limits Class B interests to 7.5% in the aggregate.

 

A summary of activity forgrants of Class B interests in Vangent Holdings LLC follows:

 
| ** **                       | ** ** | **Class B  Interests** | ** ** | **Fair Value at  Date of  Grant** | ** ** |
|----------------------------------|------------|-----------------------------|------------|--------------------------------------------------|------------|
| Balance,  February 15, 2007 | ** ** | **—**                  |       | $                                                | —     |   |
| Grants                           |       | 5.3                         | %          | 5,946                                            |       |
| Forfeitures                      |       | (0.4                        | )          | (454                                             | )          |
| Balance,  December 31, 2007 |       | 4.9                         | %          | 5,492                                            |       |
| Grants                           |       | 1.1                         |       | 1,191                                            |       |
| Forfeitures                      |       | (0.6                        | )          | (589                                             | )          |
| Balance,  June 28, 2008     |       | 5.4                         | %          | $                                                | 6,094      |   |

 

The fair value ofthe Class B interests at the date of grant is based upon the value of theinterests of Vangent Holding LLC less a 35% discount for lack of liquidity. Thevalue was determined based upon the amount paid for 90% of the Class Ainterests of Vangent Holding LLC by Veritas Capital and the value of Pearson’s10% Class A interests in February 2007.  Equity-based compensation expense is recordedbased on the grant-date fair value on a straight-line basis over the totalrequisite service period for the award, and amounted to $592 for the six monthsended June 28, 2008.  Theunamortized amount of equity-based compensation expense was $4,593 at June 28,2008, and amortization of approximately $1,200 per year is scheduled for eachof the next four years.

 

*Predecessor Entity*

 

The PredecessorEntity accounted for equity-based compensation using the fair value method.Under the fair value method, stock options were valued on the date of grant,and equity-based compensation expense was

 

14

----

Table ofContents

 

recognized overthe service period. Grants of restricted stock awards were measured at fairvalue on the date of grant based on the number of shares granted and the quotedprice of the underlying stock, and such value was recognized as an expense overthe corresponding service period.  Theremaining balances of unvested equity-based awards were vested in full inconnection with the Acquisition, resulting in equity-based compensation expenseof $1,477 for the period January 1 to February 14, 2007.

 

**9.  Related Party Transactions**

 

Vangent pays an annual management fee of $1,000 toVeritas Capital for general business management, financial, strategic andconsulting services.

 

Included in thepurchase consideration relating to the Acquisition in February 2007 is aone-time transaction fee of $10,000 paid to Veritas Capital as consideration inconnection with planning, structuring and consummating the Acquisition.

 

Certain members ofmanagement of Vangent and certain outside directors of Vangent Holding Corp.were granted Class B interests in Vangent Holding LLC, the majorityshareholder of Vangent Holding Corp. which in turn owns all of Vangent’s commonstock.

 

**10.  Accumulated Other Comprehensive Income (Loss)**

 

The components ofaccumulated other comprehensive income (loss) follow:

 
| ** **                                | ** ** | **December 31,** | ** ** | **June 28,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                | ** ** | **2007**              | ** ** | **2008**          | ** ** |
| Effect of  hedging activities, net of tax |       | $                     | (3,362     | )                 | $          | (2,028 | ) |
| Foreign currency  translation adjustment  |       | 425                   |       | 738               |       |
|                                      |       | $                     | (2,937     | )                 | $          | (1,290 | ) |

 

**11.   Business Segments and Major Customers**

 

Operating segmentsare defined as components of an enterprise about which separate financialinformation is available that is evaluated regularly by the chief operatingdecision maker in deciding how to allocate resources and in assessingperformance.

 

Vangent reports operating results and financial datafor three business segments: government group, commercial group andinternational group. The government group customers are primarily U.S. federalagencies.  The government group assistscivilian, defense and intelligence agencies as well as government-relatedentities with the design and execution of information and technology strategy,helps develop and maintain their complex, mission-critical systems and deliversa wide range of business process outsourcing solutions.  The commercial group primarily serves theprivate sector and designs, builds, and operates workforce solutions thatautomate and improve the recruitment, assessment, selection and development ofan organization’s workforce.  Theinternational group provides consulting, systems integration and businessprocess outsourcing solutions to both commercial and foreign local and centralgovernment customers.

 

Vangent evaluatesthe performance of its operating segments based on operating income, but doesnot measure revenue or operating income by its major service offerings, eitherfor internal management or external financial reporting purposes, as it wouldbe impractical to do so.  The new basisof accounting resulting from the Acquisition in February 2007 has asignificant effect on results of operations.

 

Summarizedfinancial information for business segments and major customers follows:

 

15

----

Table of Contents

 
| ** **                               | ** ** | **Successor Entity** | ** ** | ** **              | **Predecessor  Entity** | ** ** | ** **                  | **Successor Entity** | ** ** |
|------------------------------------------|------------|---------------------------|------------|-------------------------|-------------------------|------------|-----------------------------|---------------------------|------------|
| ** **                               | ** ** | **Three Months**     | ** ** | **Three Months**   | ** **              | ** ** | **Period**                  | ** **                | ** ** | **Period** | ** ** | **Six Months** | ** ** |
| ** **                               | ** ** | **Ended**                 | ** ** | **Ended**               | ** **              | ** ** | **January 1 to**  | ** **                | ** ** | **February 15 to** | ** ** | **Ended** | ** ** |
| ** **                               | ** ** | **June 30,  2007**   | ** ** | **June 28,  2008** | ** **              | ** ** | **February 14,  2007** | ** **                | ** ** | **June 30,  2007** | ** ** | **June 28,  2008** | ** ** |
| Revenue:                                 |       |                      |       |                    |                    |       |                        |                      |       |   |   |   |   |
| Government group                         |       | $                         | 94,406     |                    | $                       | 95,764     |                        |                      | $          | 47,011 |   |   | $ | 133,258 |   | $ | 212,896 |   |
| Commercial group                         |       | 8,500                     |       | 7,179                   |                    |       | 3,302                       |                      |       | 13,239 |   | 14,731 |   |
| International  group                     |       | 18,678                    |       | 20,991                  |                    |       | 8,520                       |                      |       | 27,549 |   | 39,782 |   |
|                                     |       | $                         | 121,584    |                    | $                       | 123,934    |                        |                      | $          | 58,833 |   |   | $ | 174,046 |   | $ | 267,409 |   |
|                                     |       |                      |       |                    |                    |       |                        |                      |       |   |   |   |   |
| Operating income  (loss):                |       |                      |       |                    |                    |       |                        |                      |       |   |   |   |   |
| Government group                         |       | $                         | 91         |                    | $                       | 1,574      |                        |                      | $          | 647 |   |   | $ | (2,848 | ) | $ | 9,991 |   |
| Commercial group                         |       | 1,028                     |       | (291                    | )                       |       | (496                        | )                         |       | 1,056 |   | (302 | ) |
| International  group                     |       | 285                       |       | 514                     |                    |       | (281                        | )                         |       | 458 |   | 749 |   |
|                                     |       | 1,404                     |       | 1,797                   |                    |       | (130                        | )                         |       | (1,334 | ) | 10,438 |   |
| Corporate (1)                            |       | (20                       | )          | (345                    | )                       |       | (547                        | )                         |       | (20 | ) | (592 | ) |
|                                     |       | $                         | 1,384      |                    | $                       | 1,452      |                        |                      | $          | (677 | ) |   | $ | (1,354 | ) | $ | 9,846 |   |
|                                     |       |                      |       |                    |                    |       |                        |                      |       |   |   |   |   |
| Major customers:                         |       |                      |       |                    |                    |       |                        |                      |       |   |   |   |   |
| Department of  Health and Human Services |       | 46                        | %          | 43                      | %                       |       | 36                          | %                         |       | 43 | % | 46 | % |
| Department of Education                  |       | 17                        | %          | 17                      | %                       |       | 23                          | %                         |       | 19 | % | 17 | % |
|                                          |            |                           |            |                         |                         |            |                             |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)   Corporaterepresents equity-based compensationexpense.

 

**12. Condensed Issuer and Non-Guarantor Financial Information**

 

In connection withthe Acquisition by Veritas Capital and the related financing, Vangent Inc. (“Issuer”)issued $190,000 of 9 5/8% senior subordinated notes due 2015. The notes weresold to qualified institutional buyers under the provisions of Rule 144Aunder the Securities Act of 1933 and to non-U.S. persons under the provisionsof Regulation S under the Securities Act of 1933. The notes are generalobligations of Vangent, Inc. and are jointly and severally, fully,irrevocably and unconditionally, guaranteed by Blueprint Technologies, Inc.and PAS, Inc., 100%-owned subsidiaries of Vangent Inc.  As a result of an internal restructuring, theassets and liabilities and operations of Blueprint Technologies, Inc. andPAS, Inc. have been transferred to Vangent Inc., and, accordingly, theirfinancial statements are not presented separately. Certain other 100%-ownedsubsidiaries do not guarantee the notes (“Non-Guarantors”). These entitiesinclude Vangent Canada, Limited, Vangent Mexico, and S.A. de C.V., VangentServicios de Mexico, S.A. de C.V., Vangent Argentina, S.A., Vangent Venezuela,C.A., Vangent Puerto Rico, Inc., and Vangent, Ltd.

 

The presentation of the condensed combining balancesheets, statements of operations, and statements of cash flows for the Issuerand for the Non-Guarantors as of December 31, 2007, and for the three andsix months ended June 30, 2007, has been revised to separately reportfinancial data for the Issuer and to report the Issuer’s investment in andadvances to the Non-Guarantors under the equity method of accounting along withthe related elimination of the investment and advances. Condensed combiningbalance sheets, statements of operations, and statements of cash flows for theIssuer and for the Non-Guarantors follow:

 

16

----

Tableof Contents

 

*Issuerand Non-Guarantor Financial Information*

*CondensedCombining Balance Sheets*

 
| ** **                                                | ** ** | **December 31, 2007** | ** ** | **June 28, 2008** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| ** **                                                | ** ** | ** **                      | ** ** | **Non-**                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **Issuer**                      | ** ** | **Guarantors**              | ** ** | **Eliminations** | ** ** | **Total** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| **Assets**                                                |       |                            |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                           |       |                            |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                |       | $                               | 19,022     |                        | $          | 7,071 |   | $ | — |   | $ | 26,093 |   | $ | 19,067 |   | $ | 11,359 |   | $ | — |   | $ | 30,426 |   |
| Trade  receivables, net                                   |       | 102,398                         |       | 9,894                       |       | — |   | 112,292 |   | 85,347 |   | 13,452 |   | — |   | 98,799 |   |
| Other receivables  and prepaid items                      |       | 11,163                          |       | 4,307                       |       | — |   | 15,470 |   | 15,312 |   | 5,043 |   | — |   | 20,355 |   |
| Total current  assets                                     |       | 132,583                         |       | 21,272                      |       | — |   | 153,855 |   | 119,726 |   | 29,854 |   | — |   | 149,580 |   |
| Property and  equipment, net                              |       | 16,891                          |       | 10,688                      |       | — |   | 27,579 |   | 23,680 |   | 8,998 |   | — |   | 32,678 |   |
| Intangible  assets, net                                   |       | 198,027                         |       | —                      |       | — |   | 198,027 |   | 188,662 |   | — |   | — |   | 188,662 |   |
| Goodwill                                                  |       | 266,836                         |       | 35,037                      |       | — |   | 301,873 |   | 269,583 |   | 34,614 |   | — |   | 304,197 |   |
| Deferred debt  financing costs and other                  |       | 12,602                          |       | 132                         |       | — |   | 12,734 |   | 11,936 |   | — |   | — |   | 11,936 |   |
| Investment in and  advances to non- guarantor subsidaries |       | 56,418                          |       | —                      |       | (56,418 | ) | — |   | 59,054 |   | — |   | (59,054 | ) | — |   |
| Total assets                                              |       | $                               | 683,357    |                        | $          | 67,129 |   | $ | (56,418 | ) | $ | 694,068 |   | $ | 672,641 |   | $ | 73,466 |   | $ | (59,054 | ) | $ | 687,053 |   |
|                                                      |       |                            |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities  and Stockholder’s Equity**            |       |                            |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current  liabilities:                                     |       |                            |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Current portion  of long-term debt                        |       | $                               | 7,325      |                        | $          | — |   | $ | — |   | $ | 7,325 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Accounts payable  and accrued expenses                    |       | 54,568                          |       | 8,680                       |       | — |   | 63,248 |   | 57,225 |   | 12,146 |   | — |   | 69,371 |   |
| Accrued interest                                          |       | 8,547                           |       | —                      |       | — |   | 8,547 |   | 8,007 |   | — |   | — |   | 8,007 |   |
| Deferred tax  liability                                   |       | 852                             |       | —                      |       | — |   | 852 |   | — |   | — |   | — |   | 0 |   |
| Advance payments  on contracts                            |       | 2,715                           |       | 1,729                       |       | — |   | 4,444 |   | 2,084 |   | 2,019 |   | — |   | 4,103 |   |
| Total current  liabilities                                |       | 74,007                          |       | 10,409                      |       | — |   | 84,416 |   | 67,316 |   | 14,165 |   | — |   | 81,481 |   |
| Long-term debt,  net of current portion                   |       | 420,875                         |       | —                      |       | — |   | 420,875 |   | 420,366 |   | — |   | — |   | 420,366 |   |
| Other long-term  liabilities                              |       | 3,746                           |       | 3,319                       |       | (3,202 | ) | 3,863 |   | 5,062 |   | 3,354 |   | (3,248 | ) | 5,168 |   |
| Deferred tax  liability                                   |       | 4,440                           |       | 185                         |       | — |   | 4,625 |   | 8,346 |   | 141 |   | — |   | 8,487 |   |
| Total liabilities                                         |       | 503,068                         |       | 13,913                      |       | (3,202 | ) | 513,779 |   | 501,090 |   | 17,660 |   | (3,248 | ) | 515,502 |   |
| Stockholder’s  equity                                |       | 180,289                         |       | 53,216                      |       | (53,216 | ) | 180,289 |   | 171,551 |   | 55,806 |   | (55,806 | ) | 171,551 |   |
| Total liabilities  and stockholder’s equity          |       | $                               | 683,357    |                        | $          | 67,129 |   | $ | (56,418 | ) | $ | 694,068 |   | $ | 672,641 |   | $ | 73,466 |   | $ | (59,054 | ) | $ | 687,053 |   |

 

17

----

Table ofContents

 

*Issuer and Non-GuarantorFinancial Information*

*CondensedCombining Statements of Operations*

 
| ** **                                                | ** ** | **Three Months Ended June 30, 2007** | ** ** | **Three Months Ended June 28, 2008** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                | ** ** | ** **                                                    | ** ** | **Non-**                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **Issuer**                                                    | ** ** | **Guarantors**                                                | ** ** | **Eliminations** | ** ** | **Total** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Revenue                                                   |       | $                                                             | 102,987    |                                                          | $          | 18,597 |   | $ | — |   | $ | 121,584 |   | $ | 103,017 |   | $ | 20,917 |   | $ | — |   | $ | 123,934 |   |
| Cost of revenue                                           |       | 86,619                                                        |       | 16,093                                                        |       | — |   | 102,712 |   | 88,078 |   | 17,856 |   | — |   | 105,934 |   |
| Gross profit                                              |       | 16,368                                                        |       | 2,504                                                         |       | — |   | 18,872 |   | 14,939 |   | 3,061 |   | — |   | 18,000 |   |
| General and  administrative expenses                      |       | 12,291                                                        |       | 653                                                           |       | — |   | 12,944 |   | 11,438 |   | 1,035 |   | — |   | 12,473 |   |
| Selling and  marketing expenses                           |       | 3,704                                                         |       | 840                                                           |       | — |   | 4,544 |   | 3,322 |   | 753 |   | — |   | 4,075 |   |
| Operating income                                          |       | 373                                                           |       | 1,011                                                         |       | — |   | 1,384 |   | 179 |   | 1,273 |   | — |   | 1,452 |   |
| Interest (income)  expense, net                           |       | 9,620                                                         |       | (26                                                           | )          | — |   | 9,594 |   | 8,822 |   | (45 | ) | — |   | 8,777 |   |
| Income (loss)  before income taxes                        |       | (9,247                                                        | )          | 1,037                                                         |       | — |   | (8,210 | ) | (8,643 | ) | 1,318 |   | — |   | (7,325 | ) |
| Provision  (benefit) for income taxes                     |       | 1,548                                                         |       | 436                                                           |       | — |   | 1,984 |   | 1,542 |   | (314 | ) | — |   | 1,228 |   |
| Equity in net  income (loss) of non-guarantor subsidaries |       | 601                                                           |       | —                                                        |       | (601 | ) | — |   | 1,632 |   | — |   | (1,632 | ) | — |   |
| Net income (loss)                                         |       | $                                                             | (10,194    | )                                                             | $          | 601 |   | $ | (601 | ) | $ | (10,194 | ) | $ | (8,553 | ) | $ | 1,632 |   | $ | (1,632 | ) | $ | (8,553 | ) |

 
| ** **                                                | ** ** | **Predecessor Entity**                                             | ** ** | ** **     | **Successor Entity**                                             | ** **      |
|-----------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|----------------|-----------------------------------------------------------------------|-----------------|
| ** **                                                | ** ** | **Period January 1 to February 14, 2007** | ** ** | ** **     | **Period February 15 to June 30, 2007** | ** **      |
| ** **                                                | ** ** | ** **                                                              | ** ** | **Non-**       | ** **                                                            | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **Issuer**                                                              | ** ** | **Guarantors** | ** **                                                            | **Elimnations** | ** ** | **Total** | ** ** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Elimnations** | ** ** | **Total** | ** ** |
| Revenue                                                   |       | $                                                                       | 50,349     |           | $                                                                     | 8,484           |   | $ | — |   | $ | 58,833 |   |   | $ | 146,634 |   | $ | 27,412 |   | $ | — |   | $ | 174,046 |   |
| Cost of revenue                                           |       | 40,437                                                                  |       | 7,750          |                                                                  | —          |   | 48,187 |   |   | 126,412 |   | 23,701 |   | — |   | 150,113 |   |
| Gross profit                                              |       | 9,912                                                                   |       | 734            |                                                                  | —          |   | 10,646 |   |   | 20,222 |   | 3,711 |   | — |   | 23,933 |   |
| General and  administrative expenses                      |       | 9,001                                                                   |       | 382            |                                                                  | —          |   | 9,383 |   |   | 17,484 |   | 954 |   | — |   | 18,438 |   |
| Selling and  marketing expenses                           |       | 1,590                                                                   |       | 350            |                                                                  | —          |   | 1,940 |   |   | 5,643 |   | 1,206 |   | — |   | 6,849 |   |
| Operating income  (loss)                                  |       | (679                                                                    | )          | 2              |                                                                  | —          |   | (677 | ) |   | (2,905 | ) | 1,551 |   | — |   | (1,354 | ) |
| Interest (income)  expense, net                           |       | (21                                                                     | )          | 11             |                                                                  | —          |   | (10 | ) |   | 14,385 |   | (26 | ) | — |   | 14,359 |   |
| Income (loss)  before income taxes                        |       | (658                                                                    | )          | (9             | )                                                                     | —          |   | (667 | ) |   | (17,290 | ) | 1,577 |   | — |   | (15,713 | ) |
| Provision  (benefit) for income taxes                     |       | (327                                                                    | )          | 35             |                                                                  | —          |   | (292 | ) |   | 2,322 |   | 614 |   | — |   | 2,936 |   |
| Equity in net  income (loss) of non-guarantor subsidaries |       | (44                                                                     | )          | —         |                                                                  | 44              |   | — |   |   | 963 |   | — |   | (963 | ) | — |   |
| Net income (loss)                                         |       | $                                                                       | (375       | )              | $                                                                     | (44             | ) | $ | 44 |   | $ | (375 | ) |   | $ | (18,649 | ) | $ | 963 |   | $ | (963 | ) | $ | (18,649 | ) |

 
|                                                      |       |       |       |       |       |       |       |       |       |                                                        |       |           |       |            |       |       |       |   |   |    |   |   |   |   |   |   |
|-----------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|-------------------------------------------------------------|------------|----------------|------------|-----------------|------------|------------|------------|--------|--------|---------|--------|--------|--------|--------|--------|--------|
| ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Six Months Ended June 28, 2008** | ** ** |
| ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                                                  | ** ** | **Non-**       | ** ** | ** **      | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Issuer**                                                  | ** ** | **Guarantors** | ** ** | **Elimnations** | ** ** | **Total**  | ** ** |
| Revenue                                                   |       |       |       |       |       |       |       |       |       | $                                                           | 227,799    |           | $          | 39,610          |       | $          | —     |   | $      | 267,409 |   |
| Cost of revenue                                           |       |       |       |       |       |       |       |       |       | 189,378                                                     |       | 33,722         |       | —          |       | 223,100    |       |
| Gross profit                                              |       |       |       |       |       |       |       |       |       | 38,421                                                      |       | 5,888          |       | —          |       | 44,309     |       |
| General and  administrative expenses                      |       |       |       |       |       |       |       |       |       | 24,204                                                      |       | 2,053          |       | —          |       | 26,257     |       |
| Selling and  marketing expenses                           |       |       |       |       |       |       |       |       |       | 6,603                                                       |       | 1,603          |       | —          |       | 8,206      |       |
| Operating income                                          |       |       |       |       |       |       |       |       |       | 7,614                                                       |       | 2,232          |       | —          |       | 9,846      |       |
| Interest (income)  expense, net                           |       |       |       |       |       |       |       |       |       | 17,814                                                      |       | (87            | )          | —          |       | 17,727     |       |
| Income (loss)  before income taxes                        |       |       |       |       |       |       |       |       |       | (10,200                                                     | )          | 2,319          |       | —          |       | (7,881     | )          |
| Provision for  income taxes                               |       |       |       |       |       |       |       |       |       | 3,054                                                       |       | 42             |       | —          |       | 3,096      |       |
| Equity in net  income (loss) of non-guarantor subsidaries |       |       |       |       |       |       |       |       |       | 2,277                                                       |       | —         |       | (2,277          | )          | —     |       |
| Net income (loss)                                         |       |       |       |       |       |       |       |       |       | $                                                           | (10,977    | )              | $          | 2,277           |       | $          | (2,277     | )      | $      | (10,977 | )      |
|                                                           |            |            |            |            |            |            |            |            |            |                                                             |            |                |            |                 |            |            |            |        |        |         |        |        |        |        |        |        |  |  |  |  |  |  |

 

18

----

Tableof Contents

 

*Issuerand Non-Guarantor Financial Information*

*CondensedCombining Statements of Cash Flows*

 
| ** **                                                    | ** ** | **Predecessor Entity**                                             | ** ** | ** **     | **Successor Entity**                                             | ** **       |
|---------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|----------------|-----------------------------------------------------------------------|------------------|
| ** **                                                    | ** ** | **Period January 1 to February 14, 2007** | ** ** | ** **     | **Period February 15 to June 30, 2007** | ** **       |
| ** **                                                    | ** ** | ** **                                                              | ** ** | **Non**        | ** **                                                            | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Non** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **Issuer**                                                              | ** ** | **Guarantors** | ** **                                                            | **Eliminations** | ** ** | **Total** | ** ** | ** ** | **Issuer** | ** ** | **Guarantors** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Net cash (used  in) provided by operating activities          |       | $                                                                       | (14,238    | )              | $                                                                     | (4,658           | ) | $ | — |   | $ | (18,896 | ) |   | $ | 20,454 |   | $ | 2,703 |   | $ | — |   | $ | 23,157 |   |
| Net cash (used  in) provided by investing activities          |       | (3,669                                                                  | )          | (58            | )                                                                     | —           |   | (3,727 | ) |   | (623,705 | ) | 4,011 |   | 2,406 |   | (617,288 | ) |
| Net cash provided  by financing activities                    |       | 10,029                                                                  |       | 3,242          |                                                                  | —           |   | 13,271 |   |   | 618,743 |   | 2,406 |   | (2,406 | ) | 618,743 |   |
| Effect of  exchange rate changes on cash and cash equivalents |       | —                                                                  |       | (166           | )                                                                     | —           |   | (166 | ) |   | — |   | 389 |   | — |   | 389 |   |
| Net (decrease)  increase in cash and cash equivalents         |       | (7,878                                                                  | )          | (1,640         | )                                                                     | —           |   | (9,518 | ) |   | 15,492 |   | 9,509 |   | — |   | 25,001 |   |
| Cash and cash  equivalents, beginning of period               |       | 8,341                                                                   |       | 3,372          |                                                                  | —           |   | 11,713 |   |   | — |   | — |   | — |   | — |   |
| Cash and cash  equivalents, end of period                     |       | $                                                                       | 463        |           | $                                                                     | 1,732            |   | $ | — |   | $ | 2,195 |   |   | $ | 15,492 |   | $ | 9,509 |   | $ | — |   | $ | 25,001 |   |

 
| ** **                                                    | ** ** | **Six Months Ended June 28, 2008** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **Issuer**                                                  | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Net cash  provided by operating activities                    |       | $                                                           | 16,607     |   | $ | 4,569 |   | $ | — |   | 21,176 |   |
| Net cash used in  investing activities                        |       | (8,590                                                      | )          | (387 | ) | — |   | (8,977 | ) |
| Net cash used in  financing activities                        |       | (7,972                                                      | )          | — |   | — |   | (7,972 | ) |
| Effect of  exchange rate changes on cash and cash equivalents |       | —                                                      |       | 106 |   | — |   | 106 |   |
| Net increase in  cash and cash equivalents                    |       | 45                                                          |       | 4,288 |   | — |   | 4,333 |   |
| Cash and cash  equivalents, beginning of period               |       | 19,022                                                      |       | 7,071 |   | — |   | 26,093 |   |
| Cash and cash  equivalents, end of period                     |       | $                                                           | 19,067     |   | $ | 11,359 |   | $ | — |   | $ | 30,426 |   |
|                                                               |            |                                                             |            |  |  |  |  |  |  |  |  |  |  |

 

19

----

Table of Contents

 

**ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*The following discussion and analysis of ourconsolidated financial condition and results of operations should be read inconjunction with the condensed consolidated financial statements and theaudited consolidated financial statements, and notes thereto, and Management’sDiscussion and Analysis of Financial Condition and Results of Operationsincluded in our annual report on Form 10-K for the year ended December 31,2007.*

 

**Overview**

 

We are a leading provider of information management and businessprocess outsourcing services to several U.S. public health care and othercivilian government agencies, as well as select U.S. defense and intelligenceagencies, foreign government organizations and private sector entities. Wedesign, build and operate mission-critical systems and processes to seamlesslydeliver vital information, services and programs to our customers and theirconstituents. Most of our revenue is generated from long-term contracts thattypically have a duration of four to six years, including option years. As of June 28,2008, our total contract backlog was $1.8 billion, approximately the same as atDecember 31, 2007.

 

We manage our business through three segments: the Government Group,the International Group and the Commercial Group.  Our two largest customers are the Departmentof Health and Human Services (“HHS”) and the Department of Education (“DoED”).HHS and DoED represented 46% and 17% of revenue for the six months ended June 28,2008, compared with 41% and 20% for the corresponding periods in 2007,respectively.

 

The Government Group is our largest segment and has over 30 yearsof experience in providing information management and business process outsourcingto several civilian and defense agencies of the federal government, including a28-year history with the Department of Education, over 10 years with theDefense Information Systems Agency and seven years with the Centers forMedicare and Medicaid Services.  TheGovernment Group is also responsible for the development, management, analysisand dissemination of healthcare information to the public sector and is one ofthe largest non-government providers of health information in the UnitedStates.  The Government Group represented80% of revenue for the six months ended June 28, 2008, compared with 77%for the corresponding period in 2007.

 

The Commercial Group primarily serves the private sector and designs,builds and operates workforce solutions that automate and improve therecruitment, assessment, selection and development of a customer’s workforce.We provide solutions that automate pre-employment screening, which improves thequality and retention of new employees and reduces the cost and time associatedwith hiring an hourly workforce. The Commercial Group represented 5% of revenuefor the six months ended June 28, 2008, compared with 7% for thecorresponding period in 2007.

 

The International Group serves local governments, central governmentsand commercial customers, primarily in the United Kingdom, Canada and LatinAmerica. This segment provides consulting, systems integration and businessprocess outsourcing to address a variety of managerial disciplines, includingcustomer interaction, as well as the management of data, identity, revenue andhuman capital. The International Group represented 15% of revenue for the sixmonths ended June 28, 2008, compared with 16% for the corresponding periodin 2007.

 

**The Acquisition**

 

On February 14, 2007, Vangent Holding Corp. (the “Buyer”)consummated the Acquisition of all of the equity interests of (i) PearsonGovernment Solutions, Inc., an indirect 100%-owned subsidiary of Pearson,and (ii) the domestic and international affiliates of Pearson GovernmentSolutions, Inc. engaged in the consulting, systems integration andbusiness process outsourcing business operated by the Pearson GovernmentSolutions operating unit of Pearson and the other seller entities, which isreferred to as the “Acquisition.”  Pearsonand the other seller entities are referred to as the “sellers” or PredecessorEntity.

 

*ClosingPrice and Purchase Adjustments**. ***The purchaseprice for the Acquisition was as follows: (i) $560.0 million in cash;(ii) $35.0 million in Series A preferred stock of the Buyer; (iii) $5.0 millionin Series B

 

20

----

Table ofContents

 

preferred stock of the Buyer and (iv) 10% of the Class A membershipinterests of Vangent Holding LLC (the “Buyer Parent”).

 

*Indemnification.*  The stock purchase agreement  provides that the sellers will indemnify us,the Buyer and its other affiliates without regard to any time limitation forany losses incurred by us, our parent and its other affiliates in connectionwith an investigation by the U.S. Government through the Department of Justiceand the Inspector General of the Department of Homeland Security to determinewhether we and NCS Pearson Inc. violated the Civil False Claims Act or otherfederal laws in connection with a contract awarded by the TransportationSecurity Administration to NCS Pearson Inc. in 2002, except that the first$20.0 million in losses resulting from such investigation will be shared equally.Upon closing of the Acquisition, we entered into a joint defense agreement withone of the sellers, NCS Pearson Inc., pursuant to which both parties assumedjoint defense with respect to such investigation.

 

**Basis ofPresentation**

 

The financial statements for the Predecessor Entity have been preparedin accordance with generally accepted accounting principles in the UnitedStates from the historical accounting records of Pearson plc and are presentedon a carve-out basis until February 14, 2007, the date of the Acquisition.The carve-out financial statements include allocations from Pearson forcorporate expenses based on a percentage of revenue or headcount measures tocover support and administrative services.

 

For management discussion and analysis purposes, thestatements of operations data for the six months ended June 30, 2007represent the mathematical addition of the results for the Predecessor Entityfor the period January 1 to February 14, 2007 and for the SuccessorEntity for the period February 15 to June 30, 2007. Although thisapproach is not consistent with generally accepted accounting principles, webelieve it is the most meaningful way to review the statements of operationsdata for such periods.

 

The new basis of accounting resulting from theAcquisition in February 2007 and related financing had a significanteffect on statements of operations data for periods subsequent to theAcquisition and reflects amortization of intangible assets, interest expense ondebt, and an income tax valuation allowance.

 

**FactorsAffecting Our Results of Operations**

 

Our future results of operations are affected by a number of factors,including but not limited to the following:

 

*Dependence on Federal GovernmentContracts.*  Contractsfunded by U.S. government agencies represented 74% of revenue for the sixmonths ended June 28, 2008, compared with 71% for the corresponding periodin 2007. Revenue from contracts in which we acted as the prime contractorrepresented 89% of revenue in the six months ended June 28, 2008, aboutthe same as for the corresponding period in 2007. Revenue from cost-plus,fixed-price and time and materials contracts was split as follows:

 
| ** **          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **          | ** ** | **June 30,  2007**          | ** ** | **June 28,  2008**        | ** ** | **June 30,  2007** | ** ** | **June 28,  2008** | ** ** |
|                |       |                             |       |                           |       |   |   |   |   |
| Cost-plus           |       | 46                               | %          | 46                             | %          | 40 | % | 47 | % |
| Fixed-price         |       | 49                               | %          | 50                             | %          | 53 | % | 49 | % |
| Time and  materials |       | 5                                | %          | 4                              | %          | 7 | % | 4 | % |
|                |       | 100                              | %          | 100                            | %          | 100 | % | 100 | % |

 

*Cost of Revenue.* Cost of revenue includes labor, facilities,direct contract costs, overhead, management and support, amortization ofintangible assets, depreciation, and other costs attributable to serving ourcustomers. Labor includes salaries, wages and related employee benefitsassociated with the professional and customer service staff. Facilities costsinclude rent for commercial office space and a portion of headquarterscosts.  Direct contract costs includetravel, hardware and software, and costs of subcontractors. The number andtypes of personnel, including their salaries and other costs, have a significantimpact on cost of revenue.

 

21

----

Tableof Contents

 

*General and Administrative Expenses.*  General and administrative expenses are notdirectly associated with performing work for our customers and include salariesand wages, associated fringe benefits, facilities, depreciation, travel, andinsurance. Among the functions covered by these expenses are human resources,information systems, accounting, general management, legal, finance, contracts,and purchasing. Most of these expenses qualify as allowable costs under thecost accounting standards for contracting with the federal government and arerecoverable under cost-plus contracts.

 

*Selling and Marketing Expenses.*  Selling and marketing expenses for the salesand business development group include salaries, wages and commissions,associated fringe benefits, facilities, travel, depreciation, and bid andproposal expenses.

 

*Purchase Accounting Adjustments.*  The Acquisition was accounted for underEmerging Issues Task Force Issue No. 88-16, *Basis in Leveraged Buyout Transactions* (“EITF 88-16”). Inaccordance with EITF 88-16, the portion of Pearson plc’s (“continuingstockholder”) basis in us represented by its 10% residual interest was assignedto the assets and liabilities acquired. The remainder of the investment in theassets and liabilities acquired (the 90%) by the Buyer was recorded at fairvalue. As a result, the assets and liabilities have been assigned new valueswhich include part carryover basis and part fair value basis. The excess of thepurchase price over assets acquired and liabilities assumed amounted to $301.9million and was allocated to goodwill.

 

*Income Taxes.*  The Buyer made an election under Section 338(h) (10) ofthe Internal Revenue Code that significantly increased the tax basis of ourassets, primarily intangible assets and goodwill, and increased tax deductionsfor the related amortization of intangibles and goodwill. The tax deductionsfor amortization contributed to the net operating losses for the periodssubsequent to the Acquisition, and the net operating loss carryforward plusfuture tax amortization are available to reduce future cash taxes.

 

**Contract Backlog**

 

Total contract backlog is the amount of revenue we expect to realizeover the remaining term of the contracts. We do not include contract ceilingvalues under government-wide acquisition contracts or indefinite delivery,indefinite quantity contracts in backlog. Firm contract backlog is the value of the base period plus all currentlyexercised options.  Funded backlog is theportion for which funding has been authorized. A significant portion of ourbacklog represents work relating to the continuation of services undercontracts or projects where we are the incumbent provider.  Most of our federal government contractsallow the customer the option of extending the period of performance for aperiod of one or more years.

 

A summary of contract backlog by business segment follows (inmillions):

 
| ** **           | ** ** | **December 31, 2007** | ** ** | **June 28, 2008** | ** ** |
|----------------------|------------|---------------------------------|------------|-----------------------------|------------|
| ** **           | ** ** | **Total  Contract  Backlog**    | ** ** | **Firm  Contract  Backlog** | ** ** | **Funded  Contract  Backlog** | ** ** | **Total  Contract  Backlog** | ** ** | **Firm  Contract  Backlog** | ** ** | **Funded  Contract  Backlog** | ** ** |
| Government Group     |       | $                               | 1,422.7    |                        | $          | 180.7 |   | $ | 135.9 |   | $ | 1,451.4 |   | $ | 428.9 |   | $ | 140.9 |   |
| International  Group |       | 335.4                           |       | 215.9                       |       | 215.9 |   | 316.8 |   | 202.8 |   | 202.8 |   |
| Commercial Group     |       | 11.8                            |       | 11.8                        |       | 11.8 |   | 21.2 |   | 17.5 |   | 17.5 |   |
|                 |       | $                               | 1,769.9    |                        | $          | 408.4 |   | $ | 363.6 |   | $ | 1,789.4 |   | $ | 649.2 |   | $ | 361.2 |   |

 

**Critical Accounting Policies**

 

The criticalaccounting estimates used in the preparation of the condensed consolidatedfinancial statements are described in our annual report on Form 10-K forthe year ended December 31, 2007.  There has been no significantchange in the critical accounting estimates:

 
|   | · | Revenue  recognition and cost estimation on long-term contracts |
|--------|--------|-----------------------------------------------------------------|
|   | · | Intangible  assets                                              |
|   | · | Goodwill                                                        |
|   | · | Litigation and  contingencies                                   |
|   | · | Equity-based  compensation                                      |

 

22

----

Tableof Contents

 
|   | · | Income taxes |
|--------|--------|--------------|

 

The process ofpreparing financial statements in conformity with generally accepted accountingprinciples requires the use of estimates and assumptions to determine certainof the assets, liabilities, revenue and expenses. These estimates andassumptions are based upon what we believe is the best information available atthe time of the estimates or assumptions. The estimates and assumptions couldchange materially as conditions within and beyond our control change.Accordingly, actual results could differ materially from those estimates.

 

**Results of Operations**

 

Statements of operations data follow (dollars in thousands):

 
| ** **                                                                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                             | ** ** | **June 30,**                | ** ** | **June 28,**              | ** ** | **June 30,** | ** ** | **June 28,** | ** ** |
| ** **                                                                                             | ** ** | **2007**                         | ** ** | **2008**                       | ** ** | **2007 (1)** | ** ** | **2008** | ** ** |
| **Statements  of Operations Data**                                                                     |       |                             |       |                           |       |   |   |   |   |
| Revenue                                                                                                |       | $                                | 121,584    |                           | $          | 123,934 |   | $ | 232,879 |   | $ | 267,409 |   |
| Cost of revenue                                                                                        |       | 102,712                          |       | 105,934                        |       | 198,300 |   | 223,100 |   |
| Gross profit                                                                                           |       | 18,872                           |       | 18,000                         |       | 34,579 |   | 44,309 |   |
| General and  administrative expenses                                                                   |       | 12,944                           |       | 12,473                         |       | 27,821 |   | 26,257 |   |
| Selling and  marketing expenses                                                                        |       | 4,544                            |       | 4,075                          |       | 8,789 |   | 8,206 |   |
| Operating income  (loss)                                                                               |       | 1,384                            |       | 1,452                          |       | (2,031 | ) | 9,846 |   |
| Interest  expense, net                                                                                 |       | 9,594                            |       | 8,777                          |       | 14,349 |   | 17,727 |   |
| Loss before  income taxes                                                                              |       | (8,210                           | )          | (7,325                         | )          | (16,380 | ) | (7,881 | ) |
| Provision for  income taxes                                                                            |       | 1,984                            |       | 1,228                          |       | 2,644 |   | 3,096 |   |
| Net loss                                                                                               |       | $                                | (10,194    | )                              | $          | (8,553 | ) | $ | (19,024 | ) | $ | (10,977 | ) |
|                                                                                                   |       |                             |       |                           |       |   |   |   |   |
| **Statements of Operations Data**** as a Percent of Revenue**  |       |                             |       |                           |       |   |   |   |   |
| Revenue                                                                                                |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |
| Cost of revenue                                                                                        |       | 84.5                             |       | 85.5                           |       | 85.2 |   | 83.4 |   |
| Gross profit  margin                                                                                   |       | 15.5                             |       | 14.5                           |       | 14.8 |   | 16.6 |   |
| General and  administrative expenses                                                                   |       | 10.7                             |       | 10.0                           |       | 11.9 |   | 9.8 |   |
| Selling and  marketing expenses                                                                        |       | 3.7                              |       | 3.3                            |       | 3.8 |   | 3.1 |   |
| Operating income  (loss)                                                                               |       | 1.1                              |       | 1.2                            |       | (0.9 | ) | 3.7 |   |
| Interest  expense, net                                                                                 |       | 7.9                              |       | 7.1                            |       | 6.2 |   | 6.6 |   |
| Loss before  income taxes                                                                              |       | (6.8                             | )          | (5.9                           | )          | (7.1 | ) | (2.9 | ) |
| Provision for  income taxes                                                                            |       | 1.6                              |       | 1.0                            |       | 1.1 |   | 1.2 |   |
| Net loss                                                                                               |       | (8.4                             | )%         | (6.9                           | )%         | (8.2 | )% | (4.1 | )% |
|                                                                                                   |       |                             |       |                           |       |   |   |   |   |
| **Revenue  by Business Segment**                                                                       |       |                             |       |                           |       |   |   |   |   |
| Government Group                                                                                       |       | $                                | 94,406     |                           | $          | 95,764 |   | $ | 180,269 |   | $ | 212,896 |   |
| Commercial Group                                                                                       |       | 8,500                            |       | 7,179                          |       | 16,541 |   | 14,731 |   |
| International  Group                                                                                   |       | 18,678                           |       | 20,991                         |       | 36,069 |   | 39,782 |   |
|                                                                                                   |       | $                                | 121,584    |                           | $          | 123,934 |   | $ | 232,879 |   | $ | 267,409 |   |
|                                                                                                   |       |                             |       |                           |       |   |   |   |   |
| **Business Segment Revenue**** as a Percent of Total Revenue** |       |                             |       |                           |       |   |   |   |   |
| Government Group                                                                                       |       | 77.6                             | %          | 77.3                           | %          | 77.4 | % | 79.6 | % |
| Commercial Group                                                                                       |       | 7.0                              | %          | 5.8                            |       | 7.1 |   | 5.5 |   |
| International  Group                                                                                   |       | 15.4                             |       | 16.9                           |       | 15.5 |   | 14.9 |   |
|                                                                                                   |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |

 

----

(1)Represents the mathematical additionof the Predecessor Entity for the period January 1 to February 14,2007, and the Successor Entity for the period February 15 to June 30,2007.

 

23

----

Tableof Contents

 

***Three and SixMonths Ended June 28, 2008 and June 30, 2007***

 

*Revenue*

 

The Department of Healthand Human Services (“HHS”), as a major customer, represented 46% of totalrevenue for the six months ended June 28, 2008, compared with 41% for thecorresponding period in 2007. The Department of Education (“DoED”), as a majorcustomer, represented 17% of total revenue for the six months ended June 28,2008, compared with 20% for the corresponding period in 2007.

 

The increases in totalrevenue of $2.4 million, or 2%, for the three months and $34.5 million, or15%, for the six months ended June 28, 2008, primarily reflect higherrevenue from the Government Group.

 

Government Group revenueincreased $1.4 million, or 1%, for the three months and $32.6 million, or 18%,for the six months ended June 28, 2008. The increase in the three-monthperiod includes revenue of $3.8 million from new contract awards with theDepartment of Defense (“DoD”) and a $1.6 million from new contract awards withthe Department of Labor (“DoL”), partly offset by a reduction of $3.9 millionfrom Medicare related outsourcing contracts. The increase in the six-monthperiod reflects an increase of $24.7 million from higher prescription drugenrollment volume under continuing Medicare related outsourcing contracts, $6.9million from new contract awards with DoD, and $1.6 million from new contractawards with DoL, partly offset by reductions to revenue for contracts completedin 2007 for $1.2 million with the Veterans Administration and $1.4 million withthe Equal Employment Opportunity Commission.

 

Commercial Group revenuedeclined $1.3 million, or 16%, for the three months and $1.8 million, or 11%,for the six months ended June 28, 2008, reflecting lower commercialassessment product sales for various commercial customers and a reduction intraining services and assessment related services for several Fortune 500customers due in part to overall economic conditions and reductions in customerhiring patterns. The reduction for the six-month period was partly offset by anincrease of $0.6 million in services performed under a contract with the AirForce.

 

International Grouprevenue increased $2.3 million, or 12%, for the three months and $3.7million, or 10%, for the six months ended June 28, 2008. The increasesreflect two new contracts in Canada.

 

*Costof Revenue*

 

Cost of revenueincreased $3.2 million, or 3%, for the three months and $24.8 million, or 13%,for the six months ended June 28, 2008, reflecting increased labor andservices provided under government contracts and an increase of $2.5 millionfor the six-month period in amortization of intangible assets resulting fromthe Acquisition on February 14, 2007. Amortization of intangibles wasrecorded for the six months ended June 28, 2008, compared with 4.5 monthsfor the corresponding period of 2007. Costs for the six months ended June 30,2007, included a charge of $3.2 million resulting from the termination of acontract with the University of California.

 

*GrossProfit*

 

Gross profit declined $0.9 million, or 5%, for thethree months but increased $9.7 million, or 28%, for the six months ended June 28,2008. The gross margin percentage declined to 14.5% of revenue in the threemonths ended June 28, 2008, from 15.5% for the corresponding period in2007. The gross margin percentage increased to 16.6% of revenue in the sixmonths ended June 28, 2008, from 14.8% for the corresponding period in2007. The increase in gross profit and the improvement in the gross margin inthe six-month period reflect an increase of $3.2 million in award fees earnedbased on multi-year performance under cost-plus government contracts.

 

*Generaland Administrative Expenses*

 

General and administrative expenses were $.5 million,or 4%, lower for the three months ended June 28, 2008. Expenses were 10%of revenue, compared with 11% for the corresponding period in 2007.  Expenses for the three months ended June 28,2008, include $0.5 million in legal fees for litigation issues and relatedinsurance recoveries. Expenses for the 2007 period included transition-relatedexpenses of $1.8 million, including sales and retention bonuses of $1.3million.

 

24

----

Tableof Contents

 

General and administrative expenses were $1.6 million,or 6%, lower for the six months ended June 28, 2008.  Expenses were 10% of revenue, compared with12% for the corresponding period in 2007. Expenses for the six months ended June 28,2008, include $1.2 million in legal fees for litigation issues and relatedinsurance recoveries and $0.5 million for consulting fees for compliance withthe internal control requirements under Sarbanes Oxley that become effectivefor the Company in 2008. Expenses for the six months ended June 28, 2008also include a net charge of $2.0 million consisting of an expense of $4.0million to increase the claim settlement amount to $5.0 million relating to acontract dispute with the University of California, partly offset by an expensereduction of $2.0 million resulting from an agreement with the Company’sinsurance carrier under which the carrier agreed to contribute $2.0 million tofund the settlement with the University of California under a mutualreservation of rights and reimbursement agreement.

 

Expenses for the six-month period in 2007 includedtransition-related expenses of $5.5 million, including sales and retentionbonuses of $2.9 million, transition costs of $1.1 million and equity-basedcompensation of $1.5 million resulting from the accelerated vesting ofPredecessor Entity equity-based awards in connection with the Acquisition, andincluded a charge of $1.0 million for an increase in expected settlement costsrelating to a terminated contract with the Transportation SecurityAdministration.

 

*OperatingIncome (Loss)*

 

A summary of operating income (loss) by business segment follows(dollars in thousands):

 
| ** **                                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                         | ** ** | **June 30,**                | ** ** | **June 28,**              | ** ** | **June 30,** | ** ** | **June 28,** | ** ** |
| ** **                                                         | ** ** | **2007**                         | ** ** | **2008**                       | ** ** | **2007** | ** ** | **2008** | ** ** |
| Operating income  (loss):                                          |       |                             |       |                           |       |   |   |   |   |
| Government Group                                                   |       | $                                | 91         |                           | $          | 1,574 |   | $ | (2,201 | ) | $ | 9,991 |   |
| Commercial Group                                                   |       | 1,028                            |       | (291                           | )          | 560 |   | (302 | ) |
| International  Group                                               |       | 285                              |       | 514                            |       | 177 |   | 749 |   |
|                                                               |       | 1,404                            |       | 1,797                          |       | (1,464 | ) | 10,438 |   |
| Corporate                                                          |       | (20                              | )          | (345                           | )          | (567 | ) | (592 | ) |
|                                                               |       | $                                | 1,384      |                           | $          | 1,452 |   | $ | (2,031 | ) | $ | 9,846 |   |
|                                                               |       |                             |       |                           |       |   |   |   |   |
| Operating income  (loss) as a percent of business segment revenue: |       |                             |       |                           |       |   |   |   |   |
| Government Group                                                   |       | 0.1                              | %          | 1.6                            | %          | (1.2 | )% | 4.7 | % |
| Commercial Group                                                   |       | 12.1                             | %          | (4.1                           | )%         | 3.4 | % | (2.1 | )% |
| International  Group                                               |       | 1.5                              | %          | 2.4                            | %          | 0.5 | % | 1.9 | % |

 

The increase in total operating income of$11.9 million for the six months ended June 28, 2008, primarily reflectsthe higher gross profit margin for the Government Group including anincrease of $3.2 million in award fees earned based on multi-year performanceunder cost-plus government contracts. The total operating loss of $2.0 millionfor the 2007 period included transition-related expenses of $5.5 million forbonuses and Predecessor Entity equity-based compensation.

 

Government Groupoperating income increased $1.5 million for the three months ended June 28,2008. Operating income for the 2007 period included a loss of $0.7 millionin connection with the disputed contract with the University of California.

 

Government Groupoperating income increased $12.2 million for the six months ended June 28,2008, and reflects increases of $6.8 million from Medicare related outsourcingcontracts including award fees earned, $1.9 million from DoD contracts, $1.3million from DoED contracts, and $1.1 million from HHS contracts.  Theincreases were partially offset by an increase of $2.5 million in amortizationof intangibles resulting from the Acquisition on February 14, 2007. Amortization of intangibles was recorded for the six months ended June 28,2008, compared with 4.5 months for the corresponding period of 2007. Operatingincome for the six months ended June 28, 2008, also reflects a net chargeof $2.0 million, net of insurance recovery, resulting from the settlement ofclaims with the University of California.

 

25

----

Tableof Contents

 

The operating loss forthe six-month period in 2007 included a loss of $3.2 million in connection withthe disputed contract with the University of California.

 

The Commercial group operating losses amounted to $0.3 million for thethree and six months ended June 28, 2008, compared with operating incomeof $1.0 million and $0.6 million for the corresponding periods in 2007. Theoperating losses reflect the revenue reductions of $1.3 million for thethree-month and $1.8 million for the six-month periods, partly offset withreductions to costs. General and administrative expenses for the six-monthperiod in 2007 included transition-related expenses of $0.3 million.

 

The increases in International Group operating income of $0.2 millionfor the three months and $0.6 million for the six months ended June 28,2008, primarily reflect two newcontracts in Canada, partially offset by higher general and administrativeexpenses.

 

*InterestExpense, Net*

 

Interestexpense is accrued on borrowings in connection with the Acquisition on February 14,2007, including a $240.0 million term loan under the senior secured creditfacility and $190.0 million of 9 5/8% senior subordinated notes due 2015. The reductionof $0.8 million, or 9%, in net interest expense for the three months ended June 28,2008, reflects lower variable interest rates that declined more than 200 basispoints on the unhedged portion of the term loan and the lower debt levelresulting from repayments of the term loan. The increase of $3.4 million, or24%, in net interest expense for the six months ended June 28, 2008,reflects interest accrued on an average outstanding debt level of $424 millionfor six months, compared with an average debt level of $433 million for 4.5months for the corresponding period in 2007, partly offset by the decline invariable rates on the unhedged portion of the term loan.

 

*Provisionfor Income Taxes*

 

Asummary of the provision for income taxes follows (dollars in thousands):

 
| ** **                                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                              | ** ** | **June 30,**                | ** ** | **June 28,**              | ** ** | **June 30,** | ** ** | **June 28,** | ** ** |
| ** **                                                              | ** ** | **2007**                         | ** ** | **2008**                       | ** ** | **2007** | ** ** | **2008** | ** ** |
| Provision  (benefit) for income taxes excluding tax valuation allowance |       | $                                | (950       | )                              | $          | (1,074 | ) | $ | (1,220 | ) | $ | (1,622 | ) |
| Tax valuation  allowance                                                |       | 2,934                            |       | 2,302                          |       | 3,864 |   | 4,718 |   |
| Total provision  for income taxes                                       |       | $                                | 1,984      |                           | $          | 1,228 |   | $ | 2,644 |   | $ | 3,096 |   |

 

Accounting for income taxes by the Successor Entitydiffers significantly from the Predecessor Entity.  As a result of the Acquisition, the tax basisof assets and liabilities changed significantly, primarily intangible assetsand goodwill.  The valuation allowanceresulted primarily from net operating losses generated since the Acquisition,and the net operating losses reflect amortization of tax deductiblegoodwill.  The Company has concluded,based upon available evidence, it is more likely than not that the U.S.federal, state, and local deferred tax assets at June 28, 2008, will notbe realizable. Therefore, a valuation allowance has been provided against U.S.deferred tax assets.

 

*Net Loss*

 

The reduction of $1.6 million, or 16%, in the netloss for the three months ended June 28, 2008, reflects the reduction ininterest expense. The reduction of $8.0 million, or 42%, in the net loss forthe six months ended June 28, 2008, reflects the increase of $11.9 millionin operating income partially offset by the increase in interest expense withAcquisition-related debt outstanding for the full six-month period ended June 28,2008.

 

**Liquidity and Capital Resources**

 

Our primary source ofliquidity has been available cash and cash equivalents, cash flows fromoperating activities, and available revolving credit under the senior securedcredit facility.  Cash and cashequivalents amounted to $30.4 million at June 28, 2008, cash flow fromoperating activities was $21.2 million for the six months ended June 28,2008, and $49.6 million was available under the revolving credit facility.  Based on our current level

 

26

----

Tableof Contents

 

of operations, we believeour cash and cash equivalents, cash flow from operations, and availableborrowings under the revolving credit facility will be adequate to meet ourliquidity needs for at least the next twelve months.

 

Our long-term debtmatures in the years 2013 and 2015. In view of current credit market conditionsand our credit ratings and in the event we were to refinance the senior securedcredit facility or the senior subordinated notes, we wouldlikely encounter higher interest rates and limited availability of debtfinancing capacity.

 

A summary of workingcapital follows (in thousands):

 
| ** **                             | ** ** | **December 31,** | ** ** | **June 28,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                             | ** ** | **2007**              | ** ** | **2008**          | ** ** |
| Cash and cash  equivalents             |       | $                     | 26,093     |              | $          | 30,426 |   |
| Trade  receivables, net                |       | 112,292               |       | 98,799            |       |
| Other  receivables and prepaid items   |       | 15,470                |       | 20,355            |       |
| Current portion  of long-term debt     |       | (7,325                | )          | —            |       |
| Accounts payable  and accrued expenses |       | (63,248               | )          | (69,371           | )          |
| Accrued interest                       |       | (8,547                | )          | (8,007            | )          |
| Other                                  |       | (5,296                | )          | (4,103            | )          |
| Working capital                        |       | $                     | 69,439     |              | $          | 68,099 |   |

 

Cash and cash equivalents of $30.4 million is composed of highly liquidinstruments with original maturities of 90 days or less.  Cash in bank accounts at times may exceedfederally insured limits.  Cashequivalents are comprised of repurchase agreements with a major commercial bankunder which cash is invested in U.S. Treasury and U.S. government agencysecurities.

 

Trade receivables declined from $112.3 million at December 31,2007, to $98.8 million at June 28, 2008. The reduction of $13.5 million,or 12%, reflects the effect of the reduction in revenue from $147.6 million forthe three months ended December 31, 2007, to $123.9 million for the threemonths ended June 28, 2008.

 

The increase of $4.9 million in other receivables and prepaid itemsreflects an accrued receivable of $2.0 million from the Company’s insurancecarrier relating to the settlement of claims in May 2008 with theUniversity of California and a prepaid software maintenance agreement of $0.9million.

 

A summary of net cash flows follows (in thousands):

 
| ** **                         | ** ** | **Predecessor  Entity**                               | ** ** | ** ** | **Successor Entity**                           | ** ** |
|------------------------------------|------------|-------------------------------------------------------|------------|------------|-----------------------------------------------------|------------|
| ** **                         | ** ** | **Period  January 1 to  February 14,** | ** ** | ** ** | **Period  February 15 to  June 30,** | ** ** | **Six Months  Ended  June 28,** | ** ** |
| ** **                         | ** ** | **2007**                                              | ** ** | ** ** | **2007**                                            | ** ** | **2008** | ** ** |
| Cash flows (used  in) provided by: |       |                                                  |       |       |                                                |       |   |   |
| Operating  activities              |       | $                                                     | (18,896    | )          |                                                | $          | 23,157 |   | $ | 21,176 |   |
| Investing  activities              |       | (3,727                                                | )          |       | (617,288                                            | )          | (8,977 | ) |
| Financing  activities              |       | 13,271                                                |       |       | 618,743                                             |       | (7,972 | ) |
|                                    |            |                                                       |            |            |                                                     |            |  |  |  |  |  |

 

*Operating Activities*

 

Net cash flow of $21.2 million provided by operating activities for thesix months ended June 28, 2008, reflects the net loss of $11.0 millionadjusted by noncash charges of $10.5 million for amortization of intangibleassets and $6.8 million for depreciation and amortization of property andequipment and a net reduction of $13.5 million in trade receivables resultingfrom lower revenue, partly offset by a net increase of $3.9 million in otherreceivables and prepaid items.

 

Net cash flow of $23.2 million provided by operating activitiesfor the period February 15 to June 30, 2007, reflects the net loss of$18.6 million adjusted by noncash charges of $8.6 million for amortization ofintangible

 

27

----

Tableof Contents

 

assets and $4.8million for depreciation and amortization of property and equipment, a netincrease of $20.0 million in accounts payable and accrued expenses, andinterest of $9.2 million accrued on long-term debt.

 

Net cash flow of $18.9 million used in operating activities for theperiod January 1 to February 14, 2007, reflects an increase of $16.4million in accounts receivable from the timing of customer collections.

 

*InvestingActivities*

 

Cash paid to purchase the government health integration group of AptivTechnology Partners in May 2008 amounted to $3.9 million, includingacquisition fees.

 

Capital expenditures funded in cash amounted to $5.0 million for thesix months ended June 28, 2008, and are expected to total $14.5 millionfor 2008 primarily for anticipated contractual and general infrastructurerequirements and new business growth.

 

Noncash investing and financing activities included leaseholdimprovements of $2.5 million recorded under an operating lease for officespace. Other liabilities increased for the corresponding deferred rentobligation under the operating lease.

 

Net cash flow of $617.3 million used in investing activities forthe period February 15 to June 30, 2007, reflects $615.2 millionresulting from the Acquisition.

 

Net cash flow of $3.7 million used in investing activities for theperiod January 1 to February 14, 2007, represents capitalexpenditures.

 

*FinancingActivities*

 

Borrowings under the senior secured credit facility are subject tomandatory prepayment based on a percentage of annual excess cash flow, asdefined.  Repayments of $7.8 million,primarily a mandatory prepayment, were made in the six months ended June 28,2008.

 

Net cash of $618.7 million provided by financing activities for theperiod February 15 to June 30, 2007, reflects debt of $430.0 millionand equity of $203.5 million issued in connection with the Acquisition.  Debt financing costs of $14.0 million werepaid in connection with financing for the Acquisition.

 

Net cash of $13.3 million provided by financing activities for theperiod January 1 to February 14, 2007, reflects a net investment byPredecessor Entity.

 

*SeniorSecured Credit Facility*

 

At June 28,2008, the senior secured credit facility consisted of a term loan of $230.4million due February 14, 2013, an available revolving credit facility ofup to $49.6 million that expires February 14, 2012 and a letter of creditof $0.4 million.  There were noborrowings outstanding under the revolving credit facility at June 28,2008 or December 31, 2007.  Acommitment fee of .50% per year is paid on the available unused portion of therevolving credit facility.

 

Borrowingsunder the**senior secured credit facility bearinterest at a rate equal to, at the Company’s option, either: (i) the baserate, as defined, plus an applicable margin of 1.25-1.50%, or (ii) theadjusted LIBOR rate, as defined, plus an applicable margin of 2.25-2.50%. Theterm loan is scheduled to be repaid in 11 quarterly installments of $0.6million beginning June 2010 with the balance due February 14,2013.  Borrowings are subject tomandatory prepayment with (i) 100% of the net cash proceeds of certainasset sales; (ii) 50% of the net cash proceeds of equity offerings orcapital contributions subject to certain exceptions; (iii) 100% of the netcash proceeds of additional debt; and (iv) a percentage of annual excesscash flow, as defined. Payments resulting from the annual excess cash flowrequirement are due 90 days following the year end.  Since the excess cash flow requirement isbased on annual cash flow, it is not possible to estimate the amount, if any,that would become payable in March 2009 or subsequent years.

 

28

----

Tableof Contents

 

Borrowings are secured by accounts receivable, cash,intellectual property and other assets and are guaranteed, jointly andseverally, by all existing and future domestic subsidiaries. Foreignsubsidiaries do not guarantee the borrowings.  The senior secured creditfacility contains various customary affirmative and negative covenants andevents of default, including, but not limited to, restrictions on the disposalof assets, incurring additional indebtedness or guarantee obligations, payingdividends, creating liens on assets, making investments, loans or advances, andcompliance with a maximum total leverage ratio. At June 28, 2008, theCompany was in compliance with the covenants.

 

*9 5/8% Senior Subordinated Notes*

 

In February 2007, the Company completed anoffering of $190.0 million principal amount of 9 5/8 % senior subordinatednotes due February 15, 2015. Interest accrues at the fixed rate of 9 5/8%and is paid semi-annually. Proceeds of the offering were used to fund theAcquisition. The notes are general unsecured obligations of the Company and aresubordinated to all existing and future senior loans including borrowings underthe senior secured credit facility. The notes are guaranteed, jointly andseverally, by all existing and future domestic subsidiaries. Foreignsubsidiaries do not guarantee the notes.

 

In the event of an equity offering on or prior to February 15,2010, the Company may redeem the notes with the net cash proceeds of one ormore equity offerings at 109.625% of the principal amount, provided that atleast 65% of the principal amount of the notes originally issued remainsoutstanding immediately following such redemption.

 

With respect to a redemption not related to an equityoffering at any time prior to February 15, 2011, the Company may redeemall or part of the notes at a redemption price of 100% of the principal amountplus an applicable premium, as defined, and additional interest, as defined.The notes are redeemable at the option of the Company at the redemption priceof 104.8125% of the principal amount on or after February 15, 2011,102.4063% on or after February 15, 2012, and 100% on or after February 15,2013.

 

*Interest Rate Swaps onVariable-Rate Term Loan under Senior Secured Credit Facility*

 

The Company has entered into interest rate swapagreements to hedge fluctuations in LIBOR interest rates on a portion of theterm-loan borrowing under the senior secured credit facility. The Companyexchanged its floating LIBOR interest rate for a fixed interest rate, asfollows:

 
| ** **            | ** ** | ** **   | ** ** | **Fixed**                | ** ** | **Variable**                 | ** ** | ** **                               | ** **                               |
|-----------------------|------------|--------------|------------|--------------------------|------------|------------------------------|------------|------------------------------------------|------------------------------------------|
| ** **            | ** ** | **Notional** | ** ** | **Interest Rate**   | ** ** | **Interest Rate**       | ** ** | ** **                               | ** **                               |
| **Date Entered** | ** ** | **Amount**   | ** ** | **to be Paid** | ** ** | **to be Received** | ** ** | **Period Covered**                  | ** **                               |
| February 2007    |       | $            | 140,000    |                     | 5.215      | %                            | LIBOR      |                                     | February 2007 to February 2008 |   |
|                  |       | 120,000      |       | 5.215                    | %          | LIBOR                        |       | February 2008 to February 2009 |                                     |
|                  |       | 110,000      |       | 5.215                    | %          | LIBOR                        |       | February 2009 to February 2010 |                                     |
|                  |       |         |       |                     |       |                         |       |                                     |                                     |
| April 2008       |       | $            | 75,000     |                     | 3.280      | %                            | LIBOR      |                                     | April 2008 to February 2010    |   |
|                  |       | 150,000      |       | 3.280                    | %          | LIBOR                        |       | February 2010 to February 2011 |                                     |

 

The Company documented its risk management objectiveand nature of the risks being hedged and has designated the interest rate swapsas cash flow hedges at inception of the agreements. The Company performs aquarterly analysis of the effectiveness of the hedge and has concluded that thehedging relationship is highly effective due to the consistency ofcritical terms of the interest rate swap and related term loan under the seniorsecured credit facility. The fair value of the net interest rate swapliability was $2.2 million at June 28, 2008, resulting in an unrealizedloss of $2.0 million reported in accumulated other comprehensive loss in theconsolidated statement of stockholder’s equity and a realized loss of $0.2million for the ineffective portion reported as interest expense.

 

In the unlikely event that the counterparty fails tomeet the terms, the Company’s exposure is limited to the interest ratedifferential on the notional amount at each quarterly settlement period overthe life of the agreement. We do not anticipate non-performance by thecounterparty. The use of derivative financial instruments is limited to

 

29

----

Tableof Contents

 

interestrate swaps, the purpose of which is to hedge interest expense on a portion ofthe variable-rate term loan. The Company does not hold or issue derivativefinancial instruments for speculative purposes.

 

*Credit Ratings*

 

The debt-to-equity ratiowas 245% at June 28, 2008, compared with 238% at December 31, 2007.There have been no changes in the ratings assigned by Standard and Poor’s in April 2007and by Moody’s in January 2007, as follows:

 
| ** **                          | ** ** | **Standard &  Poor’s** | ** ** | **Moody’s** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|------------------|------------|
| Senior secured  credit facility     |       | BB                                   |       | Ba3              |       |
| Senior  subordinated notes due 2015 |       | B-                                   |       | Caal             |       |
| Corporate credit                    |       | B+                                   |       | B-2              |       |
| Outlook                             |       | Negative                             |       | Stable           |       |

 

*Contractual Obligations*

 

Contractual commitmentsto make future cash payments under long-term debt agreements, contracts andcontingent commitments at June 28, 2008, follow (in millions):

 
| ** **                                          | ** ** | ** ** | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------------------------|------------|------------|------------|-------------------------------------------|------------|
| ** **                                          | ** ** | **Total**  | ** ** | **Less than 1  Year**           | ** ** | **1 to 3  Years** | ** ** | **4 to 5  Years** | ** ** | **More than 5  Years** | ** ** |
| Long-term debt:                                     |       |       |       |                                      |       |   |   |   |   |   |   |
| Term loan under  senior secured credit facility (1) |       | 230.4      |       | $                                         | —     |   | $ | 2.4 |   | $ | 228.0 |   | $ | — |   |
| Senior  subordinated notes due 2015                 |       | 190.0      |       | —                                    |       | — |   | — |   | 190.0 |   |
| Interest  relating to long-term debt (2)            |       | 182.0      |       | 32.4                                      |       | 57.9 |   | 55.1 |   | 36.6 |   |
| Operating and capital  leases                       |       | 74.2       |       | 15.5                                      |       | 24.1 |   | 16.0 |   | 18.6 |   |
| Purchase  commitments (3)                           |       | 30.9       |       | 17.9                                      |       | 13.0 |   | — |   | — |   |
|                                                |       | $          | 707.5      |                                      | $          | 65.8 |   | $ | 97.4 |   | $ | 299.1 |   | $ | 245.2 |   |
|                                                     |            |            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |

 

----

| (1)    | There were no  borrowings under the senior secured revolving credit facility at  June 28, 2008. Scheduled payments for the term loan under the senior  secured credit facility do not give effect to possible future additional  mandatory payments resulting from excess cash flow. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                      |
| (2)    | Future interest  payments consist of interest on the variable-rate term loan under the senior  secured credit facility based on the prevailing rate of 4.64% at  June 28, 2008, the related interest rate swap, and the fixed rate of 9  5/8% for the senior subordinated notes.     |
|   |                                                                                                                                                                                                                                                                                      |
| (3)    | Purchase commitments  represent the minimum noncancelable obligations under service agreements,  primarily information technology and telecommunications services.                                                                                                                        |

 

*Off-BalanceSheet Arrangements*

 

As of June 28, 2008,there were no off-balance sheet arrangements other than operating leases foroffice facilities and a letter of credit issued under the senior secured creditfacility.

 

**RecentAccounting Pronouncements**

 

Reference is made to thenotes to the condensed consolidated financial statements for information onrecent accounting pronouncements.

 

30

----

Tableof Contents

 

**ITEM 3. QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

*FinancialInstruments*

 

Thefair value of financial instruments at June 28, 2008, follows (inthousands):

 
| ** **                                                    | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** |
|---------------------------------------------------------------|------------|----------------------|------------|---------------------|------------|
| Long-term debt:                                               | ** ** | ** **           | ** ** | ** **          | ** ** |
| Variable-rate  term loan under senior secured credit facility |       | $                    | 230,366    |                | $          | 230,366 |   |
| 9 5/8% senior  subordinated notes, due February 15, 2015 |       | 190,000              |       | 165,300             |       |
| Net liabilitiy:                                               |       |                 |       |                |       |
| Interest rate  swaps                                          |       | 2,191                |       | 2,191               |       |
|                                                               |            |                      |            |                     |            |  |  |

 

The carrying amount ofthe variable-rate term loan under the senior secured credit facilityapproximates fair value. The fair value of the 9 5/8% senior subordinated notesis based on quoted market prices; the fair value changes based on marketconditions and changes in interest rates. The carrying amounts of otherfinancial instruments, including cash and cash equivalents, trade accountsreceivable and accounts payable and accrued expenses, approximate fair valuedue to their short term nature.

 

*Interest Rate Risk*

 

We are subject tointerest rate risk in connection with the unhedged portion of the variable-rateterm loan and the available revolving variable-rate credit facility under thesenior secured credit facility. The unhedged portion of the outstanding termloan was $35.4 million, and $49.6 million was available under the revolvingcredit facility at June 28, 2008.

 

*Foreign Currency Risk*

 

We invoice customersprimarily in U.S. dollars and in local currencies in the countries in which wehave foreign operations. We are exposed to foreign exchange rate fluctuationsfrom the time customers are invoiced in local currency until such currency isexchanged for U.S. dollars. At June 28, 2008, 10% of our trade receivableswere denominated in foreign currencies.

 

*Inflation Risk*

 

We have generally beenable to anticipate increases in costs when pricing our contracts. Bids forlonger-term fixed-unit price and time and materials contracts typically includesufficient labor and other cost escalations in amounts expected to cover costincreases over the period of performance. Consequently, since costs and revenueinclude an inflationary increase commensurate with the general economy where weoperate, our gross margin expressed as a percentage of revenue has not beensignificantly impacted by inflation.

 

**ITEM 4T. CONTROLSAND PROCEDURES**

 

Evaluationof Disclosure Controls and Procedures

 

Our management, with the participation of our ChiefExecutive Officer and our Chief Financial Officer, has evaluated our disclosurecontrols and procedures (as such term is defined in Rules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934, as amended). Based onthat evaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that, as of the end of the period covered by this report, ourdisclosure controls and procedures were effective to ensure that informationrequired to be disclosed in reports that we file or submit under the SecuritiesExchange Act are: (i) recorded, processed, summarized and reported withinthe time periods specified in the SEC’s rules and forms; and (ii) accumulatedand communicated to our management, including our Chief Executive Officer andChief Financial Officer, as appropriate to allow timely decisions regardingrequired disclosure.

 

Changesin Internal Control Over Financial Reporting

 

During the three monthsended June 28, 2008, there have been no changes in the internal controlover financial reporting that have materially affected, or are reasonablylikely to materially affect, internal control over financial reporting.

 

31

----

Tableof Contents

 

**PART II– OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

*Universityof California Contract*

 

In July 2007, theCompany received a notice from the University of California that it deemed theCompany to be in breach of one of the contracts and directing the Company tostop work on that contract.  In July 2008, the Company and TheRegents of the University of California executed a definitive settlementagreement under which the Company subsequently paid $5.0 million to theUniversity of California. The Company has made a claim for coverage under itsprofessional liability policy with respect to this matter. The insurancecarrier previously denied the initial request for coverage, which denial wasdisputed by the Company.  In August 2008, the carrier contributed$2.0 million to fund the settlement with the University of California pursuantto a mutual reservation of rights and reimbursement agreement entered into on May 8,2008. To the extent the carrier seeks reimbursement of all or a portion of itscontribution and is successful in such action, the Company would be required toreimburse up to the amount paid plus interest. As a result of the settlementwith the University of California and the reservation of rights andreimbursement agreement with the insurance carrier, the Company recorded acharge of $4.0 million to general and administrative expense for the six monthsended June 28, 2008, increasing its settlement liability to $5.0 millionat June 28, 2008, and recorded a reduction of $2.0 million in general andadministrative expense and recorded a receivable in the same amount from theinsurance carrier at June 28, 2008.

 

*Transportation SecurityAdministration*

 

Our contracts with thefederal government are subject to various legal and regulatory requirementsand, from time to time, agencies of the federal government may investigate theconduct of our operations in accordance with these requirements. The UnitedStates government, through the Department of Justice and the Inspector General ofthe Department of Homeland Security, is investigating to determine whether weand NCS Pearson violated the Civil False Claims Act and other federal laws inconnection with a contract awarded by the Transportation SecurityAdministration to us in 2002. In the event we are determined to have violatedthe Civil False Claims Act or other federal laws in connection with theperformance of this contract, we may face administrative, civil or criminalliabilities, including repayments, fines or penalties being imposed upon us.Pearson and the other sellers under the stock purchase agreement have agreed toindemnify us, the Buyer and its other affiliates without regard to any timelimitation for any losses incurred by us, our parent and its other affiliatesin connection with such investigation, except that the first $20.0 million inlosses resulting from such investigation which will be shared equally.

 

*Other*

 

We are also involved invarious claims and lawsuits from time to time, including employment and thirdparty liability claims and litigation. We do not believe that the ultimateresolution of any of these other actions will have a material adverse effect onour financial position, results of operations, liquidity or capital resources.

 

32

----

Tableof Contents

 

**ITEM 1A. RISK FACTORS**

 

There have been no material changes in the informationrelating to risk factors reported in our annual report on Form 10-K forthe year ended December 31, 2007.

 

**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIESAND USE OF PROCEEDS**

 

None

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

None

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

None

 

**ITEM 5. OTHER INFORMATION**

 

None

 

**ITEM 6. EXHIBITS**

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                |
|--------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1 *             |       | Certification of Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                     |
|               |       |                                                                                                                                                           |
| 31.2 *             |       | Certification of Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                     |
|               |       |                                                                                                                                                           |
| 32.1 *             |       | Certification of Chief  Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|               |       |                                                                                                                                                           |
| 32.2 *             |       | Certification of Chief  Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

----

*****Filed herewith.

 

 

**SIGNATURE**

 

Pursuant to therequirements of the Section 13 or 15 (d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 

 
|                 | **Vangent, Inc.**                                  |
|----------------------|---------------------------------------------------------|
|                 |                                                    |
|                 |                                                    |
| August 11, 2008 | /s/ Christine M. Bailey                                 |
|                 | Christine M. Bailey                                     |
|                 | Senior Vice President  and Chief Financial Officer      |
|                 | (Principal Financial  and Principal Accounting Officer) |

 

33

----