**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-K**

**x**                              ANNUALREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

For the fiscal year ended March 31,2007

OR

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

Commission File No. 001-33083

**STANLEY, INC.**

(Exact name of registrantas specified in its charter)

| **Delaware**                              | ** ** | **11-3658790**       |
|-------------------------------------------|------------|----------------------|
| (State or other  jurisdiction of          |       | (I.R.S. Employer     |
| incorporation or organization)            |       | Identification  No.) |
| **3101 Wilson Boulevard, Suite 700** |       |                 |
| **Arlington,  VA**                        |       | **22201**            |
| (Address of  principal executive offices) |       | (Zip Code)           |

 

| **(703) 684-1125**                    |
|---------------------------------------|
| (Registrant’s  telephone number, |
| including area  code)                 |

 

Securities to be registeredpursuant to Section 12(b) of the Act:

| **Title of Each Class**        |   | **Name of  Each Exchange on Which Registered** |
|--------------------------------|--------|------------------------------------------------|
| Common Stock,  $0.01 par value |   | New York Stock  Exchange                       |

 

Securities to be registered pursuant to Section 12(g) ofthe Act:

**None**

(Title of Class)

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 oftheSecurities Act. Yes o  No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d)of the Act. Yes o  Nox

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.   Yes x No  o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

o Large accelerated filer  o  Acceleratedfiler x Non-accelerated filer

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

The aggregate market valueof the voting stock held by non-affiliates of the Registrant was approximately $225.5million based upon the closing price per share of $15.50, as quoted by the NewYork Stock Exchange on October 18, 2006, the day the Registrant’s CommonStock commenced trading. For the purposes of calculating this amount only, alldirectors, executive officers and 10% stockholders of the Registrant have beentreated as affiliates.

As of May 31, 2007,there were 22,089,244 shares of the Registrant’s Common Stock, par value $0.01per share, outstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

Certain portions of the Registrant’s definitive proxystatement relating to the Registrant’s 2007 Annual Meeting of Stockholders areincorporated by reference into Part III of this Form 10-K.

 

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**STANLEY,INC.FORM 10-KFOR THE FISCAL YEAR ENDED MARCH 31, 2007TABLE OF CONTENTS**

|                                                                                                                            | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| **PART 1**                                                                                                            | ** ** | ** ** | ** ** |
| ITEM 1. BUSINESS                                                                                                           |       | 2          |       |
| ITEM 1A.RISK FACTORS                                                                                                       |       | 14         |       |
| ITEM 1B. UNRESOLVED STAFF COMMENTS                                                                                         |       | 27         |       |
| ITEM 2. PROPERTIES                                                                                                         |       | 27         |       |
| ITEM  3. LEGAL PROCEEDINGS                                                                                                 |       | 27         |       |
| ITEM 4. SUMBISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS                                                               |       | 27         |       |
| **PART II**                                                                                                           | ** ** | ** ** | ** ** |
| ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED  STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |       | 28         |       |
| ITEM 6. SELECTED FINANCIAL DATA                                                                                            |       | 30         |       |
| ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS                        |       | 31         |       |
| ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK                                                       |       | 43         |       |
| ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                        |       | 43         |       |
| ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS  ON ACCOUNTING AND FINANCIAL DISCLOSURE                              |       | 43         |       |
| ITEM 9A. CONTROLS AND PROCEDURES                                                                                           |       | 43         |       |
| ITEM  9B. OTHER INFORMATION                                                                                                |       | 44         |       |
| **PART III**                                                                                                          | ** ** | ** ** | ** ** |
| ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE  GOVERNANCE                                                           |       | 45         |       |
| ITEM 11. EXECUTIVE COMPENSATION                                                                                            |       | 45         |       |
| ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS                   |       | 45         |       |
| ITEM 13. CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS AND DIRECTOR INDEPENDENCE                                         |       | 45         |       |
| ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                            |       | 45         |       |
| **PART IV**                                                                                                           | ** ** | ** ** | ** ** |
| ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                        |       | 46         |       |

 

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**PART I**

**ITEM 1.**                BUSINESS

**Company Overview**

We provide information technology services andsolutions to U.S. defense and federal civilian government agencies. We offerour customers solutions and expertise to support their mission-essentialneeds at any stage of program, product development or business lifecyclethrough five service areas: systems engineering, enterprise integration,operational logistics, business process outsourcing and advanced engineeringand technology. As a systems integrator, we apply these five service areas toenable our customers to achieve interoperability between different businessprocesses and information technology systems.

We were founded in 1966 and have establishedlong-standing, successful relationships with our federal government customers.We currently have over 200 active contractual engagements across 40 federalgovernment agencies. Our customers include the Department of Defense (includingall major agencies within the Department of Defense), the Department of State,the Department of Homeland Security, the Department of Transportation, theDepartment of the Treasury, NASA, the Department of Justice, and the Departmentof Health and Human Services.

For the fiscal year ended March 31, 2007, orfiscal 2007, we derived approximately 65% of our revenues from the Departmentof Defense, including agencies within the intelligence community, andapproximately 35% of our revenues from federal civilian government agencies.Our contract with the Department of State for the provision of passportprocessing and support services, which is our largest revenue-generatingcontract or task order under indefinite delivery/indefinite quantity, or ID/IQ,contracts, accounted for approximately 15% of our revenues for fiscal 2007. Forfiscal 2007, our top ten revenue-generating contracts or task ordersunder ID/IQ contracts accounted for approximately 38% of our revenues. Asidefrom our contract for passport processing and support services, no singlecontract or task order under ID/IQ contracts exceeded 4% of our revenues forfiscal 2007. We acted as the prime contractor on contractual engagements thatprovided approximately 80% of our revenues for fiscal 2007.

From the fiscal year ended March 31, 1997 throughfiscal 2007, we increased our revenues at a compound annual growth rate of33.3%, and we have been profitable in every year during that period. Ourrevenues for fiscal 2007 were $409.4 million. As of March 31, 2007,our total backlog was $974.8 million and our funded backlog was$224.4 million. For a discussion of how we calculate backlog, see “Backlog,page 12.”

Over the three year period ended March 31, 2007,we have won 100% of competitively awarded contracts on which we were theincumbent. During fiscal 2007, we achieved an overall win rate, including theincumbent contracts referred to above, of approximately 58%. For a discussionof how we calculate our win rate, see “Business Development, page 10.”

We emphasize threeessential attributes—a commitment to strong partnerships, integrity in alldealings and results for our customers—in order to develop long-termrelationships with our customers and achieve the highest quality workforce inour industry. Our senior management team includes a core group of executiveswho have grown our company over the course of the past two decades. Our teamhas been supplemented with strategic hires and is supported by a high qualitystaff of approximately 2,700 employees. A majority of our senior managementteam, including our chief executive officer, has served in the U.S. armedforces, and this experience has provided us with significant knowledge of theseorganizations. As of March 31, 2007, approximately 53% of our employeesheld Secret or Top Secret clearances, which are necessary to work on classifiedcontracts. Additionally, our management team and our employees have a personalstake in our continued growth and success as they own a significant portion ofour common stock.

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**Industry Background**

The federal government is the largest purchaser ofinformation technology services and solutions in the United States. Informationtechnology accounts for a significant portion of the federal government’sspending, and, according to INPUT, an independent federal government marketresearch firm, federal government information technology spending is expectedto grow from $79.8 billion in federal fiscal year 2007 to$101.7 billion in federal fiscal year 2012. Of the total informationtechnology spending, INPUT forecasts that the contracted-out portion will growfrom $67.6 billion in federal fiscal year 2007 to $88.3 billion infederal fiscal year 2012. Information technology professional services andoutsourcing, which are the primary components of our systems integrationservices, are expected by INPUT to be among the fastest growing segments of thefederal information technology market in the next five years.

We believe that over thenext several years the continued increase in the federal government’s demandfor information technology services and solutions will be primarily driven bythe following factors:

***Increased Spendingon National Defense, Intelligence and Homeland Security***

The continuing Global Waron Terror and increased focus on U.S. border security have intensified thefederal government’s commitment to strengthen our country’s military,intelligence and homeland security capabilities and increased the need forsystems integration solutions capable of supporting this commitment. Accordingto INPUT, national defense, intelligence and homeland security spending isprojected to continue to grow over the next several years as the Global War onTerror, including the demand for intelligence capabilities and reconstructionefforts in Afghanistan and Iraq, defense transformation and homeland securityremain high priorities for the federal government.

***Demand for GreaterGovernment Efficiency and Effectiveness***

Federal governmentagencies are under increasing pressure from the Office of Management and Budgetto be more efficient and effective, and as a result they are re-engineeringtheir business processes, consolidating redundant systems, upgrading theirinformation technology capabilities and expanding e-government services. As anexample of this trend, the Department of Homeland Security has sought tomodernize its legacy systems, improve security, enhance business intelligencecapabilities and institute mature software development processes. In addition,in order to enhance efficiency, the federal government has increased its use oflower cost, open architecture systems using commercial off-the-shelf,or COTS, hardware and software, which are displacing the single purpose, customsystems historically favored by the federal government and driving demand forsystems integration services.

***Increased FederalGovernment Reliance on Outsourcing***

Federal governmentagencies are increasingly adopting outsourcing of information technologyservices, in particular integration services, and business processes. Federalagencies are striving to maintain their core functions and meet efficiency andeffectiveness demands, including information technology upgrade and competitivesourcing requirements, with limited technical resources and a shrinkingworkforce. As a result, according to INPUT, more than 45% of federalinformation technology workers will beeligible to retire by federal fiscal year 2008, further straining federalgovernment personnel resources and increasing reliance on external providers.According to INPUT, federal information technology will experience the largestgrowth among the different segments of information technology services and willincrease from $14.4 billion in federal fiscal year 2007 to$19.7 billion by federal fiscal year 2012.

***Increased Emphasison Defense System Sustainment and Modernization***

To balance the costs ofnew initiatives with the costs of ongoing military operations, the Departmentof Defense is emphasizing upgrading existing platforms to next generationtechnologies rather than 

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procuringcompletely new systems. For example, rather than replacing certain maritimecommand and control systems in its fleet, the U.S. Navy has invested insignificant upgrades, using the latest information technology and weaponssystems. To achieve these upgrades in an environment of military supportpersonnel reductions, the armed services are increasingly dependent on highlyskilled contractors that can provide the full spectrum of informationtechnology services and solutions needed to support these activities.

**Our CompetitiveStrengths**

We believe that we possessthe following key competitive strengths:

***Strong Presence inKey Strategic Areas and Deep Knowledge of Our Diverse Customer Base***

We provide services inareas that we believe are a high priority for the federal government, such asdefense transformation, homeland security and the Global War on Terror, and webelieve that our extensive experience with our customers provides us withsignificant insight into their missions and needs. We currently havecontractual engagements across approximately 40 federal government agencies.Through these long-standing relationships, we have developed an extensiveknowledge of our customers’ business processes and information technologyarchitectures, which enables us to deliver innovative integrated solutions tomeet their changing needs. The ability to apply experience gained from previouscontractual engagements across a diverse customer base is a key criterion infederal government evaluation of companies providing these services.

***Outstanding Recordof Past Performance Fueling Growth***

We have a strong record ofpast performance with our government customers, as evidenced by our customersurveys and feedback. In 2005, we were chosen as the Mid-Size Contractor of theYear at the Greater Washington Government Contractor Awards. Our emphasis oncustomer satisfaction is reflected by a win rate of 100% over the three yearperiod ended March 31, 2007, on competitively awarded contracts on whichwe were the incumbent.

***ExperiencedManagement Team and Highly-Skilled Workforce***

Our senior management teamincludes a core group of executives who have grown our company over the courseof the past two decades. A majority of our senior management team, includingour chief executive officer, has served in the U.S. armed forces, and thisexperience has provided us with significant knowledge of these organizations.We have also supplemented our team with strategic hires. In addition, we have along-standing commitment to employee development, and have implemented a broadrange of internal training programs focusing on technical, managerial andaccount management skills, including discrete programs for our programmanagers, supervisors and business development personnel, always with a strongfocus on customer service and satisfaction. As of March 31, 2007,approximately 53% of our employees held Secret or Top Secret clearances, whichare necessary to work on classified contracts.

***Proven BusinessDevelopment Infrastructure***

We have developed systemsand processes modeled after industry best practices to successfully market,develop, acquire and expand contracts with the federal government. The Stanleyaccount management process represents a disciplined, team-based approach tocustomer relationships and business development, and emphasizes ourcontribution to the strategic organizational objectives of the customer. Wesupport our business development professionals, who are highly experienced inmarketing to our government customers, with business intelligence resources andsystems and processes that include a capture management system providingreal-time reporting of pipeline and bid status. As a result, for the 

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twelvemonths ended March 31, 2007, we achieved an overall win rate, includingbids where we were the incumbent contractor, of approximately 58%. We believethat our ability to collaborate internally, our dedicated support staff and ourconsistent processes make us particularly well-suited to take advantage ofincreasingly streamlined government procurement procedures.

***Proven Track Recordof Acquisitions and Integration***

We believe that anintegral part of our growth is our ability to identify, acquire and integratecompanies that expand our systems integration capabilities and provide us withaccess to new customers and contract vehicles. We have disciplined acquisitionprocesses for identifying, acquiring and integrating target companies andsuccessfully growing these businesses post-acquisition. Our disciplinedapproach to acquisitions also ensures that we align not only the systems of atarget company but also its culture in order to retain and expand both ourcustomer and employee bases.

***Commitment toCorporate Culture***

Our success as a systemsintegrator and provider of information technology services and solutions ishighly dependent on our employees. We have a culture focused on long-termrelationships with our customers and achieving the highest quality workforce inour industry. We believe we have been successful in developing a culture thatfocuses on developing our employees throughout their career and promoting themwithin our organization. In 2007, we were named to FORTUNE® Magazine’s list of “100Best Companies to Work For”. We emphasize three essential attributes—acommitment to strong partnerships, integrity in all our dealings and resultsfor our customers. We reinforce these principles regularly in our recruitingprocess, training programs, proposals, company meetings and internalcommunications. Additionally, our management team and our employees have apersonal stake in our continued growth and success as they own a significantportion of our common stock.

***CorporateInfrastructure Positioned for Growth***

During the past severalyears we have made significant investments in our corporate infrastructure inanticipation of future growth. These investments include ISO 9001-2000certified processes, internal controls, sales and marketing and accountmanagement processes, effective web-based project management tools andrelocation to an expanded headquarters. This infrastructure and the supportingbusiness processes based on industry best practices result in operationalefficiencies positioning us for continued growth through contract wins andacquisition.

**Our BusinessStrategy**

Our strategy is tocontinue to profitably grow our business as a provider of informationtechnology services and solutions to the federal government and to focus on ourstrength as a systems integrator providing lifecycle solutions to ourcustomers. Key elements of our strategy include:

***Focusing onOpportunities to Support Mission-Essential Programs as a Prime Contractor***

We have a proud heritageof providing mission-essential support for federal government customersas a prime contractor, and as a result we have developed specialized expertisein the systems, business processes and requirements of our customers. As aresult, we have developed a deep functional understanding of our customers’requirements and missions, which places us in a strong position to win futureprime contractor engagements.

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***Cross-SellingServices and Expanding Customer Presence***

We will continue ourpractice of cross-selling services to expand the breadth and depth of ourcustomer engagements and create opportunities to provide additional solutionsto our customers. We will continue to utilize our centralized accountmanagement process, which is a highly disciplined, team-based approach tocustomer relationship management, to enhance our understanding of our customers’needs among our division managers, program managers and customer segment leads,enabling them to offer our customers our full range of service expertise. Thisteam will work cooperatively to generate new sales and internal growth withinexisting customer contracts, and will play an essential role in our ongoingefforts to cross-sell services to both existing and new customers.

***Expanding OurCustomer and Contract Base***

Our current contract baseincludes twelve prime contractor positions on government-wide acquisitioncontracts, or GWACs, and agency-specific ID/IQ contracts. We intend toaggressively pursue task orders under these vehicles in order to maximize ourrevenue and strengthen our customer relationships. We believe that our abilityto provide advanced engineering and technical solutions to our customers, ourstrong past performance record and our knowledge of our customers’ needsposition us to win additional task orders under these prime contract vehicles.We also intend to expand our contract base into areas with significant growth opportunitiesby leveraging our industry reputation and long-term customer relationships. Weanticipate that this expansion will enable us to pursue additional higher valuework and further diversify our revenue base across the federal government. Ourlong-term relationships with federal government agencies, together with ourGWAC and ID/IQ vehicles, give us opportunities to win contracts with newcustomers.

***Being an Employerof Choice and Developing Top Talent***

Our practice is to promotepeople from within our company, which we believe fosters a culture of investingin our employees. To ensure that we have future leadership, we will continue todevelop our managerial workforce at the task, project, program and executivelevel through ongoing company-sponsored training and developmentprograms. In addition, we intend to continue to attract and retain skilledprofessionals, including managers, engineers, analysts, programmers,technicians and support specialists, in order to ensure that we are able tomeet our customers’ needs. We continue to retain our employees by offeringcompetitive compensation and incentive plans, opportunities for career growth,company-supported education programs, and challenging work assignments atover 100 locations around the world.

***Pursuing StrategicAcquisitions***

We continue to pursuestrategic acquisitions that complement and broaden our existing customer base,increase our presence in strategic geographic markets, expand our capabilitiesas a systems integrator and provide access to prime contract vehicles. Weemploy a disciplined methodology to evaluate and select acquisition candidatesand have used it to make five strategic acquisitions since 2000. Theseacquisitions enhanced our services portfolio, broadened our customer base andexpanded the geographic reach of our company.

**Our Services**

As a systems integrator,our service portfolio is comprised of five service areas, each customizable tomeet unique customer needs. These are systems engineering, enterpriseintegration, operational logistics, business process outsourcing and advancedengineering and technology. Our end-to-end information technology servicesprovide our customers with solutions throughout the design, build, delivery,and 

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operationand modernization stages of a program. By combining knowledge and successfulimplementation of best-of-breed processes with intelligent application ofemergent technologies, we help our customers meet critical goals and milestoneson time and within budget in support of their operational objectives.

***Systems Engineering***

Our systems engineering services apply formalengineering methods and practices to analyze, design, develop, deploy andmodernize information systems providing high-end capability for Command,Control, Communications, Computers, Intelligence, Surveillance andReconnaissance, or C4ISR, functions, operations, logistics and businesssystems. Systems engineering activities are provided by teams of senior system,software, data and communications engineers who are supported by clearedpersonnel, infrastructure and facilities.

Our software andsystems engineering programs apply best practices using theCarnegie-Mellon Software Engineering Institute (SEI) Capability Maturity ModelIntegration, or CMMI. Some of our business units have achieved an officialSEI CMMI Maturity rating of Level 3; other business units operate at thehighest level, CMMI Maturity Level 5. Our CMMI ratings have been achievedthrough official SEI Appraisals led by independent, authorized SEI Appraisers. Ourprimary software and systems engineering service offerings are:

·       systemsdesign and enterprise architecture development;

·       softwareengineering and development;

·       securityengineering and information assurance;

·       Commandand Control, or C2, and C4ISR engineering and integration;

·       systemsproduction and deployment;

·       informationand data engineering and development;

·       networkand IT infrastructure engineering;

·       systemsengineering and technical assistance; and

·       independent verificationand validation.

***EnterpriseIntegration***

Our enterpriseintegration services provide interoperability of data, functionality andinformation management to business processes, users and other informationsystems in order to support our customers’ missions. Enabled by our expert knowledgeof COTS packages, which include enterprise resource planning, or ERP, andbusiness process management technologies, we integrate new functionality withexisting applications and infrastructure to enhance horizontal interoperabilityacross the enterprise. Our service offerings that support enterpriseintegration include:

·       businessprocess development and workflow automation;

·       COTSsoftware integration;

·       enterprisecontent management;

·       enterpriseapplication integration;

·       documentmanagement;

·       e-governmentand e-business solutions; and

·       ERP blueprinting,configuration and implementation.

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***OperationalLogistics***

Our operationallogistics services provide resource, supply chain, maintenance and sustainmentplanning, management and support to federal government customers, principallyto U.S. military operations. Our solution sets include personnel with broadlogistics experience, a family of proven logistics business applications andlogistics engineers, and support personnel dedicated to our customers’missions. Our operational logistics service offerings include:

·       logisticsengineering;

·       logisticsbusiness systems;

·       systemfielding and lifecycle support;

·       trainingprogram support;

·       supplymanagement and warehouse operations;

·       maintenanceengineering;

·       documentationand e-manual development; and

·       large-scale militarydeployment planning and embarkation support.

***Business ProcessOutsourcing***

Our businessprocess outsourcing services offer engineers, analysts and subject-matterexperts in key business functions, such as requirements analysis, project andprogram management, operational support, administration and budgeting. Ourbusiness process outsourcing team members bring with them proven techniques forprocess and product improvement, which we believe continue to enhanceorganizational performance after the contractual engagement’s goals have beenachieved. Our business process outsourcing service offerings include:

·       facilityoperations;

·       businessprocess improvement;

·       programand project management;

·       functionalanalysis; and

·       developmental andoperational test and evaluation.

***AdvancedEngineering and Technology***

Our advancedengineering and technology capabilities deliver expert analysis, design,prototyping and engineering to the U.S. defense and federal civilian governmentcustomers implementing state-of-the-art and emergent technologies to enhanceinformation exchange, interoperability, data-sharing capabilities, C4ISR andweapons systems effectiveness. Our primary advanced engineering and technologyofferings are:

·       sensorintegration;

·       serviceoriented architectures;

·       microsystemsdesign/development;

·       fiber/electrooptics;

·       microelectronics;and

·       domainand situational awareness.

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**Qualifications**

We apply proven andrepeatable quality control and management processes to ensure effective andefficient solution delivery for our customers. The foundation of this effort isour Quality Management System, or QMS, which operates in accordance withindustry methodologies, including ISO 9001-2000, Six Sigma, and LeanManufacturing, as well as the Software Engineering Institute’s CMMI Level III.We apply QMS to our contract and task management procedures, operationssupport, systems and software engineering and systems integration. Our programmanagers have been trained to adapt CMMI Level III to the evolving technology,practices and priorities of our customers, thereby mitigating program and taskrisk, while retaining its core principles and processes. In particular, we haveadapted QMS to meet the specific integration needs of the JSF Program Office,the U.S. Marine Corps, the U.S. Army, the Department of State and other federalcivilian government customers.

**StrategicAcquisitions**

We have supplemented our internal growth and expandedour service offerings and customer base through five strategic acquisitionssince 2000. In January 2000, we acquired GCI Information Services, Inc.,or GCI, broadening our electronic records management services and adding theDepartment of Commerce and Department of the Treasury as customers. In September 2002,we acquired CCI, Incorporated, or CCI, expanding our operational logisticsportfolio and adding a strong presence with the Naval Air Systems Command. In December 2003,we acquired Fuentez Systems Concepts, Inc., or FSC, providing us withadditional systems engineering, production, integration and C4ISR expertise,and adding the Space and Naval Warfare Systems Command, the Department ofHomeland Security and agencies within the intelligence community as ourcustomers.

In February 2006, we completed the acquisition ofMorgan Research Corporation, or Morgan. This acquisition provides us with apresence in Huntsville, Alabama, which, as a result of the Department ofDefense’s Base Realignment and Closure program, or BRAC, will be the newheadquarters of the Army Materiel Command, the Army Space and Missile DefenseCommand and a substantial portion of the Missile Defense Agency. In addition,this acquisition combines the specialized engineering and technology expertiseof Morgan with our systems integration capabilities, and provides us withadditional key prime contract vehicles. This acquisition enables us to providecomplementary information technology and systems engineering services and tooffer an expanded suite of solutions to our customers.

Subsequent to the end ofour fiscal 2007 year, we completed the acquisition of Techrizon LLC. Theacquisition combines the specialized expertise of Techrizon with Stanley’sproven systems integration capabilities. The two companies providecomplementary information technology services and together will offer anexpanded suite of solutions for their combined customer base. Techrizonprovides support to the U.S. Army’s Communications-Electronics Life CycleManagement Command and the Fires Center of Excellence. Techrizon has alsoprovided support to the U.S. Army’s Field Artillery School since 1976. Theacquisition reinforces our strategy to expand presence in key markets positivelyimpacted by the Base Realignment and Closure, or BRAC, process.

**Customers**

We have successfully established long-standingrelationships with many governmental agencies. We currently have over 200active contractual engagements across 40 federal government agencies. Ourcustomers include the Department of Defense (including all major agencieswithin the Department of Defense), the Department of State, the Department ofHomeland Security, the Department of Transportation, the Department of theTreasury, NASA, the Department of Justice, and the Department of Health andHuman Services. We have served customers that provided over 90% of our revenuesfor fiscal 2007 for an average of thirteen years. We believe our long-standingrelationships are due in large 

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part to our customer-centricaccount management process, our technical expertise and proven performance onindividual contracts.

For fiscal 2007, wederived approximately 65% of our revenues from the Department of Defense,including agencies within the intelligence community, as compared to 70% infiscal 2005 and 61% in fiscal 2006. Approximately 35% of our fiscal 2007revenues were from federal civilian government agencies. In fiscal 2005 and2006, approximately 30% and 39% of our revenues were from federal civiliangovernment agencies. Our largest customer group, which includes five separateagencies, is the U.S. Army, which accounted for approximately 35% of revenuesfor fiscal 2007. In fiscal 2005 and 2006, the U.S. Army accounted forapproximately 29% and 25%, respectively, of our revenues. Our contract with theDepartment of State for the provision of passport processing and supportservices, which is our largest revenue-generating contract, accounted forapproximately 15% of our revenues for fiscal 2007 as compared to 15% in fiscal2005 and 19% in fiscal 2006. Contracts for which we acted as the primecontractor represented approximately 80% of our revenues for fiscal 2005, 2006and 2007.

**BusinessDevelopment**

Our account management process is a highlydisciplined, team-based approach to customer relationship management andbusiness development designed to understand our customers, their organizationsand their mission. Our scalable process, modeled after industry best practicesand refined over years of application, identifies sales opportunities well inadvance of contract competition and guides the lead generation and developmentprocess, focusing limited resources on achieving growth objectives whileproviding the basis for making strategic decisions in meeting both existing andnew customer needs and opportunities.

Systems and processes developed in support of ourbusiness development process include a capture management system thataggregates customer data throughout the lead identification process and fromprevious contractual engagements and third party sources, ultimatelyfacilitating the bid decision and proposal process. The system also provides uswith real-time reporting of pipeline and bid status. The strategic operationsorganization also includes a business intelligence function facilitatingprogram account opportunity reviews, sales training, research and competitiveanalyses.

Our business development professionals are highlyexperienced in marketing to our government customers and have extensiveknowledge of both the services and solutions we offer, as well as theparticular customer’s organization, mission, culture and technologyinitiatives. These professionals also possess a working knowledge of themarketing limitations that are specific to the government arena, includinggovernment funding systems, conflict of interest restrictions, procurementintegrity limitations and other pertinent procedural requirements. Infulfilling its mission, the business development organization cooperatesclosely with the various operations groups and other support organizations.

During fiscal 2007, weachieved an overall win rate of approximately 58%. Overall win rate representsthe number of bids won as a percentage of the total number of bids submitted.We also measure our win rate with respect to competitively awarded contracts onwhich we are the incumbent contractor. Over the three year period ended March 31,2007, we achieved a win rate of 100% of such contracts.

**Existing ContractProfile**

***Contract Types***

We currently have more than 200 active contractualengagements, each employing one of three types of price structures: cost-plus-fee,time-and-materials or fixed-price.

***Cost-Plus-FeeContracts.******  ***Cost-plus-fee contracts providefor reimbursement of costs, to the extent that such costs are reasonable,allowable and allocable to the contract, and for the payment of a “fee,” 

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which essentiallyrepresents the profit margin negotiated between the contractor and thecontracting agency. There are three basic types of cost-plus-feecontracts. Cost-plus-fixed-fee contracts provide for a negotiatedfee that is fixed at inception and does not vary with actual costs. Cost-plus-award-feecontracts provide for a fee consisting of a base amount fixed at inception andan award amount which varies based on the federal government’s evaluation ofcontractor performance. Cost-plus-incentive-fee contracts providefor an initially negotiated fee that is adjusted based on a formula thatprovides, within limits, for increases or decreases based on the relationshipof total allowable costs to target costs.

Contracts may require completion of defined tasks orperformance of a specific number of hours of service. Our total cost incurredon our cost-plus-fee contracts cannot exceed the funded cost ceiling setforth in the contract without the approval of the agency. If a contracted taskhas not been completed or the specific number of hours of service have not beenperformed at the time the authorized cost is expended, we may be required tocomplete the work and be reimbursed for the additional costs with no increasein fee or the fee may be reduced proportionately to the number of hoursactually provided. Even though cost-plus-fee contracts are generallythought to involve a relatively low degree of risk, we try to carefully manageour cost-plus-fee contracts to ensure that they are performed within theestimated cost and that the required work is completed and/or the minimum hoursare provided.

***Time-and-MaterialsContracts.******  ***Under a time-and-materials contract,our compensation is based on a fixed hourly rate established for specifiedlabor or skill categories. We are paid at the established hourly rates for thehours we expend performing the work specified in the contract. Labor costs, overhead,general and administrative costs and profit are included in the fixed hourlyrate. Materials, subcontractors, travel and other direct costs are reimbursedat actual costs plus an allocation of indirect costs without fee. We makecritical pricing assumptions and decisions when developing and proposingtime-and-materials labor rates. We risk incurring a loss of profitability ifour actual costs exceed the costs incorporated into the fixed hourly laborrate.

***Fixed-PriceContracts.******  ***In a fixed-price contract, wemust complete the work to receive the price, which is fixed and is not affectedby the cost of performance. Thus, if our costs are greater than the price, wewill suffer a loss and if our price is greater than the costs, we will realizea profit. Because we agree to accept the cost risk for the contract, there isgreater risk involved with performing this type of contract. However, if workis performed or solutions are developed more efficiently than anticipated,there is the possibility of receiving higher profit margins than thosetypically recognized on cost-plus-fee and time-and-materials contracts.

Thefollowing table summarizes our historical contract mix, measured as apercentage of total revenues, for the periods indicated:

| ** **         | ** ** | **Fiscal Year Ended  March 31,** | ** ** |
|--------------------|------------|-------------------------------------------------|------------|
| ** **         | ** ** | **2005**                                        | ** ** | **2006** | ** ** | **2007** | ** ** |
| Cost-plus-fee      |       |                                            | 60         | % |   |   | 62 | % |   |   | 52 | % |   |
| Time-and-materials |       |                                            | 11         | % |   |   | 20 | % |   |   | 32 | % |   |
| Fixed-price        |       |                                            | 29         | % |   |   | 18 | % |   |   | 16 | % |   |

 

Because the customerusually specifies the type of contract for a particular contractual engagement,we generally do not influence the choice of contract type. However, where we dohave the opportunity to influence the contract type, and where customerrequirements are clear, we prefer time-and-materials and fixed-pricearrangements rather than cost-plus-fee arrangements becausetime-and-materials and fixed-price contracts, as compared with cost-plus-feecontracts, generally provide greater opportunity for the customer to save moneyand for us to generate higher margins.

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***Contract Vehicles***

We compete for task ordersthrough a variety of arrangements, or contract vehicles, including GWACs,blanket purchase agreements, GSA schedules and agency-specific ID/IQcontracts. For a description of these contract vehicles, see “GovernmentContracting and Regulations”. We hold a number of GWACs, agency-specificID/IQ contracts and GSA schedule contracts. These are popular contract awardmethods, offering more flexible, cost-effective and rapid procurementprocesses.

**Backlog**

We define backlog as the amount of revenues we expectto realize (i) over the remaining base contract performance period and (ii) fromthe exercise of option periods that we reasonably believe will be exercised,from signed contracts in existence as of the measurement date. We do notinclude contract ceiling values under GWAC or ID/IQ contracts in our backlogcalculation.  We also do not include inbacklog (i) the expected amount of revenues that would be realized if, andwhen, we were successful in the re-compete of signed contracts in existence asof the measurement date or (ii) the expected amount of revenues that wouldbe realized from future unidentified growth on signed contracts and task ordersin existence as of the measurement date.

We define funded backlog as the portion of our backlogfor which funding currently is appropriated and obligated to us under a signedcontract or task order by the purchasing agency, or otherwise authorized forpayment to us by a customer upon completion of a specified portion of work,less the amount of revenue we have previously recognized under the contract.Our funded backlog does not include the full potential value of our contracts,because Congress often appropriates funds to be used by an agency for aparticular program or contract on a yearly or quarterly basis, even though thecontract may call for performance over a number of years. As a result,contracts typically are only partially funded at any point during their term,and all or some of the work to be performed under the contracts may remainunfunded unless and until Congress makes subsequent appropriations and theprocuring agency allocates funding to the contract.

As of March 31, 2006,our total backlog was $845.3 million and funded backlog was $160.9 million. Ourtotal and funded backlog was $974.8 million and $224.4 million,respectively, as of March 31, 2007.

**Partnering**

Strong industrypartnerships with leading vendors and other systems integrators provide avaluable source of information regarding new technology trends and techniques.Similar to our approach for managing customer relationships, we designatepartnership leads responsible for understanding the product roadmaps ofspecific technologies and for working closely with vendors such asEMC/Documentum, Oracle, SAP and Sun Microsystems. We seek to utilize theresearch and development investments of our partners for our customers’benefit. These partnerships enable us to provide significant additionalcapabilities to our customers, including technology and software services thatare not otherwise available directly from us.

**Subcontractors**

When we act as a prime contractor, as we typically do,we derive revenue either through our own work or through the efforts of oursubcontractors. As part of the contract bidding process, we may enter intoteaming agreements with subcontractors to enhance our ability to bid on large,complex assignments or to address more completely a particular customer’srequirements. Teaming agreements and subcontracting relationships are usefulbecause they permit us, as a prime contractor, to compete more effectively on awider range of projects. In addition, we may engage a subcontractor to performa discrete task on an engagement or a subcontractor may approach us because ofour position as a prime contractor. When we 

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are a prime contractor onan engagement, we are ultimately responsible for the overall engagement as wellas the performance of our subcontractors.

We estimate that revenuesderived from work performed by our subcontractors represented approximately 31%of our revenues for fiscal 2007. Asdiscussed further in “Risk Factors,” if our subcontractors fail to performtheir contractual obligations, our performance and reputation as a primecontractor and our ability to obtain future business could suffer and as aresult our financial condition and results of operations could decline.

**Competition**

Despite consolidation overthe past several years, the federal information technology services andsolutions industry is comprised of a large number of enterprises ranging fromsmall, niche-oriented companies to multi-billion dollarcorporations with a major presence throughout the federal government. Becauseof the diverse requirements of federal government customers and the highlycompetitive nature of large federal contracting initiatives, corporationsfrequently form teams to pursue contract opportunities. Prime contractorsleading large proposal efforts select team members on the basis of theirrelevant capabilities and experience particular to each opportunity. As aresult of these circumstances, companies that are competitors for oneopportunity may be team members for another opportunity. In each of our fiveservice areas, we generally bid against companies of varying sizes andspecialties. Our competitors include large defense and information technologyprime contractors, as well as a number of smaller federal contractors withspecialized capabilities. We compete on the basis of our technical abilities,customer relationships, past performance, cost containment, reputation andability to provide quality personnel.

**Employees**

We have approximately2,700 employees, located in 28 states, Washington, D.C. and eight foreigncountries. The depth and breadth of the security clearances held by ouremployees is instrumental in allowing us to compete for, and work on,classified projects. As of March 31, 2007, approximately 53% of ouremployees held Secret or Top Secret clearances. None of our employees isrepresented by a labor union or subject to a collective bargaining agreement.We believe that our relations with our employees are good.

**IntellectualProperty**

Our solutions are not generally dependent on patentprotection. We currently have eleven pending patent applications outstanding.While we believe these patent applications are valid, we do not consider ourbusiness to be dependent on the issuance or protection of these patents in anymaterial way.

We have a number of tradesecrets that contribute to our success and competitive position, and weendeavor to protect the secrecy of this proprietary information. While webelieve that retaining continuing protection of our trade secrets andconfidential information is important, we are not materially dependent on anyspecific trade secret or group of trade secrets.

**Company Website andInformation**

Our website can be found on the Internet atwww.stanleyassociates.com. The website contains information about us and ouroperations. Through a link to the Investor Relations section of our website,copies of each of our filings with the SEC on Form 10-K, Form 10-Qand Form 8-K and all amendments to those reports can be viewed anddownloaded free of charge as soon as reasonably practicable after the reportsand amendments are electronically filed with or furnished to the SEC.

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You may request a copy of the materials identified inthe preceding paragraph, at no cost, by writing or telephoning us at thefollowing address or telephone number:

Stanley, Inc.Attention: Investment Relations3101 Wilson Boulevard, Suite 700Arlington, VA 22201Telephone: (703) 684-1125

**ITEM 1A.**        RISKFACTORS

*Any of the risks described below could materiallyadversely affect our business, financial condition and operating results.*

**Risks Related toOur Business**

***We depend oncontracts with federal government agencies for substantially all of ourrevenues. If our relationships with these agencies were harmed, our revenuesand operating results could decline.***

Revenues from federalgovernment contracts, either as a prime contractor or as a subcontractor,accounted for nearly 100% of our revenues for the fiscal year ended March 31,2007. We believe that federal government contracts will continue to be thesource of substantially all of our revenues for the foreseeable future. Forthis reason, any issue that compromises our relationship with agencies of thefederal government in general, or with the Department of Defense or Departmentof State in particular would cause serious harm to our business. Among the keyfactors in maintaining our relationships with federal government agencycustomers are our performance on individual contracts and task orders, thestrength of our professional reputation and the relationships of our keyexecutives with customer personnel. To the extent that our performance does notmeet customer expectations, or our reputation or relationships with one or morekey customers are impaired, our revenues and operating results could decline asa result.

***Changes in thespending policies or budget priorities of the federal government, and theDepartment of Defense or Department of State in particular, could cause us tolose revenues.***

Changes in federalgovernment fiscal or spending policies, or in the Department of Defense or theDepartment of State budget allocations, could directly affect our financialperformance. Among the factors that could harm our business are:

·       curtailmentof the federal government’s use of technology services firms;

·       asignificant decline in spending by the federal government in general or byspecific departments or agencies in particular;

·       reductionsin federal government programs or requirements;

·       ashift in spending to federal programs and agencies that we do not support orwhere we currently do not have contracts or key relationships;

·       delaysin the payment of our invoices by government payment offices;

·       federalgovernmental shutdowns, such as the shutdown that occurred during thegovernment’s 1996 fiscal year, and other potential delays in the governmentappropriations process, such as federal agencies having to operate under acontinuing funding resolution because of delays in Congressional budgetappropriations;

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·       emergencyspending that reduces funds available for other government priorities, such asthe emergency spending for relief following hurricanes Katrina and Rita; and

·       generaleconomic and political conditions, including any event that reduces federal taxreceipts or results in a change in spending priorities of the federalgovernment.

These or other factors could cause federal governmentagencies and departments to reduce their purchases under contracts, to exercisetheir right to terminate contracts or not to exercise options to renewcontracts, any of which could cause us to lose revenues.

In particular, revenues earned from contracts with theDepartment of Defense, including from subcontracts having the Department ofDefense as the ultimate purchaser, represented approximately 65% of ourrevenues for the fiscal year ended  March 31,2007. In the past, the U.S. defense budget has declined from time to time,resulting in a slowing of new program starts, program delays and programcancellations. These reductions may cause defense-related governmentcontractors to experience declining revenues, increased pressure on operatingmargins and, in some cases, net losses. Current federal government spendinglevels on defense-related programs is in part related to the U.S. militaryoperations in Afghanistan and Iraq and may not be sustainable, including as aresult of changes in government leadership, policies or priorities. Futurelevels of expenditures and authorizations for defense-related programs maydecrease or shift to programs in areas where we do not provide services. Anysuch decline or shift in defense-related expenditures could harm our revenuesand operating results.

In addition, anylimitations imposed on spending by other federal government agencies thatresult from efforts to reduce the federal deficit may limit both the continuedfunding of our existing contracts and our ability to obtain additional contracts.Our backlog consists exclusively of contracts with federal departments andagencies, and the continuation of these contracts, or award of additionalcontracts from these agencies, could be materially harmed by federal governmentspending reductions or budget cutbacks at these departments or agencies.

***Our revenues maydecline materially if we are unable to obtain a new award of our passportprocessing services contract with the Department of State in September 2007or if we are unable to renew any of our other significant contracts.***

We earn a significantportion of our revenues from the provision of passport processing and supportservices to the Department of State. Revenues from these services wereapproximately 15% of our revenues for the fiscal year ended March 31,2007. The fixed initial term of our contract with the Department of State forthe provision of passport processing and support services has expired, and weare currently performing these services pursuant to the Department of State’sexercise of a one-year renewal option that expires in September 2007. Wecurrently expect the Department of State to subject this contract torecompetition before awarding a new contract and while we will participate inthe recompetition there can be no guarantee of acceptance of our proposal. Ourrevenues may decline materially if we are unable to obtain a renewal of thiscontract or any of our other significant contracts. This contract is relatedbut separate from the recently awarded ten year contract worth $164 millionwith the State Department to conduct passport book personalization services inup to two contractor-supplied and operated turnkey facilities.

***We may not realize the full value of our backlog,which may result in lower than expected revenues.***

Our total backlog represents the amount of revenues weexpect to realize over the remaining base contract performance period and fromthe exercise of all option periods that we reasonably believe will beexercised, in each case from signed contracts in existence as of themeasurement date. We do not include contract ceilings for GWACs oragency-specific ID/IQ contracts in our backlog calculation. Congress typicallyappropriates funds for our federal government customers on an annual basis,even though their 

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contracts with us may callfor performance that is expected to take a number of years. As a result,contracts typically are only partially funded at any point during their term,and all or some of the work to be performed under the contracts may remainunfunded unless and until Congress makes subsequent appropriations and theprocuring agency allocates funding to the contract.

We may never realize someof the revenues that are included in our total backlog, and there is a higherdegree of risk in this regard with respect to unfunded backlog. As of March 31,2007, our total backlog was approximately $974.8 million, of which onlyapproximately $224.4 million was funded. In addition, there can be no assurancethat our backlog will result in actual revenues in any particular period. Thisis because the actual receipt, timing and amount of revenues under contractsincluded in backlog are subject to various contingencies, many of which arebeyond our control. For example, the actual receipt of revenues from contractsincluded in backlog may never occur or may be delayed because a programschedule could change or the program could be cancelled, or a contract could bereduced, modified or terminated early, including as a result of a lack ofappropriated funds. In addition, the fact that our backlog may translate intorevenue does not guarantee that the contracts will be profitable.

***Loss of ourposition as a qualified contractor under one or more General ServicesAdministration schedules, or as a prime contractor on one or more of ourcontracts would impair our operating results and our ability to win newbusiness.***

In recent years, the federal government hasincreasingly relied on General Services Administration, or GSA, schedules andmulti-award ID/IQ contracts for its procurement needs. When using GSA schedulesand multi-award ID/IQ contracts, a procuring officer chooses providers from apre-selected group of contractors, and contractors that are not part of thegroup generally will not be notified of, and will not be able to compete for,these contracts or task orders. Accordingly, our ability to maintain ourexisting business and win new business depends on our ability to maintain ourposition as a GSA schedule contractor and a prime contractor on multi-awardID/IQ contracts.

If we were to lose any ofour GSA schedules or our prime contractor position on any of our contracts, wecould lose revenues, and our ability to win new business and our operatingresults could decline as a result. Similarly, unless we are successful inexpanding our GSA schedule presence and our base of multi-award ID/IQcontracts, our ability to grow our business may be hindered.

***Most of ourrevenues are earned from contracts with limited initial terms. We may expendsignificant resources in connection with these contracts that we may notrecover if our customers do not exercise their contract extension options.***

Our contracts typically have a one or two year initialterm, with multiple options that are exercisable by our customers to extend thecontract for one or more additional years. Our customers may not exercise anyof their extension options. Moreover, because we believe that our contractswith limited initial terms represent the early portion of longer customerprograms, we expend significant financial and personnel resources and expandour operations to be able to fulfill these programs beyond the initial contractterm. If a significant number of our contracts are not extended beyond theirinitial terms, we may not realize anticipated revenues and our operatingresults may be harmed.

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***The loss of one ormore members of our senior management team could impair our relationships withgovernment customers and our ability to compete and could disrupt themanagement of our business.***

We believe that oursuccess depends on the continued contributions of the members of our seniormanagement team. Our senior management team has extensive industry experience,and the relationships and reputation that members of our senior management teamhave established and maintain with government personnel contribute to ourability to maintain good customer relations and to identify new businessopportunities. The loss of the services of one or more of our senior executivescould impair our ability to identify and secure new contracts, to maintain goodcustomer relations and to otherwise manage our business, any of which couldharm our business and operating results. Currently, the Chief Financial Officeris the only member of our senior management that has entered into an employmentagreement.

***If we fail to attractand retain skilled employees, we might not be able to perform under ourcontracts and our ability to maintain and grow our business could be limited.***

The growth of our businessand revenues depends in large part upon our ability to attract and retain sufficientnumbers of highly qualified individuals who have advanced informationtechnology skills and appropriate security clearances, and who work well withour defense and federal civilian government customers. Competition for suchpersonnel is intense, and recruiting, training and retention costs placesignificant demands on our resources. If we are unable to recruit and retain asufficient number of qualified employees, our ability to maintain and grow ourbusiness could be limited. Furthermore, we could be required to engage largernumbers of contracted personnel, which could reduce our profit margins. Inaddition, many of our professional personnel may have specific knowledge of andexperience with our federal government customers’ operations, and we obtainsome of our contracts based on that knowledge and experience. The loss ofservices of key personnel could impair our ability to perform required servicesunder some of our contracts and to retain such contracts, as well as ourability to win new business.

***We face intensecompetition from many competitors that have greater resources than we do, whichcould result in price reductions, reduced profitability and loss of marketshare.***

We operate inhighly competitive markets and generally encounter intense competition to wincontracts and task orders. For example, we must often discount our GSA schedulerates in order to secure contracts from many of our customers in competitivesituations. Many of our competitors have greater financial, technical, marketingand public relations resources, larger customer bases and greater brand or namerecognition than we do. We expect that the number of such competitors will growthrough industry consolidation and the increasing participation in the federalgovernment services market by traditional consulting and outsourcing providersand hardware and software manufacturers that seek to increase their serviceofferings. These competitors could, among other things:

·       divertsales from us by winning very large-scale government contracts due to differentor greater technical capabilities, past performance on large-scale contracts,geographic presence, price and the availability of key professional personnel;

·       forceus to charge lower prices in order to win or maintain contracts;

·       harmour relationships with customers; and

·       seekto hire our employees.

If we lose business to our competitors or are forcedto lower our prices, our revenues and our operating profits could decline andwe could suffer a loss of market share.

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In addition, we may facecompetition from our subcontractors who, from time to time, seek to obtainprime contractor status on contracts for which they currently serve as asubcontractor for us. If one or more of our current subcontractors are awardedprime contractor status on such contracts in the future, it would divert salesfrom us and could force us to charge lower prices in order to ensure that weretain our prime contractor status.

***We derivesubstantially all of our revenues from contracts awarded through competitiveprocurement processes, which can impose substantial costs upon us andnegatively impact our operating results.***

We derivesubstantially all of our revenues from federal government contracts that areawarded through competitive procurement processes. Competitive procurementimposes substantial costs and presents a number of risks to us, including:

·       theneed to bid on projects in advance of knowing the complete design or fullrequirements, which may result in unforeseen difficulties in executing theengagement and cost overruns;

·       thesubstantial cost and managerial time and effort that we spend to prepare bidsand proposals for contracts that may not be awarded to us and schedules thatmay not be used; and

·       theexpense and delay that we may face if our competitors protest or challengecontract awards made to us pursuant to competitive procedures, and the riskthat any such protest or challenge could result in the resubmission of offers,or in termination, reduction or modification of the awarded contract.

The costs we incur in thecompetitive procurement process may be substantial, and, to the extent weparticipate in competitive procurements and are unable to win particularcontracts, these costs could negatively affect our operating results. In addition,GSA schedule contracts, GWACs, blanket purchase agreements and other ID/IQcontracts do not guarantee more than a minimal amount of work for us, butinstead provide us access to work generally through further competitiveprocedures. The increasing reliance by the federal government on GSA schedules,GWACs and other multi-award ID/IQ contracts for its procurement needs has ledto increased competition and pricing pressure, requiring that we make sustainedpost-award efforts to realize revenues under these contracts.

***We may lose money on some contracts if we miscalculatethe resources we need to perform under the contract.***

We provide services to thefederal government under contracts with three basic types of price structure:cost-plus-fee, time-and-materials and fixed-price. For the fiscal year ended  March 31, 2007,we derived approximately 52%, 32% and 16% of revenues from cost-plus-fee,time-and-materials and fixed-price contracts, respectively. Each of these typesof contracts, to varying degrees, involves the risk that we underestimate ourcost of fulfilling the contract, and we occasionally have suffered in the past,and may suffer in the future, reduced profits or financial losses on ourcontracts, thereby causing our operating results to decline as a result. Thisrisk is greater for fixed-price contracts, where we bear the full impact ofcost overruns, and an increase of fixed-price contracts in our contract mixwould increase our exposure to this risk.

***Our margins andoperating results may suffer if we experience unfavorable changes in theproportion of cost-plus-fee or fixed-price contracts in our total contract mix.***

Although fixed-pricecontracts entail a greater risk of a reduced profit or financial loss on acontract compared to other types of contracts we enter into, fixed-pricecontracts typically provide higher profit opportunities because we receive thebenefit of cost savings. In contrast, cost-plus-fee contracts are subject tostatutory limits on profit margins, and generally are the least profitable ofour contract types. Our federal government customers typically determine whattype of contract we enter into. Cost-plus-fee and 

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fixed-pricecontracts accounted for approximately 52% and 16%, respectively, of ourrevenues for the fiscal year ended March 31, 2007, and approximately 62%and 18%, respectively, of our revenues for the fiscal year ended  March 31,2006. To the extent that we enter into more cost-plus-fee or less fixed-pricecontracts in proportion to our total contract mix in the future, our marginsand operating results may suffer.

***Our cash flow andprofitability could be reduced if expenditures are incurred prior to the finalreceipt of a contract.***

We provide variousprofessional services and sometimes procure equipment and materials on behalfof our federal government customers under various contractual arrangements.From time to time, in order to ensure that we satisfy our customers’ deliveryrequirements and schedules, we may elect to initiate procurement in advance ofreceiving final authorization from the government customer or a primecontractor. If our government or prime contractor customers’ requirementsshould change or if the government or the prime contractor should direct theanticipated procurement to a contractor other than us or if the equipment ormaterials become obsolete or require modification before we are under contractfor the procurement, our investment in the equipment or materials might be atrisk if we cannot efficiently resell them. This could reduce anticipatedearnings or result in a loss, negatively affecting our cash flow andprofitability.

***Failure to maintain strong relationships with othercontractors could result in a decline in our revenues.***

Revenues derived fromcontracts in which we acted as a subcontractor to other companies representedapproximately 20% of our revenues for the fiscal year ended  March 31, 2007. As a subcontractor, weoften lack control over fulfillment of a contract, and poor performance on thecontract could tarnish our reputation, even when we perform as required. As aprime contractor, we rely on other companies to perform some of the work undera contract. We expect to continue to depend on relationships with othercontractors for portions of our delivery of services and revenues in theforeseeable future. Our business, prospects, financial condition and operatingresults could be harmed if other contractors eliminate or reduce theirrelationships with us, whether because they choose to establish relationshipswith our competitors or because they choose to directly offer services thatcompete with our business, or if the government terminates or reduces otherprime contractors’ programs or does not award them new contracts.

***If oursubcontractors fail to perform their contractual obligations, our performanceand reputation as a prime contractor and our ability to obtain future businesscould suffer.***

As a prime contractor, weoften rely significantly upon other companies as subcontractors to perform workwe are obligated to perform for our customers. We estimate that revenuesderived from work performed by our subcontractors represented approximately 31%of our revenues for fiscal 2007. If one or more of our subcontractors fail toperform satisfactorily the agreed-upon services on a timely basis, or violategovernment contracting policies, laws or regulations, our ability to performour obligations or meet our customers’ expectations as a prime contractor maybe compromised. In some cases, we have limited involvement in the workperformed by the subcontractors but are nevertheless responsible for the workperformed. In extreme cases, performance or other deficiencies on the part ofour subcontractors could result in a customer terminating our contract fordefault. A default termination could expose us to liability for the agency’scosts of reprocurement, damage our reputation and hurt our ability to competefor future contracts and task orders.

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***Unfavorablegovernment audit results could subject us to a variety of penalties and sanctions,and could harm our reputation and relationships with our customers.***

The federal government audits and reviews ourperformance on contracts, pricing practices, cost structure and compliance withapplicable laws, regulations and standards. Like most large governmentcontractors, our contracts are audited and reviewed on a continual basis byfederal agencies, including the Defense Contract Audit Agency, or the DCAA. Anunfavorable audit of us, including any companies we have acquired or mayacquire, or any of our subcontractors could have a substantial adverse effecton our operating results. For example, any costs that were previouslyreimbursed could subsequently be disallowed. In this case, cash we have alreadycollected may need to be refunded and future operating margins may be reduced.

Our incurred cost submissions have been audited by theDCAA through December 31, 2004 for Morgan and through March 31, 2004for Stanley, CCI, GCI and FSC.  Costs forwhich Morgan was reimbursed after December 31, 2004 and costs for whichStanley, CCI, GCI and FSC were reimbursed after March 31, 2004, may besubsequently disallowed upon the completion of future audits. In addition,non-audit reviews by the U.S. government may still be conducted on all of ourgovernment contracts.

If a government audituncovers improper or illegal activities, we may be subject to civil andcriminal penalties and administrative sanctions, including termination ofcontracts, forfeiture of profits, suspension of payments, fines and suspensionor debarment from doing business with government agencies. In addition, wecould suffer serious harm to our reputation if allegations of impropriety weremade against us, whether or not true.

***If we experiencesystems or services failures, our reputation could be harmed and our customerscould assert claims against us for damages or refunds.***

We create,implement and maintain information technology and engineering systems, andprovide services that are often critical to our customers’ operations, some ofwhich involve classified or other sensitive information, and may be conductedin war-zones or other hazardous environments. We have experienced and may inthe future experience some systems or services failures, schedule or deliverydelays, and other problems in connection with our work. If our solutions,services, products, including third-party products we may resell to ourcustomers, or other applications have significant defects or errors, aresubject to delivery delays or fail to meet our customers’ expectations, we may:

·       loserevenues due to adverse customer reactions;

·       berequired to provide additional services to customers at no charge;

·       receivenegative publicity, which could damage our reputation and harm our ability toattract or retain customers; or

·       sufferclaims for substantial damages.

The successful assertionof any large claims against us could seriously harm our business. Even if notsuccessful, these claims could result in significant legal and other costs, maybe a distraction to our management and may harm our reputation.

***Security breaches in sensitive government systemscould result in the loss of customers and negative publicity.***

Many of the systems wedevelop, integrate and maintain involve managing and protecting informationinvolved in intelligence, national security and other sensitive or classifiedgovernment functions. A security breach in one of these systems could causeserious harm to our business, damage our reputation and prevent us from beingeligible for further work on sensitive or classified systems for federalgovernment customers. We could incur losses from such a security breach thatcould exceed the policy limits under our 

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professionalliability insurance program. Damage to our reputation or limitations on oureligibility for additional work resulting from a security breach in one of thesystems we develop, install and maintain could materially reduce our revenues.

***Our failure toobtain and maintain necessary security clearances may limit our ability toperform classified work for government customers, which could cause us to losebusiness.***

Some government contractsrequire us to maintain facility security clearances and require some of ouremployees to maintain individual security clearances. Obtaining and maintainingsecurity clearances for employees involves a lengthy process, and it isdifficult to identify, recruit and retain employees who already hold securityclearances. If our employees lose or are unable to timely obtain securityclearances or we lose a facility clearance, the government customer mayterminate the contract or decide not to renew it upon its expiration. As aresult, to the extent we cannot obtain or maintain the required securityclearances for a particular contract, or we fail to obtain them on a timelybasis, we may not derive the revenues anticipated from the contract, whichcould harm our operating results. To the extent we are not able to obtainfacility security clearances or engage employees with the required securityclearances for a particular contract, we will be unable to perform thatcontract and we may not be able to compete for or win new awards for similarwork.

***Our quarterlyoperating results may fluctuate significantly as a result of factors outside ofour control, which could cause the market price of our common stock to decline.***

Our revenues andoperating results will vary from quarter to quarter and, as a result, ouroperating results may fall below the expectations of securities analysts andinvestors, which could cause the price of our common stock to decline. Factorsthat may affect our operating results include those listed in this “RiskFactors” section and others that are specific to our industry such as:

·       fluctuationsin revenues earned on government contracts;

·       seasonalfluctuations in our staff utilization rates;

·       commencement,completion or termination of contracts during any particular quarter;

·       variablepurchasing patterns under GSA schedule contracts, GWACs, blanket purchaseagreements and other ID/IQ contracts;

·       changesin contract requirements by our government agency customers;

·       changesin the extent to which we use subcontractors; and

·       changesin presidential administrations and senior federal government officials thataffect the timing of technology procurement.

Reductions in revenues ina particular quarter could lead to lower profitability in that quarter becausea relatively large amount of our expenses are fixed in the short-term. We mayincur significant operating expenses during the start-up and early stages oflarge contracts and may not receive corresponding payments in the same quarter.We may also incur additional expenses when contracts expire or are terminatedor not renewed. In addition, payments due to us from government agencies may bedelayed due to billing cycles or as a result of failures of governmentalbudgets to gain Congressional and administration approval in a timely manner.

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***We may be harmed by intellectual property infringementclaims.***

Many of the services and solutions that we provide toour customers involve extensive use of software and other intellectualproperty. As a result, we could become subject to claims of third parties whoassert that software and other forms of intellectual property that we use indelivering services and solutions infringe upon intellectual property rights ofthose third parties, and we could incur substantial costs to defend thoseclaims. In addition, if any of these infringement claims are ultimatelysuccessful, in addition to paying damages, we could be required to take any ofthe following actions, each of which could entail significant expenses orresult in a significant reduction in revenues:

·       ceaseselling or using services or solutions that incorporate the challenged softwareor technology;

·       obtaina license or additional licenses from third parties; or

·       redesign our services andsolutions that rely on the challenged software or technology.

***We may incur substantial costs and liabilities inconnection with acquisitions.***

We have completedfive acquisitions since 2000 and expect to consider further acquisitions andinvestments in the future. If we make an acquisition or investment, we may:

·       issuestock that would dilute your stock ownership;

·       incurdebt that would restrict our cash flow;

·       assumeliabilities;

·       incurlarge and immediate write-offs;

·       incurunanticipated costs;

·       incurunanticipated liabilities under purchase and sale agreements with targetcompanies;

·       foregoprocurement opportunities as a result of organizational conflict of interest, orOCI, concerns;

·       experiencerisks associated with entering markets in which we have no or limited priorexperience; and

·       losekey employees from the acquired operations.

In connection with anyacquisition we make, there may be liabilities that we fail to discover or thatwe inadequately assess. In addition, acquired operations may not performaccording to the forecasts that we used to determine the purchase price. If theacquired entity fails to achieve these forecasts, or if we are not successfulin offering our services to the customer base of the acquired entity orotherwise do not achieve the anticipated benefits of the acquisition, ourfinancial condition and operating results may decline as a result. In addition,if we incur a substantial amount of indebtedness in order to finance one ormore acquisitions, our increased leverage may restrict our business andoperations, reduce our cash flows or restrict our future access to sufficientfunding to finance desired growth.

***We may not successfully integrate companies that wehave acquired or may acquire in the future.***

The process of integratingcompanies requires a significant amount of resources and management attentionwhich detracts from attention to our business. If we are unable to integratethe operations of Techrizon, which we acquired in April 2007, or of anycompany we may acquire in the future as planned, our management’s attention maycontinue to be diverted from the operation of our business, our operationscould be disrupted and we may be unable to deliver our services to ourcustomers as planned, 

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any ofwhich would hinder implementation of our business plan, harm our relationshipswith our customers and force us to incur unanticipated expenses.

***A preference forminority-owned, small and small disadvantaged businesses could impact ourability to be a prime contractor on certain governmental procurements.***

As a result of the SmallBusiness Administration, or SBA, set-aside program, the federal government maydecide to restrict certain procurements only to bidders that qualify asminority-owned, small or small disadvantaged businesses. As a result, we wouldnot be eligible to perform as a prime contractor on those programs and would berestricted to a maximum of 49% of the work as a subcontractor on thoseprograms. An increase in the amount of procurements under the SBA set-asideprogram may impact our ability to bid on new procurements as a prime contractoror restrict our ability to recompete on incumbent work that is placed in theset-aside program.

***Our employees may engage in misconduct or otherimproper activities, which could harm our business.***

A significant number ofour employees are involved in government contracting and billing processes,which require compliance with a number of procurement laws and regulations. Inaddition, in the course of our business, our employees routinely obtain accessto sensitive or classified government information. As a result, we are exposedto the risk that employee fraud or other misconduct could occur. Misconduct byemployees could include intentional or unintentional failures to comply withfederal government procurement regulations, engaging in unauthorized activitiesor falsifying time records. Employee misconduct could also involve the improperuse of our customers’ sensitive or classified information, which could resultin regulatory sanctions against us and serious harm to our reputation. It isnot always possible to deter employee misconduct, and the precautions we taketo prevent and detect this activity may not be effective in controlling unknownor unmanaged risks or losses, which could materially harm our business.

***Our businesscommitments require our employees to travel to potentially dangerous places,which may result in injury to our employees.***

Our business involvesproviding services that require some of our employees to operate in countriesthat may be experiencing political unrest, war or terrorism, includingAfghanistan and Iraq. Certain senior level employees or executives may, onoccasion, be part of the teams deployed to provide services in these countries.As a result, it is possible that certain of our employees or executives willsuffer injury or bodily harm in the course of these deployments. It is alsopossible that we will encounter unexpected costs in connection with additionalrisks inherent in sending our employees to dangerous locations, such asincreased insurance costs, as well as the repatriation of our employees orexecutives for reasons beyond our control. These problems could cause ouractual results to differ materially from those anticipated.

**Risks Related toOur Industry**

***Federal governmentcontracts contain provisions giving government customers a variety of rightsthat are unfavorable to us, including the ability to terminate a contract atany time for convenience.***

Federal governmentcontracts contain provisions and are subject to laws and regulations thatprovide government customers with rights and remedies not typically found incommercial contracts. These rights and remedies allow government customers,among other things, to:

·       terminateexisting contracts, with short notice, for convenience, as well as for default;

·       reduceorders under or otherwise modify contracts;

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·       forcontracts subject to the Truth in Negotiations Act, reduce the contract priceor cost where it was increased because a contractor or subcontractor duringnegotiations furnished cost or pricing data that was not complete, accurate andcurrent;

·       forsome contracts, demand a refund, make a forward price adjustment or terminate acontract for default if a contractor provided inaccurate or incomplete dataduring the contract negotiation process, or reduce the contract price undercertain triggering circumstances, including the revision of pricelists or otherdocuments upon which the contract award was predicated, the granting of morefavorable discounts or terms and conditions than those contained in suchdocuments and the granting of certain special discounts to certain customers;

·       terminateour facility security clearances and thereby prevent us from receivingclassified contracts;

·       cancelmulti-year contracts and related orders if funds for contract performance forany subsequent year become unavailable;

·       declineto exercise an option to renew a multi-year contract or issue task orders inconnection with ID/IQ contracts;

·       claimrights in solutions, systems and technology produced by us;

·       prohibitfuture procurement awards with a particular agency due to a finding oforganizational conflict of interest based upon prior related work performed forthe agency that would give a contractor an unfair advantage over competingcontractors or the existence of conflicting roles that might bias a contractor’sjudgment;

·       subjectthe award of contracts to protest by competitors, which may require thecontracting federal agency or department to suspend our performance pending theoutcome of the protest and may also result in a requirement to resubmit offersfor the contract or in the termination, reduction or modification of theawarded contract; and

·       suspendor debar us from doing business with the federal government.

If a federal governmentcustomer terminates one of our contracts for convenience, we may recover only aportion of our incurred or committed costs, settlement expenses and profit onwork completed prior to the termination. If a federal government customer wereto unexpectedly terminate, cancel or decline to exercise an option to renew oneor more of our significant contracts or suspend or debar us from doing businesswith the federal government, our revenues and operating results would bematerially harmed.

***Our failure tocomply with complex procurement laws and regulations could cause us to losebusiness and subject us to a variety of penalties.***

We must comply withlaws and regulations relating to the formation, administration and performanceof federal government contracts, which affect how we do business with ourfederal government customers and may increase our expenses. Among the mostsignificant laws and regulations are:

·       theFederal Acquisition Regulation, and agency regulations analogous orsupplemental to the Federal Acquisition Regulation, which comprehensivelyregulate the formation, administration, and performance of governmentcontracts, including provisions relating to the avoidance of conflicts ofinterest and intra-organizational conflicts of interest;

·       theTruth in Negotiations Act, which requires certification and disclosure of allcost and pricing data in connection with some contract negotiations;

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·       theProcurement Integrity Act, which requires evaluation of ethical conflictssurrounding procurement activity and establishing certain employmentrestrictions for individuals who participate in the procurement process;

·       theCost Accounting Standards, which impose accounting requirements that govern ourright to reimbursement under some cost-based government contracts;

·       laws,regulations and executive orders restricting the use and dissemination ofinformation classified for national security purposes and the exportation ofspecified products, technologies, and technical data; and

·       compliancewith antitrust laws.

If a government review orinvestigation uncovers improper or illegal activities, we may be subject tocivil and criminal penalties and administrative sanctions, including thetermination of our contracts, the forfeiture of profits, the suspension ofpayments owed to us, fines and our suspension or debarment from doing businesswith federal government agencies. In particular, the civil False Claims Actprovides for treble damages and potentially substantial civil penalties where,for example, a contractor presents a false or fraudulent claim to thegovernment for payment or approval, or makes a false statement in order to geta false or fraudulent claim paid or approved by the government. Actions underthe civil False Claims Act may be brought by the government or by other personson behalf of the government. These provisions of the civil False Claims Actpermit parties, such as our employees, to sue us on behalf of the governmentand share a portion of any recovery. Any failure to comply with applicable lawsand regulations could result in contract termination, damage to our reputation,price or fee reductions or suspension or debarment from contracting with thegovernment, each of which could lead to a material reduction in our revenues.

***The failure byCongress to timely approve budgets for the federal agencies we contract withcould delay or reduce spending and cause us to lose revenues.***

On an annual basis,Congress must approve budgets that govern spending by each of the federalagencies we contract with. When Congress is unable to agree on budgetpriorities, and thus is unable to pass the annual budget on a timely basis,Congress typically enacts a continuing resolution that allows federalgovernment agencies to operate at spending levels approved in the previousbudget cycle. Operation by government agencies on the basis of a continuingresolution may delay or cancel funding we expect to receive from customers onwork we are already performing and is likely to result in new initiatives beingdelayed, and in some cases being cancelled.

***The adoption of newprocurement laws or regulations could reduce the amount of services that areoutsourced by the federal government and could cause us to lose futurerevenues.***

New legislation or procurement regulations could causefederal agencies to adopt restrictive procurement practices regarding the useof outside service providers. For example, the American Federation ofGovernment Employees, the largest federal employee union, strongly endorseslegislation that may restrict the procedure by which services are outsourced togovernment contractors. If such legislation were to be enacted, it would likelyreduce the amount of information technology services that could be outsourcedby the federal government, which could materially reduce our future expectedrevenues.

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***The Office of Management and Budget process forensuring government agencies properly support capital planning initiatives,including information technology investments, could reduce or delay federalinformation technology spending and cause us to lose revenue.***

The Office of Managementand Budget, or OMB, supervises spending by federal agencies and enforces theGovernment Performance Results Act. This Act requires, among other things, thatfederal agencies make an adequate business justification to support capitalplanning initiatives, including all information technology investments. Thefactors considered by the OMB include, among others, whether the proposedinformation technology investment is expected to achieve an appropriate returnon investment, whether related processes are contemporaneously reviewed,whether interoperability with existing systems and the capacity for thesesystems to share data across government agencies has been considered andwhether existing commercial off-the-shelf products are being utilized to theextent possible. If our customers do not adequately justify proposedinformation technology investments to the OMB, the OMB may refuse funding fortheir new or continuing information technology investments, and we may loserevenue as a result.

**Risks Related to Our Common Stock**

***Our executive officers and directors as a group andour Employee Stock Ownership Plan, or ESOP, own a significant percentage of ourcommon stock, and as a result have significant influence over our affairs andpolicies.***

Our executive officers anddirectors beneficially own approximately 29% of our outstanding common stock.For so long as our executive officers and directors continue to own asignificant portion of our outstanding common stock, they will have significantinfluence over matters submitted to our stockholders for approval and exercisesignificant control over our business policies and affairs, including theelection of directors, amendments to our certificate of incorporation anddeterminations with respect to mergers and other business combinations,including those that may result in a change of control. In addition, the ESOPbeneficially owns approximately 28% of our outstanding common stock.Substantially all of the participants in the ESOP are our employees. If theseparticipants act together, they will also be able to exert influence overmatters submitted to our stockholders for approval, and if they act togetherwith our executive officers and directors, they will be able to determine theoutcome of matters submitted for stockholder approval. The interests of ourexecutive officers and directors and the ESOP participants may conflict withyour interests as a stockholder.

***Provisions of our charter documents may inhibitpotential acquisition bids that you and other stockholders may considerfavorable, and the market price of our common stock may be lower as a result.***

Provisionsof our certificate of incorporation and by-laws, as amended and restated, maydeter, delay or prevent a third-party from acquiring us. These provisionsinclude:

·       limitationson who may call special meetings of stockholders;

·       theabsence of cumulative voting in the election of directors;

·       theinability of stockholders to act by written consent;

·       advancenotice requirements for nominations for election to the board of directors andfor stockholder proposals; and

·       theauthority of our board of directors to issue, without stockholder approval, upto 500,000 shares of preferred stock with such terms as the board of directorsmay determine and to issue additional shares of our common stock.

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These provisions couldhave the effect of delaying, deferring or preventing a change in control of ourcompany, discourage others from making tender offers for our shares, lower themarket price of our stock or impede the ability of our stockholders to changeour management, even if such changes would be beneficial to our stockholders.

***A substantial number of shares will be eligible forsale in the near future, which could cause our common stock price to decline.***

Prior to our initialpublic offering in October 2006, substantially all of our common stock washeld by our employees, including through our ESOP. If our existing stockholderssell, or the market perceives that our stockholders intend to sell, substantialamounts of our common stock in the public market, the market price of ourcommon stock could decline significantly. These sales also might make it moredifficult for us to sell equity or equity-related securities in the future at atime and price that we deem appropriate. In connection with our initial publicoffering, our executive officers, directors, the selling shareholders (otherthan the ESOP), and certain other stockholders entered into lock-up agreements.In accordance with these lock-up agreements, 5,306,904 shares of common stockwill be available for sale in the public market 360 days after October 17,2006. These lock-up agreements are subject to a number of exceptions andCitigroup Global Markets Inc., on behalf of the underwriters in the initialpublic offering, may release these stockholders from their lock-up agreementswith the underwriters at any time and without notice, which would allow forearlier sale of shares in the public market. As restrictions on resale end, themarket price of our common stock could drop significantly if the holders ofrestricted shares sell them or are perceived by the market as intending to sellthem. In addition, our ESOP holds 6,212,451 shares of our common stock, all ofwhich was allocated to employee accounts. Under certain circumstances, such asthe termination of an employee’s employment with us, the ESOP may distributeshares to ESOP participants (or sell shares in the market), depending on theelections of ESOP participants. In addition, pursuant to certaindiversification rights that will be available to ESOP participants pursuant toinstructions given during the 90-day period which began on March 31,2007, up to an additional 1,831,665 shares held by the ESOP may be sold in thepublic market at that time.

**ITEM1B.**       UNRESOLVED STAFF COMMENTS

None.

**ITEM2.**                PROPERTIES

We lease our officefacilities and we do not own any facilities or real estate materially importantto our operations. We lease approximately 49,100 square feet in Arlington, Virginiafor our corporate headquarters for a term expiring December 31, 2015. Wealso lease facilities at approximately 28 additional locations in 14 states andthe District of Columbia. We believe our present facilities are adequate tomeet our current and projected needs. Our leases and subleases have variousterms ranging from one month to ten years and annual rents ranging fromapproximately $5,000 to $1.6 million. We expect to be able to renew each of ourleases or to lease comparable facilities on terms commercially acceptable tous.

**ITEM3.**                LEGAL PROCEEDINGS

We are not currentlysubject to any material legal proceedings, nor, to our knowledge, is anymaterial legal proceeding threatened against us.

**ITEM4.**                SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submittedto a vote of stockholders during the fourth quarter of the fiscal year ended March 31,2007.

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**PART II**

**ITEM 5.**                MARKETFOR THE COMPANY’S COMMON EQUITY AND RELATED STOCKHOLER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES

Our common stock is traded on the New York StockExchange under the symbol “SXE.” We completed our initial public offering on October 18,2006 at a price of $13 per share. Prior to such date there was no public marketfor our common stock.

Thefollowing table reflects, by quarter, the high and low closing prices per shareof our common stock on the New York Stock Exchange. We have never declared norpaid any cash dividends on our common stock. We currently intend to retainearnings, if any, to support our growth strategy and do not anticipate payingcash dividends in the foreseeable future.

| **Quarter Ended** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------|------------|----------|------------|---------|------------|
| 12/31/06               |       | $        | 18.24      |    | $          | 14.95 |   |
| 03/31/07               |       | $        | 17.00      |    | $          | 14.15 |   |

 

As of May 31, 2007, there were approximately 30registered holders of record of our common stock.

**Recent Sales ofUnregistered Securities**

The followinginformation relates to all securities issued or sold by us during fiscal 2007,which were not registered under the Securities Act of 1933, or the SecuritesAct. No underwriters were involved in the following sales of securities. Theissuance of shares to our Employee Stock Ownership Plan, or ESOP, did not constitutesales within the meaning of the Securities Act.

1.                During the quarterended June 30, 2006, 23 employees exercised options to purchase anaggregate of 390,660 shares of our common stock at an aggregate exercise priceof $400,790.

2.                During the quarterended September 30, 2006, one employee exercised options to purchase anaggregate of 3,900 shares of our common stock at an aggregate exercise price of$14,335.

3.                During the quarterended December 31, 2006, three employees exercised options to purchase anaggregate of 169,800 shares of our common stock at an aggregate exercise priceof $97,204.

4.                During the quarterended June 30, 2006, we granted options to purchase an aggregate of799,500 shares of our common stock at a weighted average exercise priceof $7.93.

5.                During the quarterended June 30, 2006, we issued 15,000 shares of our common stock to atrust for the benefit of one employee.

6.                During the quarterended June 30, 2006, we issued 11,250 shares of our common stock to anemployee as compensation. These shares were valued at the time of issuance at$6.56 per share, for an aggregate value of $73,837.50.

7.                During the quarterended September 30, 2006, we issued to five members of our board ofdirectors an aggregate of 21,600 shares of our common stock as compensation fortheir service on our board of directors. These shares were valued at the timeof issuance at $7.86 per share, for an aggregate value of $169,834.

8.                Duringthe quarter ended June 30, 2006, we issued and sold to one of our executiveofficers 30,000 shares of our common stock at a per share price of $6.56 for anaggregate purchase price of $196,900

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**PERFORMANCEMEASUREMENT COMPARISON(1)**

The following graph shows the total stockholder returnof an investment of $100 in cash on October 18, 2006 for (i) theCompany’s common stock, (ii) the Standards & Poor’s 500 Index(the “S&P 500”) and (iii) our peer group(2). All values are calculated as of October 18,2006 (the first day of trading of our Common Stock) through March 31,2007.

The comparison assumesthat all returns are market-cap weighted. The historical information set forthbelow is not necessarily indicative of future performance.

****

| ** **         | ** ** | **March 31, 2007** | ** ** |
|--------------------|------------|------------------------------|------------|
| Stanley, Inc. |       |                         | 100.65     |   |   |
| Peer Group         |       |                         | 92.80      |   |   |
| S&P 500        |       |                         | 104.21     |   |   |

 

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(1)          The material in thisreport is not “soliciting material,” is not deemed “filed” with the SEC, and isnot to be incorporated by reference into any of our filings under theSecurities Act or the Securities Exchange Act of 1934, whether made before orafter the date hereof and irrespective of any general incorporation language inany such filing.

(2)          Ourpeer group is composed of  NCI, Inc.,ManTech International Corp., Dynamics Research Corp., MTC Technologies Inc.,CACI International Inc., SI International, Inc., ICF International, Inc., SRAInternational, Inc. and SAIC, Inc.

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**ITEM 6.**                SELECTEDFINANCIAL DATA

The table below presents our selected historicalfinancial data for each of the five fiscal years in the period ended March 31,2007. We derived the statement of income data for the fiscal years ended March 31,2005, 2006, and 2007 and the balance sheet data as of March 31, 2006 and2007 from our audited consolidated financial statements included in this Form 10-K.We derived the statement of income data for the fiscal years ended March 31,2003 and 2004 and the balance sheet data as of March 31, 2003, 2004 and 2005 from our audited consolidatedfinancials for those years, which are not included in this Form 10-K.

You should read theselected financial data presented below in conjunction with the consolidatedfinancial statements, the notes to the consolidated financial statements andwith “Management Discussion and Analysis of Financial Condition and Results ofOperations” included elsewhere in this Form 10-K.

| ** **                               | ** ** | **Year Ended March 31,  (in thousands, except per share amounts)** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                               | ** ** | **2003**                                                                          | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
| **Statement of income data:**            |       |                                                                              |       |   |   |   |   |   |   |   |   |
| Revenues                                 |       | $                                                                                 | 143,488    |   | $ | 178,741 |   | $ | 282,456 |   | $ | 284,801 |   | $ | 409,411 |   |
| Operating costs and  expenses:           |       |                                                                              |       |   |   |   |   |   |   |   |   |
| Cost of revenues                         |       | 122,861                                                                           |       | 151,197 |   | 243,677 |   | 241,357 |   | 343,628 |   |
| Selling, general and administrative      |       | 10,422                                                                            |       | 13,206 |   | 16,844 |   | 19,709 |   | 30,700 |   |
| Amortization of deferred compensation    |       | 236                                                                               |       | 224 |   | 372 |   | 790 |   | 5,082 |   |
| Depreciation and amortization            |       | 979                                                                               |       | 1,349 |   | 2,327 |   | 3,057 |   | 5,424 |   |
| Impairment of intangible assets          |       | —                                                                            |       | — |   | — |   | 3,590 |   | — |   |
| Operating income                         |       | 8,990                                                                             |       | 12,765 |   | 19,236 |   | 16,298 |   | 24,577 |   |
| Other income (expense):                  |       |                                                                              |       |   |   |   |   |   |   |   |   |
| Other income (expense)                   |       | —                                                                            |       | 8 |   | 2 |   | 101 |   | (478 | ) |
| Interest expense, net                    |       | (117                                                                              | )          | (261 | ) | (822 | ) | (2,441 | ) | (5,918 | ) |
| Income before  taxes                     |       | 8,873                                                                             |       | 12,512 |   | 18,416 |   | 13,958 |   | 18,181 |   |
| Provision for  income taxes              |       | (3,437                                                                            | )          | (4,378 | ) | (7,184 | ) | (5,708 | ) | (7,476 | ) |
| Net income                               |       | $                                                                                 | 5,436      |   | $ | 8,134 |   | $ | 11,232 |   | $ | 8,250 |   | $ | 10,705 |   |
| Earnings per  share(1):                  |       |                                                                              |       |   |   |   |   |   |   |   |   |
| Basic                                    |       | $                                                                                 | 0.36       |   | $ | 0.56 |   | $ | 0.78 |   | $ | 0.58 |   | $ | 0.61 |   |
| Diluted                                  |       | $                                                                                 | 0.34       |   | $ | 0.50 |   | $ | 0.70 |   | $ | 0.51 |   | $ | 0.55 |   |
| Weighted average  shares(1):             |       |                                                                              |       |   |   |   |   |   |   |   |   |
| Basic                                    |       | 14,937                                                                            |       | 14,653 |   | 14,446 |   | 14,202 |   | 17,567 |   |
| Diluted                                  |       | 16,107                                                                            |       | 16,107 |   | 16,117 |   | 16,096 |   | 19,458 |   |
| **Balance  sheet data (at period end):** |       |                                                                              |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents(2)            |       | $                                                                                 | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 12,736 |   |
| Working capital                          |       | 10,006                                                                            |       | 4,411 |   | 13,085 |   | 29,299 |   | 60,919 |   |
| Total assets                             |       | 49,677                                                                            |       | 86,848 |   | 93,558 |   | 199,903 |   | 237,975 |   |
| Total long-term  liabilities             |       | 2,684                                                                             |       | 10,517 |   | 9,367 |   | 102,885 |   | 40,346 |   |
| Stockholders’ equity                |       | 17,796                                                                            |       | 25,094 |   | 34,567 |   | 42,389 |   | 134,152 |   |

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(1)          Earnings per share andweighted average shares are calculated after giving effect to thethirty-for-one stock split effected on September 12, 2006.

(2)          Wehistorically have not maintained a cash balance, but have applied all of ouroperating cash flow to reduce indebtedness under outstanding lines of credit.

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**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

*Youshould read the following discussion in conjunction with the auditedconsolidated financial statements and the accompanying notes included in this Form 10-K.This discussion contains forward-looking statements that involve risks anduncertainties. Our actual results may differ materially from those discussed inor implied by any of the forward-looking statements as a result of variousfactors, including but not limited to those listed in “Risk Factors” andelsewhere in this Form 10-K and those listed in other documents wehave filed with the Securities and Exchange Commission.*

**Overview**

We provide information technology services andsolutions to U.S. defense and federal civilian government agencies. We offerour customers solutions and expertise to support their mission-essential needsat any stage of program, product development or business lifecycle through fiveservice areas: systems engineering, enterprise integration, operationallogistics, business process outsourcing and advanced engineering and technology.As a systems integrator, we apply these five service areas to enable ourcustomers to achieve interoperability between different business processes andinformation technology systems.

Contracts funded byfederal government agencies account for substantially all of our revenues. Asof March 31, 2007, we had more than 200 active contractual engagementsacross 40 federal government agencies. Ourcustomers include the Department of Defense (including all major agencieswithin the Department of Defense), the Department of State, the Department ofHomeland Security, the Department of Transportation, the Department of theTreasury, NASA, the Department of Justice, and the Department of Health andHuman Services.

**Key MetricsEvaluated By Management**

We manage and assess theperformance of our business by evaluating a variety of financial andnon-financial metrics derived from and in addition to our United Statesgenerally accepted accounting principles, or GAAP, results. The mostsignificant of these metrics are discussed below.

***Revenue Growth***

We closely monitor revenue growth in order to assessthe performance of our business. In monitoring our revenue growth, we focus onboth internal revenue growth and revenue growth through acquisitions. Ourinternal revenue growth is driven primarily by two factors. First, internalrevenue growth is driven by adding new customers and by obtaining new taskorders and contracts with our existing customers. For example, over the pastseveral years we have added the Department of the Treasury’s Office of theComptroller of the Currency, the National Guard Bureau, the Department ofTransportation and agencies in the intelligence community as new customers.Second, organic revenue growth is driven by increasing revenues under existingcontracts and task orders with customers. For example, since the initial awardof our contract with the Department of State for the provision of passportprocessing and support services, the scope of services provided by us, and therevenues generated by those services, have grown significantly.

Our revenue growthstrategy also includes the pursuit of strategic acquisitions. We have completedthe following five acquisitions since 2000: our acquisition of GCI in January 2000,our acquisition of CCI in September 2002, our acquisition of FSC in December 2003,our acquisition of Morgan in February 2006, and most recently ouracquisition of Techrizon in April 2007, which will be included in fiscal2008 results.

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**Backlog**

*Wemonitor backlog, which provides us with visibility of our future revenues, as ameasure of the strength of our target markets and our ability to retainexisting contracts and win new contracts. The following table summarizes ourbacklog as of the dates indicated:*

| ** **    | ** ** | **As of March 31,** | ** ** |
|---------------|------------|------------------------------------|------------|
| ** **    | ** ** | **2005**                           | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **    | ** ** | **(in millions)**             | ** ** |
| Backlog:      |       |                               |       |   |   |   |   |
| Funded        |       | $                                  | 124.1      |   | $ | 160.9 |   | $ | 224.4 |   |
| Unfunded      |       | 395.6                              |       | 684.4 |   | 750.4 |   |
| Total Backlog |       | $                                  | 519.7      |   | $ | 845.3 |   | $ | 974.8 |   |

 

*Each year, a significant portion ofour revenues is derived from our backlog, and a significant portion of ourbacklog represents work related to the continuation of services and solutionsunder contracts or projects where we are the incumbent provider.*

We define backlog as the amount of revenues we expectto realize (i) over the remaining base contract performance period and (ii) fromthe exercise by the customer of option periods that we reasonably believe willbe exercised, in each case from signed contracts in existence as of themeasurement date. We do not include contract ceiling values, which representthe maximum amount of contract awards that could be awarded to all contractorsunder GWAC or ID/IQ contracts, in our backlog calculation.

We also do not include in backlog (i) theexpected amount of revenues that would be realized if, and when, we weresuccessful in the re-compete of signed contracts in existence as of themeasurement date or (ii) the expected amount of revenues that would berealized from future unidentified growth on signed contracts and task orders inexistence as of the measurement date.

We define funded backlogas the portion of our backlog for which funding currently is appropriated andobligated to us under a signed contract or task order by the purchasing agency,or otherwise authorized for payment to us by a customer upon completion of aspecified portion of work, less the amount of revenue we have previouslyrecognized under the contract. Our funded backlog does not include the fullpotential value of our contracts, because Congress often appropriates funds tobe used by an agency for a particular program or contract on a yearly orquarterly basis, even though the contract may call for performance over anumber of years. As a result, contracts typically are only partially funded atany point during their term, and all or some of the work to be performed underthe contracts may remain unfunded unless and until Congress makes subsequentappropriations and the procuring agency allocates funding to the contract.

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***Contract Mix***

We workwith the federal government under contracts employing one of three types ofprice structures: cost-plus-fee, time-and-materials and fixed-price.Cost-plus-fee contracts are typically lower risk arrangements and thus yieldlower profit margins than time-and-materials and fixed-price arrangements.Because the customer usually specifies the type of contract for a particularcontractual engagement, we generally do not influence the choice of contracttype. However, where we do have the opportunity to influence the contract type,and where customer requirements are clear, we prefer time-and-materials andfixed-price arrangements rather than cost-plus-fee arrangements becausetime-and-materials and fixed-price contracts, as compared with cost-plus-feecontracts, generally provide greater opportunity for the customer to save moneyand for us to generate higher margins. The following table summarizes ourhistorical contract mix, measured as a percentage of total revenues, for theperiods indicated:

| ** **         | ** ** | **Year Ended March 31,** | ** ** |
|--------------------|------------|-----------------------------------------|------------|
| ** **         | ** ** | **2005**                                | ** ** | **2006** | ** ** | **2007** | ** ** |
| Cost-plus-fee      |       | 60%                                     |       | 62% |   | 52% |   |
| Time-and-materials |       | 11%                                     |       | 20% |   | 32% |   |
| Fixed-price        |       | 29%                                     |       | 18% |   | 16% |   |

 

***Headcount and LaborUtilization***

We generate revenuesprimarily from services provided by our employees and subcontractors, withservices provided by our employees generally yielding higher profits thanservices provided by our subcontractors. Our ability to hire and deployadditional qualified employees is a key driver of our ability to generateadditional revenues, and our successful deployment of existing employees ondirect-billable jobs is a key driver of our profitability.

***Indirect Costs***

Indirect costs constitutea substantial portion of the costs associated with our performance of contractsfor customers. We carefully monitor the amount by which our actual indirectcosts under our contracts vary from those expected to be incurred, which werefer to as indirect rate variance. Increased indirect rate variance canadversely affect our ability to achieve attractive contract pricing, ourprofitability and our competitive position, by resulting in unexpectedincreased costs to our customers.

***Days SalesOutstanding***

Days sales outstanding, orDSO, is a measure of how efficiently we manage the billing and collection ofour accounts receivable, our most significant working capital requirement. Forthe fiscal year ended March 31, 2007, we reported DSO of 78 days, a slightdecrease from 79 days we reported for fiscal 2006, based on the averageaccounts receivable balance from the beginning of the year and at the end ofeach of the four quarters.

***UnbilledReceivables***

Unbilled receivables are comprised of work-in-processthat will be billed in accordance with contract terms and delivery schedules,as well as amounts billable upon final execution of contracts, contractcompletion, milestones or completion of rate negotiations. Because the billingof unbilled receivables is contingent on those events, changes in the relativeamount of unbilled receivables have an impact on our working capital andliquidity.

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Payments to us forperformance on certain of our federal government contracts are subject to auditby the DCAA and are subject to government funding. We provide a reserve againstour receivables for estimated losses that may result from rate negotiations,audit adjustments and/or government funding availability. To the extent thatactual adjustments due to rate negotiations, audit adjustments or governmentfunding availability differ from our estimates, our revenue may be impacted. Dueto the fact that substantially all of our receivables come from contractsfunded by the federal government, the likelihood of a material loss on anuncollectible account from this activity is low.

**Critical AccountingPolicies**

The discussion andanalysis of our financial condition and results of operations is based on ourconsolidated financial statements, which have been prepared in accordance withGAAP. The preparation of these consolidated financial statements requiresmanagement to make estimates and assumptions that affect reported amounts, andactual results may differ from the estimates. Our significant accountingpolicies are described in Note 1 to our consolidated financial statementsincluded in this filing. We consider the following accounting policies to becritical to the understanding of our financial condition and results ofoperations because these policies require the most difficult, subjective orcomplex judgments on the part of our management in their application, often asa result of the need to make estimates about the effect of matters that areinherently uncertain, and are the most important to our financial condition andoperating results.

***Revenue Recognition***

We recognize revenue under our contracts when acontract has been executed, the contract price is fixed and determinable,delivery of services or products has occurred and collectibility is consideredprobable and can be reasonably estimated. We use a standard management processto determine whether all required criteria for revenue recognition have beenmet, which includes regular reviews of our contract performance. This reviewcovers, among other matters, progress against a schedule, outstanding actionitems, effort and staffing, quality, risks and issues, subcontract management,costs incurred, commitments and satisfaction. During this review, we determinewhether the overall progress on a contract is consistent with the effortexpended.

Contract revenue recognition inherently involves theuse of estimates. Examples of estimates include the contemplated level ofeffort to accomplish the tasks under contract, the cost of the effort and anongoing assessment of our progress toward completing the contract. From time totime, as part of our standard management process, facts develop that require usto revise our estimated total costs and revenues. To the extent that a revisedestimate affects contract profit or revenue previously recognized, we recordthe cumulative effect of the revision in the period in which the factsrequiring the revision become known. The full amount of an anticipated loss onany type of contract is recognized in the period in which it becomes probableand can be reasonably estimated.

Under cost-plus-fee contracts, revenues are recognizedas costs are incurred and include an estimate of applicable fees earned. Weconsider fixed fees under cost-plus-fee contracts to be earned in proportion tothe allowable costs actually incurred in performance of the contract for levelof effort contracts. For completion type cost-plus-fee contracts, fixed feesare earned in proportion to the percentage of work completed. Fortime-and-materials contracts, revenues are computed by multiplying the numberof direct labor-hours expended in performance of the contract by thecontractual billing rates and adding other billable direct and indirect costs.For fixed-price contracts, revenues are recognized as services are performed,using the percentage-of-completion method, applying the cost-to-cost or unitsof delivery method, in accordance with Accounting Research Bulletin No. 45and American Institute of Certified Public Accountants (AICPA) Statement ofPosition 81-1 “Accounting for Performance of Construction-Type andCertain Production-Type Contracts” (SOP 81-1).

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For cost-plus-award fee type contracts, we recognizethe expected fee to be awarded by the customer at the time such fee can bereasonably estimated, based on factors such as prior award experience andcommunication with the customer regarding performance, including any interimperformance evaluations rendered by the customer. For cost-plus-incentive feetype contracts, the method of calculating incentive fee is specified in thecontract and it is typically based on measuring actual costs to perform thecontract against a target cost to perform the contract. We prepare periodicestimates to complete and adjust the incentive fee as required based on thecontract incentive fee formula.

Our contracts with agencies of the government aresubject to periodic funding by the respective contracting agency. Funding for acontract may be provided in full at inception of the contract or ratablythroughout the contract as the services are provided. From time to time, we mayproceed with work based on customer direction prior to the completion and signingof formal contract documents. Such situations require completion of a formalinternal review process and management approval prior to commencement of work.Additionally, revenue associated with such work is recognized without profitand only when it can be reliably estimated and realization is probable. We baseour estimates on notices to proceed from our customers, previous experiencewith customers, communications with customers regarding funding status, and ourknowledge of available funding for the contract or program. Pre-contract costsrelated to unsuccessful contract bids are expensed in the period in which weare notified that the contract will not be issued.

Disputes occasionallyarise in the normal course of our business due to events such as delays,changes in contract specifications, and questions of cost allowability orcollectibility. Such matters, whether claims or unapproved change orders in theprocess of negotiation, are recorded at the lesser of their estimated netrealizable value or actual costs incurred, and only when the realization isprobable and can be reliably estimated. Claims against us are recognized wherea loss is considered probable and can be reasonably estimated in amount.

***Contract CostAccounting***

As a contractor providingservices primarily to the federal government, we must categorize our costs aseither direct or indirect and allowable or unallowable. Direct costs are thosecosts that are identified with specific contracts. These costs include labor,subcontractor and consultant services, third party materials we purchase undera contract and other non-labor costs incurred in support of a contract.Indirect costs are those costs not identified with specific contracts. Rather,indirect costs are allocated to contracts in accordance with federal governmentrules and regulations. These costs typically include certain of ourselling, general and administrative expenses, fringe benefit expenses anddepreciation and amortization costs. Direct and indirect costs that are not allowableunder the Federal Acquisition Regulation or specific contract provisions cannotbe considered for reimbursement under our federal government contracts. We mustspecifically identify these costs to ensure we comply with these requirements.Our unallowable costs include a portion of our executive compensation, certainemployee morale activities, certain types of legal and consulting costs and theamortization of identified intangible assets, among others. A key element toour historical success has been our ability to manage indirect cost growth andunallowable costs in connection with integration of acquired businesses.

***Goodwill andIntangible Assets***

Goodwill represents theexcess of cost over the fair value of net tangible and identifiable intangible assetsof acquired companies. In accordance with Statement of Financial AccountingStandards, or SFAS, No. 142, *Goodwill and OtherIntangible Assets*, or SFAS No. 142, we do not amortizegoodwill. Rather, we test goodwill for impairment at least on an annual basis.Testing for impairment is a two-step process as prescribed by SFAS No. 142.The first step is a test for potential impairment, while the second stepmeasures the amount of impairment, if any. Under the guidelines of SFAS No. 142,we are required to 

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performan impairment test at least on an annual basis at any time during the fiscalyear, provided that the test is performed at the same time every year. Animpairment loss would be recognized when the assets’ fair value is below theircarrying value. Based on the testingperformed as of December 31, 2006, the Company determined that noimpairments existed as of December 31, 2006. In the quarter ended March 31,2006, we recorded an aggregate charge of $3.6 million relating to theimpairment of the CCI and FSC trade names. The impairment arose as a result ofour completion of substantially all of the activities in connection withnovating the contracts previously legally held by CCI and FSC. As such, we nolonger ascribe any value to the CCI and FSC trade names and that portion of theidentified intangibles was written-off as impairment of intangible assets inthe year ended March 31, 2006. Customer relationships, noncompeteagreements and backlog and contracts are amortized on a straight-line basisover periods ranging from one to seven years.

**Results ofOperations**

Ourhistorical financial statements reflect the operating results of ouracquisitions from the date of acquisition. The following tables set forth theresults of operations expressed in dollars (in thousands) and as a percentageof revenues, for the periods below:

| ** **                                 | ** ** | **Year Ended March 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                | ** ** | **2006** | ** ** | **2007** | ** ** |
| **Consolidated  Statement of Income Data** |       |                                    |       |   |   |   |   |
| Revenues                                   |       | $                                       | 282,456    |   | $ | 284,801 |   | $ | 409,411 |   |
| Operating costs  and expenses:             |       |                                    |       |   |   |   |   |
| Cost of revenues                           |       | 243,677                                 |       | 241,357 |   | 343,628 |   |
| Selling, general and administrative        |       | 16,844                                  |       | 19,709 |   | 30,700 |   |
| Amortization of deferred compensation      |       | 372                                     |       | 790 |   | 5,082 |   |
| Depreciation and amortization              |       | 2,327                                   |       | 3,057 |   | 5,424 |   |
| Impairment of intangible assets            |       | —                                  |       | 3,590 |   | — |   |
| Total operating costs and expenses         |       | 263,220                                 |       | 268,503 |   | 384,834 |   |
| Operating income                           |       | 19,236                                  |       | 16,298 |   | 24,577 |   |
| Other income  (expense):                   |       |                                    |       |   |   |   |   |
| Other income (expense)                     |       | 2                                       |       | 101 |   | (478 | ) |
| Interest expense—net                  |       | (822                                    | )          | (2,441 | ) | (5,918 | ) |
| Total other expenses                       |       | (820                                    | )          | (2,340 | ) | (6,396 | ) |
| Income before taxes                        |       | 18,416                                  |       | 13,958 |   | 18,181 |   |
| Provision for  income taxes                |       | (7,184                                  | )          | (5,708 | ) | (7,476 | ) |
| Net income                                 |       | $                                       | 11,232     |   | $ | 8,250 |   | $ | 10,705 |   |

 

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| ** **                            | ** ** | **Year Ended March 31,** | ** ** |
|---------------------------------------|------------|-----------------------------------------|------------|
| ** **                            | ** ** | **2005**                                | ** ** | **2006** | ** ** | **2007** | ** ** |
| **As a  Percentage of Revenues**      |       |                                    |       |   |   |   |   |
| Revenues                              |       | 100.0                                   | %          | 100.0 | % | 100.0 | % |
| Operating costs  and expenses:        |       |                                    |       |   |   |   |   |
| Cost of revenues                      |       | 86.3                                    |       | 84.7 |   | 83.9 |   |
| Selling, general and administrative   |       | 5.9                                     |       | 6.9 |   | 7.5 |   |
| Amortization of deferred compensation |       | 0.1                                     |       | 0.3 |   | 1.3 |   |
| Depreciation and amortization         |       | 0.9                                     |       | 1.1 |   | 1.3 |   |
| Impairment of intangible assets       |       | —                                  |       | 1.3 |   | — |   |
| Total operating costs and expenses    |       | 93.2                                    |       | 94.3 |   | 94.0 |   |
| Operating income                      |       | 6.8                                     |       | 5.7 |   | 6.0 |   |
| Other income  (expense):              |       |                                    |       |   |   |   |   |
| Other income (expense)                |       | 0.0                                     |       | 0.0 |   | (0.1 | ) |
| Interest expense—net             |       | (0.3                                    | )          | (0.8 | ) | (1.5 | ) |
| Total other expenses                  |       | (0.3                                    | )          | (0.8 | ) | (1.6 | ) |
| Income before taxes                   |       | 6.5                                     |       | 4.9 |   | 4.4 |   |
| Provision for  income taxes           |       | (2.5                                    | )          | (2.0 | ) | (1.8 | ) |
| Net income                            |       | 4.0                                     | %          | 2.9 | % | 2.6 | % |

 

We generate revenues primarily from services providedby our employees and subcontractors, with services provided by our employeesgenerally yielding higher profits than services provided by our subcontractors.To a lesser degree, we earn revenues through reimbursable travel and otherreimbursable direct and indirect costs to support the contractual effort andthird-party hardware and software that we purchase and integrate for customersas part of the solutions we provide.

Our most significant expense is cost of revenues,which includes the costs of direct labor, subcontractors, materials, equipment,travel and an allocation of indirect costs (other than selling, general andadministrative expenses and depreciation). Indirect costs consist primarily offringe benefits, applicable facility and information technology infrastructurecosts, business insurance, recruiting, training, other overhead and certainother non-direct costs that are necessary to support direct labor. The numberand types of personnel, their salaries and other costs, can have a significantimpact on our cost of revenues.

Our selling, general and administrative expensesinclude costs not directly associated with performing work for our customers.These costs include wages plus associated fringe benefits, stock-basedcompensation charges, rent, travel and insurance. Among the functions coveredby these expenses are sales, business development, contracts, purchasing,legal, finance, accounting, human resources and benefits, informationtechnology support and general management. Most of these costs are allowablecosts under the cost accounting standards for contracting with the federalgovernment and are recoverable under cost-plus-fee contracts.

Our depreciation and amortization expenses include theamortization of purchased intangibles in connection with acquisitions and theamortization of leasehold improvements and the depreciation of property andequipment purchased in the ordinary course of our business.

Our amortization of deferred compensationincludes stock-based compensation amortized over the vesting periodof the awards.

Certain revenues andpayments we receive are based on provisional billings and payments that aresubject to adjustment after audit. Federal government agencies have the rightto challenge our cost estimates and allocation methodologies with respect togovernment contracts. In addition, contracts with these agencies are subject toaudit and possible adjustment to give effect to unallowable costs under cost-

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plus-feecontracts or to other regulatory requirements affecting both cost-plus-fee andfixed-price contracts.

***Comparison ofResults of Operations for the Fiscal Years Ended March 31,  2006 and 2007***

***Revenues.******  ***Our consolidated revenuesincreased $124.6 million, or 43.8% from $284.8 million for the fiscal yearended March 31, 2006, to $409.4 million for the fiscal year ended March 31,2007. Increased revenues of $78.6 million were attributable to Morgan relatedcontracts that include specialized engineering and technology services providedto the U.S. Army Aviation and Missile Command, or AMCOM, and the U.S. ArmyProgram Executive Officer for Simulation, Training, and Instrumentation, or PEOSTRI. Increased revenues of $46 million were related to continued growthproviding enterprise integration and operational support services for the Departmentof Defense, expanding demand for passport services for the Department of State’sBureau of Consular Affairs, including the completion of the Arkansas PassportCenter, and ongoing logistics support for the Army’s equipment reset effort inthe United States and abroad.

***Cost of Revenues.******  ***Our cost of revenuesincreased $102.2 million, or 42.4%, from $241.4 million for the fiscal yearended March 31, 2006, to $343.6 million for the fiscal year ended March 31,2007. This increase was primarily the result of additional costs attributableto revenues generated by Morgan operations, in addition to the cost of revenuesassociated with the increased services provided under the contracts referred toabove.

***Selling, Generaland Administrative.******  ***Ourselling, general and administrative expense increased $11.0 million, or55.8%, from $19.7 million for the fiscal year ended March 31,  2006, to $30.7 million for the fiscal yearended March 31, 2007. This was due to increased selling, general andadministrative expenses attributable to Morgan operations and overall companygrowth, increases in business development costs associated with severalsignificant procurements, higher recruiting costs to expand our highly trainedand specialized technical workforce, and additional costs associated with beinga public company, including costs associated with legal, audit, tax, andSarbanes-Oxley Act, or SOX, compliance services.

***Amortization ofDeferred Compensation.******  ***Ouramortization of deferred compensation increased $4.3 million, or 543.4%,from $0.8 million for the fiscal year ended March 31, 2006, to $5.1million for fiscal year ended March 31, 2007. The increase was primarilyattributable to the amortization expense related to the acceleration of thevesting period of restricted stock grants in connection to our initial publicoffering in October 2006.

***Depreciation andAmortization.******  ***Ourdepreciation and amortization expense increased $2.3 million, or 77.4%, from$3.1 million for the fiscal year ended March 31, 2006, to $5.4 million forthe fiscal year ended March 31, 2007. Approximately $1.7 million of theincrease was related to the amortization of intangible assets primarilyassociated with the Morgan acquisition. The remainder of the increase wasassociated with depreciation of Morgan assets and increased capitalexpenditures and leasehold improvements during fiscal 2007.

***Impairment ofIntangible Assets.******  ***Animpairment charge of $3.6 million related to the CCI and FSC tradenames wasrecorded for the fiscal year ended March 31, 2006 and none was recordedfor the fiscal year ended March 31, 2007.

***Other Income orExpense.******  ***Ourother income was $0.1 million for the fiscal year ended March 31, 2006which was primarily related to favorable changes in market value of ourinterest rate swap agreements. Our other expense was $0.5 million for thefiscal year ended March 31, 2007 which was primarily related to changes inmarket value and cancellation of our interest rate swap agreements.

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***Interest Expense,Net.******  ***Ournet interest expense increased $3.5 million from $2.4 million for the fiscalyear ended March 31, 2006, to $5.9 million for the fiscal year ended March 31,2007. The increase in net interest expense was due to the term loan borrowingsincurred to finance the acquisition of Morgan.

***Net Income.******  ***Our net income increased $2.4million or 29.8%, from $8.3 million for the fiscal year ended March 31,2006, to $10.7 million for the fiscal year ended March 31, 2007. Theincrease in net income was attributable to increased profits from internalrevenue growth and from profits related to the Morgan operations.

***Comparison ofResults of Operations for the Fiscal Years Ended March 31, 2005 and 2006***

***Revenues.******  ***Our consolidated revenuesincreased $2.3 million, or 0.8%, from $282.5 million for the fiscal year ended  March 31, 2005, to $284.8 million for thefiscal year ended March 31, 2006. The increase was primarily due to $9.6million in increased revenues attributable to a partial year of results afterthe acquisition of Morgan, $10.7 million of increased revenue under our passportservices contract, $3.0 million of increased revenues under a new contractwith Department of Army AWRDS contract, $6.7 million of increased revenuesunder a new contract with the Department of Transportation MaritimeAdministration, which was partially offset by $37.4 million of pass throughrevenues generated in fiscal 2005.

***Cost of Revenues.******  ***Our cost of revenuesdecreased $2.3 million, or 1.0%, from $243.7 million for the fiscal year ended March 31,2005, to $241.4 million for the fiscal year ended March 31, 2006. Thisdecrease was primarily the result of a $35.0 million reduction in cost ofrevenues attributable to the decrease in pass-through revenues generatedin fiscal 2006, partially offset by the cost of revenues associated with theincreased services provided under the contracts above.

***Selling, Generaland Administrative.******  ***Ourselling, general and administrative expense increased $2.9 million, or17.0%, from $16.8 million for the fiscal year ended March 31, 2005, to $19.7 million for the fiscal yearended March 31,  2006. The largestcomponent of this increase were a $1.8 million increase in finance, accountingand human resources costs and $0.3 million of cost associated with Morgan’soperations since the date of acquisition.

***Amortization ofDeferred Compensation.******  ***Ouramortization of deferred compensation increased $0.4 million, or 112.1%,from $0.4 million for the fiscal year ended 2005, to $0.8 million for fiscalyear ended 2006. The increase was primarily attributable to the amortization ofrestricted stock grants awarded in May 2005.

***Depreciation andAmortization.******  ***Ourdepreciation and amortization expense increased $0.8 million, or 31.4%, from$2.3 million for the fiscal year ended March 31, 2005, to $3.1 million forthe fiscal year ended March 31, 2006. Approximately $0.2 million of theincrease was due to amortization of purchased intangibles associated with theMorgan acquisition and the remainder of the increase was related todepreciation expense associated with increased capital expenditures duringfiscal 2006.

***Impairment ofIntangible Assets.******  ***Infiscal 2006, we recorded an impairment charge of $3.6 million related to theCCI and FSC tradenames.

***Other Income orExpense.******  ***Ourother income was $0.1 million for the fiscal year ended March 31, 2006. Thiswas primarily related to favorable changes in market value of our interest rateswap agreements

***Interest Expense,Net.******  ***Ournet interest expense increased $1.6 million, or 197.0%, from $0.8 million forthe fiscal year ended March 31, 2005, to $2.4 million for the fiscal yearended March 31, 2006. The increase innet interest expense was due to the new term loan borrowings incurred tofinance the acquisition of Morgan, increased borrowing under our revolvingcredit facility primarily to fund stock repurchases from our ESOP and a higherinterest rate environment.

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***Net Income.******  ***Our net income decreased $2.9million from $11.2 million for the fiscal year ended March 31, 2005, to$8.3 million for fiscal year ended March 31, 2006. The primary reason forthe decline in net income was a $3.6 million impairment charge related to CCI andFSC trade names.

**Seasonality**

Our revenues and operatingincome have typically been positively affected in the quarter ending March 31due to an increase in the volume of revenues generated under our contract withthe Department of State for the provision of passport services, as the demandfor processing and delivery of U.S. passports typically increases during thisquarter.

**Inflation**

We do not believe thatinflation has had a material effect on our business for the three years ended March 31,2007.

**Liquidity andCapital Resources**

Our primary liquidityneeds are to finance the costs of operations pending the billing and collectionof accounts receivable, to service our debt, to make capital expenditures andto make selective strategic acquisitions. Based upon our current operations, weexpect that our cash flow from operations, together with amounts we are able toborrow under our senior credit facility, will be adequate to meet ouranticipated needs for the foreseeable future. In addition, we expect that ourcash flow from operations will be adequate to meet all contractual obligationsunder the credit facility and our operating leases. Although we have nospecific plans to do so, to the extent we decide to pursue one or moresignificant strategic acquisitions, we will likely need to incur additionaldebt or sell additional equity to finance these acquisitions.

***Cash Flow***

Accountsreceivable represents our largest working capital requirement. We bill most ofour customers monthly after services are rendered. Our operating cash flow isprimarily affected by the overall profitability of our contracts, our abilityto invoice and collect from our customers in a timely manner, and our abilityto manage our vendor payments.

| ** **                                           | ** ** | **Year Ended March 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                           | ** ** | **(in millions)**                  | ** ** |
| Net cash provided  by operating activities           |       | $                                       | 3.5        |   | $ | 10.2 |   | $ | 16.0 |   |
| Net cash (used  in) investing activities             |       | $                                       | (1.0       | ) | $ | (86.6 | ) | $ | (4.3 | ) |
| Net cash (used in)  provided by financing activities |       | $                                       | (2.5       | ) | $ | 76.4 |   | $ | 1.0 |   |

 

Net cash provided by operating activities of $16.0million for the fiscal year ended  March 31, 2007 primarily reflected our net income plusdepreciation and amortization expenses and amortization of deferredcompensation for that period, partially offset by a $28.3 million increase inaccounts receivable, a $7.3 million increase in accounts payable and a $9.1million increase in accrued expenses. Net cash provided by operating activitiesof $10.2 million for the fiscal year endedMarch 31,  2006 primarily reflected netincome for that period, excluding the effects of non-cash depreciation andamortization expense and impairment of assets of $3.1 and $3.6 million,respectively, and an increase of $8.0 million in accrued expenses, partiallyoffset by a $8.3 million increase in accounts receivable and a $3.4 milliondecrease in accounts payable. Net cash provided by operating activities of $3.5million for the fiscal year ended March 31, 2005 primarily reflected ournet income and an increase of $2.2 million in accrued 

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expenses, partially offsetby an increase in working capital requirements caused by a $10.3 millionincrease in accounts receivable and a $6.1 million decrease in accountspayable.

Net cash used in investing activities of $4.3 millionfor the fiscal year ended  March 31, 2007, consisted primarily of the purchase ofequipment in the ordinary course of business. Net cash used in investingactivities of $86.6 million in the fiscal year ended  March 31,  2006,consisted of a $80.6 million to complete the acquisition of Morgan, a $0.6million earnout payment in connection with our acquisition of CCI and $5.5million to purchase equipment in the ordinary course of business and leaseholdimprovements and investments in technology related to our new headquarters facility.Net cash used in investing activities of $1.0 million for the fiscal year endedMarch 31, 2005 consisted of the purchase of equipment in the ordinarycourse of business.

Net cash provided byfinancing activities of $1.0 million for the fiscal year ended  March 31, 2007primarily consisted of $71.8 million in net proceeds from the sale of stock inour initial public offering and $2.0 million in proceeds received from theexercise of stock options, partially offset by $10.4 million of net repaymentsof our line of credit and $62.3 million of repayments on our long-term debt.Net cash provided by financing activities of $76.4 million for the fiscal yearended  March 31,  2006 primarily consisted of $100.0 million ofborrowings under our credit facility to finance the acquisition of Morgan,partially offset by $10.8 million used to repay our line of credit, $8.8million used to repay a long-term note and $4.5 million to repurchase stock,primarily from our ESOP. Net cash used in financing activities of $2.5 millionfor the fiscal year ended  March 31,  2005, consisted of $4.5 million used torepurchase stock, primarily from our ESOP, partially offset by $1.9 million ofnet borrowings under our line of credit in connection with working capitalrequirements.

***Credit Facility andBorrowing Capacity***

On February 16, 2006, in order to finance ouracquisition of Morgan and to refinance our then-outstanding indebtedness, weentered into a new senior credit facility that included a $50.0 millionrevolving credit facility and $100.0 million term loan. As of March 31,2007, we had $37.8 million of term loan indebtedness outstanding under oursenior credit facility. As of March 31, 2007, our borrowing availabilityunder the revolving portion of our senior credit facility was $49.9 million(including outstanding letters of credit). The obligations under our seniorcredit facility are unconditionally guaranteed by each of our existing andsubsequently acquired or organized subsidiaries and secured on a first-prioritybasis by security interests (subject to permitted liens) in substantially allassets owned by us and each of our subsidiaries, including the shares ofcapital stock of our subsidiaries, subject to certain exceptions.

Under the terms of the credit facility, we areentitled to request an increase in the size of the credit facility by an amountnot greater than $75 million in the aggregate. If any lender elects not toincrease its commitment under the credit facility, we may designate anotherbank or other financial institution to become a party to the credit facility.

The credit agreement also contains a number ofaffirmative and restrictive covenants, including limitations on mergers,consolidations and dissolutions; sales of assets; investments and acquisitions;indebtedness and liens; repurchases of shares of capital stock and options topurchase shares of capital stock; transactions with affiliates; sale andleaseback transactions; and restricted payments.

In addition, thecredit agreement provides that we are required to meet the following financialcovenants:

·       afixed charge coverage ratio as of the end of any fiscal quarter of not lessthan 1.50 to 1.00, based upon the ratio of (i) consolidated EBITDA (asdefined in the credit agreement) less the actual amount paid by us and oursubsidiaries in cash on account of capital expenditures and taxes over theperiod consisting of the four consecutive fiscal quarters ending on orimmediately prior to the 

41

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determination date to (ii) consolidatedinterest expense for such period, scheduled principal payments required to bemade on consolidated total debt during such period and certain restrictedpayments paid during such period;

·       a maximum leverage ratiobased upon the ratio of (i) consolidated total debt to (ii) consolidatedEBITDA (as defined in the credit agreement), which required us to maintain aratio of 4.25 to 1.00 for each fiscal quarter ending on or prior to December 31,2006, and will require us to maintain a ratio of 3.50 to 1.00 for each fiscalquarter ending after December 31, 2006 and on or prior to December 31,2007, and a ratio of 3.00 to 1.00 for each fiscal quarter ending after December 31,2007; and

·       aminimum consolidated net worth equal to the sum of (i) 85% of ourconsolidated net worth as at December 31, 2005, (ii) 50% ofconsolidated net income (as defined in the credit agreement) on a cumulativebasis for all preceding fiscal quarters, commencing with the fiscal quarterended March 31, 2006, and (iii) 100% of the amount by which our totalstockholders’ equity is increased as result of any public or private offeringof our common stock after the closing date of our credit agreement.

As of March 31, 2007,we were in compliance with all covenants under the credit facility.

**CapitalExpenditures**

We have relatively lowcapital expenditure requirements. Our capital expenditures were $1.0 million,$5.5 million and $3.9 million for the fiscal 2005, fiscal 2006 and fiscal 2007,respectively. Substantially all of the expenditures in fiscal 2006 consisted ofleasehold improvements and purchases of office equipment due to investmentsmade in connection with our relocation to a new headquarters facility in fiscal2006.

**ContractualObligations and Off-Balance Sheet Arrangements**

Thefuture scheduled contractual payments at March 31, 2007 are as follows:

| ** **                       | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations** | ** ** | ** **                                | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1-3  years** | ** ** | **4-5  years** | ** ** | **More than  5 years** | ** ** |
| ** **                       | ** ** | **(in thousands)**                   | ** ** |
| Long-term debt  obligations      |       | $                                         | 37,750     |   |   | $ | 1,000 |   |   | $ | 2,000 |   | $ | 34,750 |   |   | $ | — |   |   |
| Long-term interest  payments(1)  |       | 12,455                                    |       |   | 3,026 |   |   | 6,035 |   | 3,394 |   |   | — |   |   |
| Capital lease  obligations       |       | 386                                       |       |   | 150 |   |   | 236 |   | — |   |   | — |   |   |
| Operating lease  obligations(2)  |       | 35,756                                    |       |   | 7,382 |   |   | 11,937 |   | 7,180 |   |   | 9,257 |   |   |
| Total                            |       | $                                         | 86,347     |   |   | $ | 11,558 |   |   | $ | 20,208 |   | $ | 45,324 |   |   | $ | 9,257 |   |   |
|                                  |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          Interest estimated atrates prevalent on March 31, 2007.

(2)          Leases for facilities andequipment.

We do not have anysignificant off-balance sheet arrangements as defined in Item 303(a)(4)(ii) ofSecurities and Exchange Commission Regulation S-K as of March 31, 2007.

**Recent AccountingPronouncements**

In June 2006, the FASB issued FinancialInterpretation No. 48 (FIN 48), *Accounting for Uncertaintyin Income Taxes—an interpretation of FASB Statement No. 109*.FIN 48 clarifies the accounting for uncertainty in income taxes recognized inan enterprise’s financial statements. The interpretation prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. The Company is required to adopt FIN 48 

42

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beginning fiscal year 2008and the impact that the adoption of FIN 48 will have on our financialstatements and notes thereto is currently being evaluated.

In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157 (SFAS 157), *Fair ValueMeasurements*. SFAS 157 provides guidance for measuring the fairvalue of assets and liabilities. It requires additional disclosures related tothe extent to which companies measure assets and liabilities at fair value, theinformation used to measure fair value, and the effect of fair valuemeasurements on earnings. SFAS 157 is effective for fiscal years beginningafter November 15, 2007. We are in the process of determining what effect,if any, the adoption of SFAS 157 will have on our financial position or resultsof operations.

In February 2007, theFASB issued Statement of Financial Accounting Standards No. 159 (SFAS159),*The Fair Value Option for Financial Assets andFinancial Liabilities—Including an Amendment of FASB Statement No. 115*.SFAS 159 permits entities to measure many financial instruments andcertain other items at fair value to improve financial reporting by providingentities with the opportunity to mitigate volatility in reported earningscaused by measuring related assets and liabilities differently without havingto apply complex hedge accounting. Most of the provisions in SFAS 159 areelective. This statement will be effective for us is fiscal 2009, and may beapplied prospectively. Early adoption is permitted provided we also elect toapply the provisions of SFAS 157. We are in the process of determining whateffect, if any, the application of the provisions of SFAS 159 will have on ourfinancial position and results of operations.

**ITEM 7A.**        QUANTITATIVEAND QUALITATIVE DISCUSSION ABOUT MARKET RISK

Our principal exposure tomarket risk relates to changes in interest rates. From time to time, we enterinto interest rate swap agreements to effectively limit exposure to interestrate movements within the parameters of our interest rate hedging policy. As ofMarch 31, 2007, all of the outstanding debt under our credit facility wassubject to floating interest rate risk. In October 2006, we entered intoan interest rate swap agreement covering $19.0 million of our term indebtednessunder which the swap and term debt maturities match. Even after giving effectto this agreement, we are exposed to risks due to fluctuations in the marketvalue of this agreement and changes in interest rates with respect to theportion of our credit facility that is not covered by this agreement. Ahypothetical change in the interest rate of 1% would have changed annual cashinterest expense by $0.2 million.

**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

The consolidated financialstatements of Stanley, Inc. are included on pages F-1 through F-22of this report.

**ITEM 9.**                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

**ITEM 9A.**        CONTROLSAND PROCEDURES

As of March 31, 2007, under the supervision andwith the participation of our management, including our chief executive officerand our chief financial officer, we have evaluated the effectiveness of thedesign and operation of our disclosure controls and procedures pursuant to Rule 13a-15of the Securities Exchange Act of 1934. Based on this evaluation, our chiefexecutive officer and our chief financial officer have concluded that ourdisclosure controls and procedures are effective.

43

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There were no changes inour internal control over financial reporting during the quarter ended March 31,2007 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

**ITEM 9B.**       OTHERINFORMATION

Not applicable.

44

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**PART III**

We will file adefinitive Proxy Statement for our 2007 Annual Meeting of Stockholders (the “2007Proxy Statement”) with the SEC, pursuant to Regulation 14A, not later than120 days after the end of our fiscal year. Accordingly, certaininformation required by Part III has been omitted under GeneralInstruction G(3) to Form 10-K. Only those sections of the 2007Proxy Statement that specifically address the items set forth herein areincorporated by reference.

**ITEM 10.**         DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information requiredby Item 10 is hereby incorporated by reference from our 2007 Proxy Statementunder the captions “Election of Directors” and “Section 16(a) BeneficialOwnership Reporting Compliance.”

**ITEM11.**         EXECUTIVE COMPENSATION

The information requiredby Item 11 is hereby incorporated by reference from our 2007 Proxy Statementunder the captions “Executive Compensation” and “Director Compensation.”

**ITEM12.**         SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information requiredby Item 12 is hereby incorporated by reference from our 2007 Proxy Statementunder the caption “Security Ownership of Certain Beneficial Owners andManagement.”

**ITEM13.**         CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information requiredby Item 13 is hereby incorporated by reference from our 2007 Proxy Statementunder the captions “Certain Transactions” and “Director Independence.”

**ITEM14.**         PRINCIPAL ACCOUNTANT FEESAND SERVICES.

The information requiredby Item 14 is hereby incorporated by reference from our 2007 Proxy Statementunder the caption “Audit Fees.”

**PART IV**

**ITEM 15.**         EXHIBITSAND FINANCIAL STATEMENT SCHEDULES

(a)          Documents filed as partof this Report

1.                 The followingfinancial statements are filed herewith:

Report of Independent Registered Public AccountingFirm on the Consolidated Financial Statements

Consolidated Statements of Income for the Fiscal Yearsended March 31, 2005, 2006, and 2007

Consolidated Balance Sheets as of March 31, 2006and 2007

Consolidated Statements of Changes in Stockholders’Equity for the Fiscal Years ended March 31, 2005, 2006, and 2007

Consolidated Statements of Cash Flows for the FiscalYears ended March 31, 2005, 2006, and 2007

45

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Notes toConsolidated Financial Statements

2.                 FinancialStatement Schedule

Schedule II—Valuationand Qualifying Accounts

3.                 Exhibits

Thefollowing exhibits are filed as part of this report or hereby incorporated byreference to exhibits previously filed with the Securities and ExchangeCommission:
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                              |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |       | Amended and Restated Certificate of Incorporation of  Stanley, Inc., incorporated by reference to Exhibit 3.1 to  Pre-Effective Amendment No. 2 to the Registration Statement on Form S-1  (File No. 333-134053), filed July 28, 2006.                                                                                                                                    |
| 3.3              |       | Amended and Restated  Bylaws of Stanley, Inc., incorporated by reference to Exhibit 3.3  to Pre-Effective Amendment No. 2 to the Registration Statement on  Form S-1 (File No. 333-134053), filed  July 28, 2006.                                                                                                                                                    |
| 4.1              |       | Specimen Stock  Certificate, incorporated by reference to Exhibit 4.1 to Pre-Effective  Amendment No. 2 to the Registration Statement on Form S-1  (File No. 333-134053), filed July 28, 2006.                                                                                                                                                                                      |
| 10.1*            |       | Executive Deferred  Compensation and Equity Incentive Plan, as of January 30, 2002,  incorporated by reference to Exhibit 10.6 to Pre-Effective Amendment  No. 2 to the Registration Statement on Form S-1 (File  No. 333-134053), filed July 28, 2006.                                                                                                                        |
| 10.2*            |       | Executive Deferred  Compensation and Equity Incentive Plan Trust, as of March 5, 2004,  incorporated by reference to Exhibit 10.7 to Pre-Effective Amendment  No. 2 to the Registration Statement on Form S-1 (File  No. 333-134053), filed July 28, 2006.                                                                                                                     |
| 10.3*            |       | Change in Control and  Severance Agreement, dated March 20, 2006, between the Company and Brian  J. Clark, incorporated by reference to Exhibit 10.8 to Pre-Effective  Amendment No. 1 to the Registration Statement on Form S-1  (File No. 333-134053), filed June 26, 2006.                                                                                                  |
| 10.4             |       | Revolving Credit and  Term Loan Agreement, dated as of February 16, 2006, among  Stanley, Inc., as Borrower, the Lenders From Time to Time Party Hereto,  and SunTrust Bank, as Administrative Agent, incorporated by reference to  Exhibit 10.9 to Pre-Effective Amendment No. 1 to the Registration  Statement on Form S-1 (File No. 333-134053), filed  June 26, 2006. |
| 10.5             |       | Security Agreement,  dated as of February 16, 2006, among Stanley, Inc., as Borrower,  the Subsidiaries of the Borrower Party Hereto, as Grantors, and SunTrust  Bank, as Administrative Agent, incorporated by reference to  Exhibit 10.10 to Pre-Effective Amendment No. 1 to the Registration  Statement on Form S-1 (File No. 333-134053), filed  June 26, 2006.      |
| 10.6             |       | Subsidiary Guaranty  Agreement, dated as of February 16, 2006, among the Subsidiaries of  Stanley, Inc. Listed on Schedule I Thereto, and SunTrust Bank, as  Administrative Agent, incorporated by reference to Exhibit 10.11 to  Pre-Effective Amendment No. 1 to the Registration Statement on  Form S-1 (File No. 333-134053), filed June 26,  2006.                   |
| 10.7*            |       | Amendment No. 1 to  Executive Deferred Compensation and Equity Incentive Plan, as of  June 28, 2006, incorporated by reference to Exhibit 10.12 to  Pre-Effective Amendment No. 2 to the Registration Statement on  Form S-1 (File No. 333-134053), filed July 28,  2006.                                                                                                 |

46

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| 10.8* |   | 2006 Omnibus Incentive  Compensation Plan, incorporated by reference to Exhibit 10.13 to Pre-Effective  Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-134053),  filed July 28, 2006. |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 21.1  |   | List of subsidiaries of  Stanley, Inc.                                                                                                                                                                                                       |
| 23.1  |   | Consent of  Deloitte & Touche LLP.                                                                                                                                                                                                       |
| 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 and Chief Financial Officer pursuant to Section 906 of  The Sarbanes-Oxley Act of 2002.                                                                                                            |

----

*                    Denotesmanagement contract or compensation plan or arrangement.

47

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**SIGNATURES**

Pursuantto the requirements of 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.
|        | ** ** | **STANLEY, INC.**                     |
|--------|------------|---------------------------------------|
|   | ** ** | **/s/ BRIAN J. CLARK**                |
|   |       | Brian J. Clark                        |
|   |       | Chief Financial Officer and Treasurer |
|   |       | June 1, 2007                     |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following person on behalf of the Registrant and inthe capacity and on the dates indicated.
|        | ** ** | **/s/ PHILIP O. NOLAN**                                                        |
|--------|------------|--------------------------------------------------------------------------------|
|   |       | Philip O. Nolan                                                                |
|   |       | Chairman, President and Chief Executive Officer  (Principal Executive Officer) |
|   |       | June 1, 2007                                                              |
|   | ** ** | **/s/ BRIAN J. CLARK**                                                         |
|   |       | Brian J. Clark                                                                 |
|   |       | Chief Financial Officer and Treasurer  (Principal Financial Officer)           |
|   |       | June 1, 2007                                                              |
|   | ** ** | **/s/ THOMAS R. FRADETTE**                                                     |
|   | ** ** | Thomas R. Fradette                                                             |
|   |       | Vice President and Controller  (Principal Accounting Officer)                  |
|   |       | June 1, 2007                                                              |
|   | ** ** | **/s/ GEORGE H. WILSON**                                                       |
|   |       | George H. Wilson                                                               |
|   |       | Executive Vice President for Strategic Operations  and Director                |
|   |       | June 1, 2007                                                              |
|   | ** ** | **/s/ WILLIAM E. KARLSON**                                                     |
|   |       | William E.  Karlson                                                            |
|   |       | Senior Vice  President, Outsourcing Solutions and Director                     |
|   |       | June 1, 2007                                                              |
|   | ** ** | **/s/ LAWRENCE A. GALLAGHER**                                                  |
|   |       | Lawrence A.  Gallagher                                                         |
|   |       | Director                                                                       |
|   |       | June 1, 2007                                                              |

48

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|        | ** ** | **/s/ JAMES C. HUGHES**                   |
|--------|------------|-------------------------------------------|
|   |       | James C. Hughes                           |
|   |       | Director                                  |
|   |       | June 1, 2007                         |
|   | ** ** | **/s/ JOHN P. RICEMAN**                   |
|   | ** ** | John P. Riceman                           |
|   |       | Director                                  |
|   |       | June 1, 2007                         |
|   | ** ** | **/s/ GENERAL JIMMY D. ROSS**             |
|   |       | General                                   |
|   |       | Jimmy D. Ross,  USA (Ret.)                |
|   |       | Director                                  |
|   |       | June 1, 2007                         |
|   | ** ** | **/s/ LT. GENERAL RICHARD L.  KELLY**     |
|   |       | Lt. General Richard L. Kelly, USMC (Ret.) |
|   |       | Director                                  |
|   |       | June 1, 2007                         |
|   | ** ** | **/s/ CHARLES S. REAM**                   |
|   |       | Charles S. Ream                           |
|   |       | Director                                  |
|   |       | June 1, 2007                         |

 

49

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**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**

|                                                                                                                                | ** ** | **Page** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Report  of Independent Registered Public Accounting Firm                                                                       |       |     | F-2        |   |   |
| Consolidated Statements of Income for the Fiscal Years  ended March 31, 2005, 2006, and 2007                              |       |     | F-3        |   |   |
| Consolidated  Balance Sheets as of March 31, 2006 and March 31, 2007                                                 |       |     | F-4        |   |   |
| Consolidated Statements of Changes in Stockholders’  Equity for the Fiscal Years ended March 31, 2005, 2006 and 2007 |       |     | F-5        |   |   |
| Consolidated Statements of Cash Flows for the Fiscal  Years ended March 31, 2005, 2006 and 2007                           |       |     | F-6        |   |   |
| Notes to Consolidated Financial Statements                                                                                     |       |     | F-7        |   |   |

 

F-1

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Board of DirectorsStanley, Inc. and Subsidiaries

We have audited the accompanying consolidated balancesheets of Stanley, Inc. and Subsidiaries (the “Company”) as of March 31,2006 and 2007, and the related consolidated statements of income, changes instockholders’ equity, and cash flows for the three years in the period ended March 31,2007. Our audits also included the consolidated financial statement schedulelisted at Item 15(a)(2). These consolidated financial statements andconsolidated financial statement schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements and consolidated financial statement schedule based on ouraudits.

We conducted our audits in accordance with standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform an audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged to perform,an audit of its internal control over financial reporting. Our audits includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no suchopinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of the Companyas of March 31, 2006 and 2007, and the results of their operations andtheir cash flows for the three years in the period ended March 31, 2007 inconformity with accounting principles generally accepted in the United Statesof America. Also, in our opinion, the consolidated financial statementschedule, when considered in relation to the basic consolidated financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

As discussed in Note 11 tothe consolidated financial statements, effective April 1, 2006, theCompany changed its method of accounting for stock-based compensation to conformto FASB Statement No. 123(R), *Share-BasedPayment*.

/s/ DELOITTE & TOUCHE LLP

McLean, VirginiaMay 31, 2007

F-2

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**STANLEY, INC. AND SUBSIDIARIESConsolidated Statements of Income(in thousands, except per share amounts)**

| ** **                            | ** ** | **Year Ended March 31,** | ** ** |
|---------------------------------------|------------|-----------------------------------------|------------|
| ** **                            | ** ** | **2005**                                | ** ** | **2006** | ** ** | **2007** | ** ** |
| Revenues                              |       | $                                       | 282,456    |   | $ | 284,801 |   | $ | 409,411 |   |
| Operating costs  and expenses:        |       |                                    |       |   |   |   |   |
| Cost of revenues                      |       | 243,677                                 |       | 241,357 |   | 343,628 |   |
| Selling, general and administrative   |       | 16,844                                  |       | 19,709 |   | 30,700 |   |
| Amortization of deferred compensation |       | 372                                     |       | 790 |   | 5,082 |   |
| Depreciation and amortization         |       | 2,327                                   |       | 3,057 |   | 5,424 |   |
| Impairment of intangible assets       |       | —                                  |       | 3,590 |   | — |   |
| Total operating costs and expenses    |       | 263,220                                 |       | 268,503 |   | 384,834 |   |
| Operating income                      |       | 19,236                                  |       | 16,298 |   | 24,577 |   |
| Other income  (expense):              |       |                                    |       |   |   |   |   |
| Other income (expense)                |       | 2                                       |       | 101 |   | (478 | ) |
| Interest expense—net             |       | (822                                    | )          | (2,441 | ) | (5,918 | ) |
| Total other expenses                  |       | (820                                    | )          | (2,340 | ) | (6,396 | ) |
| Income before taxes                   |       | 18,416                                  |       | 13,958 |   | 18,181 |   |
| Provision for income taxes            |       | (7,184                                  | )          | (5,708 | ) | (7,476 | ) |
| Net income                            |       | $                                       | 11,232     |   | $ | 8,250 |   | $ | 10,705 |   |
| Earnings per  share:                  |       |                                    |       |   |   |   |   |
| Basic                                 |       | $                                       | 0.78       |   | $ | 0.58 |   | $ | 0.61 |   |
| Diluted                               |       | $                                       | 0.70       |   | $ | 0.51 |   | $ | 0.55 |   |
| Weighted average  shares:             |       |                                    |       |   |   |   |   |
| Basic                                 |       | 14,446                                  |       | 14,202 |   | 17,567 |   |
| Diluted                               |       | 16,117                                  |       | 16,096 |   | 19,458 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-3

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**STANLEY, INC. AND SUBSIDIARIESConsolidated Balance Sheets(in thousands)**

| ** **                                                                                     | ** ** | **March 31, 2006** | ** ** | **March 31, 2007** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Assets**                                                                                     | ** ** |                         | ** ** | ** **                   |       |   | ** ** | ** ** |   |
| Current assets:                                                                                |       |                         |       |                         |       |   |   |   |   |
| Cash                                                                                           |       |                         | $          | —                       |       |   |   | $ | 12,736 |   |   |
| Accounts receivable—net                                                                   |       |                         | 81,732     |                         |       |   | 110,029 |   |   |
| Prepaid and other current assets                                                               |       |                         | 2,196      |                         |       |   | 1,631 |   |   |
| Total current assets                                                                           |       |                         | 83,928     |                         |       |   | 124,396 |   |   |
| Property and equipment—net                                                                |       |                         | 10,083     |                         |       |   | 11,736 |   |   |
| Goodwill                                                                                       |       |                         | 87,832     |                         |       |   | 88,249 |   |   |
| Intangible assets—net                                                                     |       |                         | 12,616     |                         |       |   | 9,417 |   |   |
| Deferred taxes                                                                                 |       |                         | —     |                         |       |   | 2,010 |   |   |
| Other assets                                                                                   |       |                         | 5,444      |                         |       |   | 2,167 |   |   |
| Total assets                                                                                   |       |                         | $          | 199,903                      |       |   |   | $ | 237,975 |   |   |
| **Liabilities  and Stockholders’ Equity**                                                 |       |                         |       |                         |       |   |   |   |   |
| Current  liabilities                                                                           |       |                         |       |                         |       |   |   |   |   |
| Line of credit                                                                                 |       |                         | $          | 10,409                       |       |   |   | $ | — |   |   |
| Accounts payable                                                                               |       |                         | 17,193     |                         |       |   | 24,476 |   |   |
| Accrued expenses and other liabilities                                                         |       |                         | 24,091     |                         |       |   | 34,438 |   |   |
| Current portion of long-term debt                                                              |       |                         | 1,000      |                         |       |   | 1,000 |   |   |
| Deferred income taxes                                                                          |       |                         | 1,225      |                         |       |   | 2,646 |   |   |
| Income taxes payable                                                                           |       |                         | 711        |                         |       |   | 917 |   |   |
| Total current  liabilities                                                                     |       |                         | 54,629     |                         |       |   | 63,477 |   |   |
| Long-term debt—net of current portion                                                     |       |                         | 99,000     |                         |       |   | 36,750 |   |   |
| Other long-term liabilities                                                                    |       |                         | 3,514      |                         |       |   | 3,596 |   |   |
| Deferred taxes                                                                                 |       |                         | 371        |                         |       |   | — |   |   |
| Total liabilities                                                                              |       |                         | 157,514    |                         |       |   | 103,823 |   |   |
| Commitments and  contingencies:                                                                |       |                         |       |                         |       |   |   |   |   |
| Stockholders’ equity                                                                      |       |                         |       |                         |       |   |   |   |   |
| Common stock, $0.01 par value—200,000 authorized;  14,967 and 21,888 issued, respectively |       |                         | 150        |                         |       |   | 219 |   |   |
| Additional paid-in capital                                                                     |       |                         | 3,858      |                         |       |   | 76,785 |   |   |
| Retained earnings                                                                              |       |                         | 47,640     |                         |       |   | 58,345 |   |   |
| Accumulated other comprehensive income                                                         |       |                         | —     |                         |       |   | (161 | ) |   |
| Less: Treasury stock: 735 and 0 at cost,  respectively                                         |       |                         | (4,791     | )                            |       |   | — |   |   |
| Deferred compensation                                                                          |       |                         | (4,392     | )                            |       |   | (1,036 | ) |   |
| Shareholder notes receivable                                                                   |       |                         | (76        | )                            |       |   | — |   |   |
| Total stockholders’ equity                                                                |       |                         | 42,389     |                         |       |   | 134,152 |   |   |
| Total liabilities  and stockholders’ equity                                               |       |                         | $          | 199,903                      |       |   |   | $ | 237,975 |   |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-4

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**STANLEY, INC.AND SUBSIDIARIESConsolidated Statements of Changes in Stockholders’ Equity(in thousands)**

| ** **                                                      | ** ** | **Issued  Shares** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Treasury  Shares** | ** ** | **Treasury  Stock** | ** ** | **Deferred  Compensation** | ** ** | **Shareholders’  Notes  Receivable** | ** ** | **Accumulated  Other  Comprehensive  Income, Net  of Tax** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|----------------------|------------|---------------------|------------|----------------------------|------------|-------------------------------------------|------------|----------------------------------------------------------------------|------------|-----------|------------|
| BALANCE—April 1,  2004                                |       |               | 14,967     |              |       |                             | $          | 150                    |       |                 |       | 2,272               |       |                       |       | 28,158                                    |       |                                                                 |       | 432       |       |   |   | (747 | ) |   |   | (3,727 | ) |   |   | (1,012 | ) |   |   | — |   |   | 25,094 |   |
| Purchase of common stock  for Treasury                          |       |               | —     |              |       |                             | —     |                   |       |                 | —     |                |       |                       | —     |                                      |       |                                                                 | 910        |      |       |   | (4,505 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   | (4,505 | ) |
| Contribution of Treasury  stock to ESOP                         |       |               | —     |              |       |                             | —     |                   |       |                 | 835        |                |       |                       | —     |                                      |       |                                                                 | (225       | )         |       |   | 389 |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 1,224 |   |
| Exercise of stock options  from Treasury                        |       |               | —     |              |       |                             | —     |                   |       |                 | 4          |                |       |                       | —     |                                      |       |                                                                 | (126       | )         |       |   | 219 |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 223 |   |
| Issuance of shares from  Treasury                               |       |               | —     |              |       |                             | —     |                   |       |                 | 118        |                |       |                       | —     |                                      |       |                                                                 | (48        | )         |       |   | 82 |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 200 |   |
| Amortization of deferred  compensation, net of cancelled shares |       |               | —     |              |       |                             | —     |                   |       |                 | —     |                |       |                       | —     |                                      |       |                                                                 | 3          |      |       |   | (5 | ) |   |   | 377 |   |   |   | — |   |   |   | — |   |   | 372 |   |
| Forgiveness of  shareholder loans                               |       |               | —     |              |       |                             | —     |                   |       |                 | —     |                |       |                       | —     |                                      |       |                                                                 | —     |      |       |   | — |   |   |   | — |   |   |   | 727 |   |   |   | — |   |   | 727 |   |
| Net income                                                      |       |               | —     |              |       |                             | —     |                   |       |                 | —     |                |       |                       | 11,232     |                                      |       |                                                                 | —     |      |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 11,232 |   |
| BALANCE, March 31,  2005                                   |       |               | 14,967     |              |       |                             | $          | 150                    |       |                 |       | 3,229               |       |                       |       | 39,390                                    |       |                                                                 |       | 946       |       |   |   | (4,567 | ) |   |   | (3,350 | ) |   |   | (285 | ) |   |   | — |   |   | 34,567 |   |
| Purchase of common stock  for Treasury                          |       |               | —     |              |       |                             | —     |                   |       |                 | —     |                |       |                       | —     |                                      |       |                                                                 | 665        |      |       |   | (4,459 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   | (4,459 | ) |
| Contribution of Treasury  stock to ESOP                         |       |               | —     |              |       |                             | —     |                   |       |                 | 1,015      |                |       |                       | —     |                                      |       |                                                                 | (300       | )         |       |   | 1,485 |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 2,500 |   |
| Exercise of stock options  from Treasury                        |       |               | —     |              |       |                             | —     |                   |       |                 | (418       | )                   |       |                       | —     |                                      |       |                                                                 | (109       | )         |       |   | 531 |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 113 |   |
| Issuance of shares from  Treasury                               |       |               | —     |              |       |                             | —     |                   |       |                 | 23         |                |       |                       | —     |                                      |       |                                                                 | (41        | )         |       |   | 202 |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 225 |   |
| Restricted stock grants                                         |       |               | —     |              |       |                             | —     |                   |       |                 | (185       | )                   |       |                       | —     |                                      |       |                                                                 | (441       | )         |       |   | 2,080 |   |   |   | (1,895 | ) |   |   | — |   |   |   | — |   |   | — |   |
| Amortization of deferred  compensation, net of canceled shares  |       |               | —     |              |       |                             | —     |                   |       |                 | —     |                |       |                       | —     |                                      |       |                                                                 | 15         |      |       |   | (63 | ) |   |   | 853 |   |   |   | — |   |   |   | — |   |   | 790 |   |
| Income tax benefit from  employee stock transactions            |       |               | —     |              |       |                             | —     |                   |       |                 | 194        |                |       |                       | —     |                                      |       |                                                                 | —     |      |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 194 |   |
| Repayment of shareholder  loans                                 |       |               | —     |              |       |                             | —     |                   |       |                 | —     |                |       |                       | —     |                                      |       |                                                                 | —     |      |       |   | — |   |   |   | — |   |   |   | 209 |   |   |   | — |   |   | 209 |   |
| Net income                                                      |       |               | —     |              |       |                             | —     |                   |       |                 | —     |                |       |                       | 8,250      |                                      |       |                                                                 | —     |      |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 8,250 |   |

| BALANCE—March 31,  2006                              |   |   | 14,967 |   |   |   | $      | 150    |   |   |   | $      | 3,858  |   |   |   | $      | 47,640 |   |   |   | 735    |   |   |   | $      | (4,791 | )      |   |   | $      | (4,392 | )      |   |   | $      | (76    | )      |   |   | — |   |   | $      | 42,389 |    |
|----------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---------|
| Purchase of common stock  for Treasury                         |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 33     |   |   |   | (259   | )      |   |   | — |   |   |   | — |   |   |   | — |   |   | (259   | )      |
| Contribution of common  stock to ESOP                          |   |   | 10     |   |   |   | — |   |   |   | 155    |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 155    |   |
| Exercise of stock options                                      |   |   | 676    |   |   |   | 7      |   |   |   | (2,596 | )      |   |   | — |   |   |   | (690   | )      |   |   | 4,606  |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 2,017  |   |
| Issuance of shares from  Treasury                              |   |   | — |   |   |   | — |   |   |   | 32     |   |   |   | — |   |   |   | (30    | )      |   |   | 165    |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 197    |   |
| Restricted stock grants                                        |   |   | — |   |   |   | — |   |   |   | 6      |   |   |   | — |   |   |   | (48    | )      |   |   | 279    |   |   |   | (285   | )      |   |   | — |   |   |   | — |   |   | — |   |
| Amortization of deferred  compensation, net of canceled shares |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 5,082  |   |   |   | — |   |   |   | — |   |   | 5,082  |   |
| Income tax benefit from  employee stock transactions           |   |   | — |   |   |   | — |   |   |   | 1,624  |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 1,624  |   |
| Shares sold in initial  public offering                        |   |   | 6,235  |   |   |   | 62     |   |   |   | 71,724 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 71,786 |   |
| Deferred compensation                                          |   |   | — |   |   |   | — |   |   |   | 1,441  |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (1,441 | )      |   |   | — |   |   |   | — |   |   | — |   |
| Stock compensation expense                                     |   |   | — |   |   |   | — |   |   |   | 541    |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 541    |   |
| Repayment of shareholder  loans, net of reclassification       |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 76     |   |   |   | — |   |   | 76     |   |
| Other comprehensive  income, net of tax                        |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (161   | )      |   | (161   | )      |
| Net income                                                     |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 10,705 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   | 10,705 |   |
| BALANCE—March 31, 2007                               |   |   | 21,888 |   |   |   | $      | 219    |   |   |   | $      | 76,785 |   |   |   | $      | 58,345 |   |   |   | — |   |   |   | $      | — |   |   |   | $      | (1,036 | )      |   |   | $      | — |   |   |   | $      | (161   | )      |   | $      | 134,152 |   |
|                                                                |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |        |         |  |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

F-5

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**STANLEY, INC.AND SUBSIDIARIESConsolidated Statements of Cash Flows(in thousands)**

| ** **                                                                                  | ** ** | **Year Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                  | ** ** | **2005**                                | ** ** | **2006** | ** ** | **2007** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                   | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                                  |       | $                                       | 11,232     |   | $ | 8,250 |   | $ | 10,705 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:          |       |                                    |       |   |   |   |   |
| Depreciation and  amortization                                                              |       | 2,327                                   |       | 3,057 |   | 5,424 |   |
| Amortization of  deferred compensation                                                      |       | 372                                     |       | 790 |   | 5,082 |   |
| Impairment of  intangible assets                                                            |       | —                                  |       | 3,590 |   | — |   |
| Loss on disposal  of property and equipment                                                 |       | 185                                     |       | 124 |   | 335 |   |
| Deferred taxes                                                                              |       | (1,073                                  | )          | (2,855 | ) | (853 | ) |
| Stock contributed  to employee stock ownership plan                                         |       | 1,224                                   |       | 2,500 |   | 155 |   |
| Income tax benefit  from stock-based compensation                                           |       | —                                  |       | — |   | 1,624 |   |
| Stock compensation  expense                                                                 |       | —                                  |       | — |   | 541 |   |
| Other                                                                                       |       | (70                                     | )          | 35 |   | — |   |
| Changes  in assets and liabilities—net of acquisition effects:                         |       |                                    |       |   |   |   |   |
| Increase in  accounts receivable                                                            |       | (10,343                                 | )          | (8,284 | ) | (28,297 | ) |
| Decrease in  prepaid income taxes                                                           |       | —                                  |       | — |   | 2,650 |   |
| Decrease  (increase) in prepaid expenses and other current assets                           |       | 270                                     |       | (349 | ) | 612 |   |
| Decrease in  inventory                                                                      |       | 3,082                                   |       | — |   | — |   |
| (Increase)  decrease in other assets                                                        |       | (394                                    | )          | (2,112 | ) | 628 |   |
| (Decrease)  increase in accounts payable                                                    |       | (6,097                                  | )          | (3,411 | ) | 7,283 |   |
| Increase in  accrued expenses                                                               |       | 2,184                                   |       | 8,040 |   | 9,148 |   |
| Increase in otherliabilities                                                                |       | 81                                      |       | 866 |   | 794 |   |
| Increase  (decrease) in income taxes payable                                                |       | 526                                     |       | (17 | ) | 206 |   |
| Net cash provided by  operating activities                                                  |       | 3,506                                   |       | 10,224 |   | 16,037 |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                   | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchase of CCI—net  of cash acquired                                                  |       | —                                  |       | (557 | ) | — |   |
| Purchase of Morgan—net  of cash acquired                                               |       | —                                  |       | (80,559 | ) | (417 | ) |
| Acquisition of  property and equipment                                                      |       | (997                                    | )          | (5,472 | ) | (3,865 | ) |
| Net cash used in  investing activities                                                      |       | (997                                    | )          | (86,588 | ) | (4,282 | ) |
| **CASH FLOW FROM FINANCING ACTIVITIES:**                                                    | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net borrowings  (repayments) under line-of-credit agreements                                |       | 1,936                                   |       | (10,805 | ) | (10,409 | ) |
| Borrowings on  long-term debt                                                               |       | —                                  |       | 100,000 |   | — |   |
| Repayments on  long-term debt                                                               |       | (1,000                                  | )          | (8,833 | ) | (62,250 | ) |
| Payments under  capital lease obligations                                                   |       | (90                                     | )          | (86 | ) | (129 | ) |
| Purchase of  treasury stock                                                                 |       | (4,505                                  | )          | (4,459 | ) | (259 | ) |
| Proceeds from  exercise of stock options                                                    |       | 223                                     |       | 113 |   | 2,017 |   |
| Cash repayments  from shareholders                                                          |       | 727                                     |       | 209 |   | 28 |   |
| Net proceeds from  sale of stock in initial public offering                                 |       | —                                  |       | — |   | 71,786 |   |
| Proceeds from sale  of treasury stock                                                       |       | 200                                     |       | 225 |   | 197 |   |
| Net cash (used in)  provided by financing activities                                        |       | (2,509                                  | )          | 76,364 |   | 981 |   |
| **NET  INCREASE IN CASH**                                                                   |       | —                                  |       | — |   | 12,736 |   |
| **CASH—Beginning of year**                                                             |       | —                                  |       | — |   | — |   |
| **CASH—End of year**                                                                   |       | $                                       | —     |   | $ | — |   | $ | 12,736 |   |
| **SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION:**                                     | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash paid during the year for:                                                              |       |                                    |       |   |   |   |   |
| Income taxes                                                                                |       | $                                       | 7,719      |   | $ | 7,265 |   | $ | 6,529 |   |
| Interest                                                                                    |       | $                                       | 857        |   | $ | 1,994 |   | $ | 6,268 |   |
| **SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS:**                                          | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| During 2006 the Company  acquired certain businesses in transactions summarized as follows: |       |                                    |       |   |   |   |   |
| Fair value of  tangible assets acquired                                                     |       | $                                       | —     |   | $ | 16,237 |   | $ | — |   |
| Acquired amortized  intangible assets                                                       |       | —                                  |       | 8,350 |   | — |   |
| Acquired  unamortized intangible assets                                                     |       | —                                  |       | 69,831 |   | — |   |
| Cash paid, net of  cash acquired                                                            |       | —                                  |       | (80,559 | ) | — |   |
| Liabilities  assumed                                                                        |       | $                                       | —     |   | $ | 13,859 |   | $ | — |   |
| **SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING  ACTIVITIES:**                              | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Assets obtained under a capital lease agreement                                             |       | $                                       | 225        |   | $ | 51 |   | $ | 347 |   |

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

F-6

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**STANLEY, INC.AND SUBSIDIARIESNotes to Consolidated Financial Statements(in thousands, except share and per share data, or as otherwise noted)**

**1.**                 SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

***Description ofBusiness******—Stanley,*** Inc.,together with its subsidiaries (“Stanley” or the “Company’), is a provider ofinformation technology services and solutions to U.S. defense and federalcivilian government agencies. Stanley offers its customers solutions to supportany stage of program, product development or business lifecycle through fiveservice areas: systems engineering, enterprise integration, operationallogistics, business process outsourcing and advanced engineering andtechnology. The Company has derived substantially all of its revenue from U.S.federal government agencies.

***Basis ofPresentation******—The***accompanyingconsolidated financial statements have been prepared in accordance withgenerally accepted accounting principles in the United States and pursuant tothe rules and regulations of the Securities and Exchange Commission. Inthe opinion of management, these statements reflect all adjustments necessaryto fairly present the Company’s financial position as of March 31, 2006and 2007, its results of operations for the fiscal years ended March 31,2005, 2006 and 2007 and its cash flows for the fiscal years ended March 31,2005, 2006 and 2007.

***Principles ofConsolidation******—The***accompanyingconsolidated financial statements include the accounts of Stanley’swholly-owned subsidiaries. All significant intercompany balances andtransactions have been eliminated in consolidation.

***Fair Value ofFinancial Instruments******—The***fairvalue of accounts receivable, accounts payable, accrued expenses, note payable,and swap contract approximates their respective carrying amounts.

***Revenue Recognition******—The***Companyrecognizes revenue under its contracts when a contract has been executed, thecontract price is fixed and determinable, delivery of services or products hasoccurred, and collectibility is considered probable and can be reasonablyestimated. Revenue is earned under cost-plus-fee, fixed-price andtime-and-materials contracts. The Company uses a standard management process todetermine whether all required criteria for revenue recognition have been met,which includes regular reviews of the Company’s contract performance. Thisreview covers, among other matters, progress against a schedule, outstandingaction items, effort and staffing, quality, risks and issues, subcontractmanagement, costs incurred, commitments, and customer satisfaction. During thisreview, the Company determines whether the overall progress on a contract isconsistent with the effort expended.

Under cost-plus-fee contracts, revenues arerecognized as costs are incurred and include an estimate of applicable feesearned. The Company considers fixed fees under cost-plus-fee contracts tobe earned in proportion to the allowable costs actually incurred in performanceof the contract for level of effort contracts. For completion type cost-plus-feecontracts, fixed fees are earned in proportion to the percentage of workcompleted. For time-and-materials contracts, revenues are computed bymultiplying the number of direct labor-hours expended in performance ofthe contract by the contractual billing rates and adding other billable directand indirect costs. For fixed-price contracts, revenues are recognized asservices are performed, using the percentage-of-completion method, applying thecost-to-cost or units of delivery method, in accordance with Accounting ResearchBulletin No. 45 and American Institute of Certified Public Accountants(AICPA) Statement of Position 81-1 “Accounting for Performance ofConstruction-Type and Certain Production-Type Contracts” (SOP 81-1).

Contract revenue recognition inherently involves theuse of estimates. Examples of estimates include the contemplated level ofeffort to accomplish the tasks under contract, the cost of the effort, and anongoing assessment of the Company’s progress toward completing the contract.From time to time, as part of the Company’s standard management process, factsdevelop that require the Company to revise its estimated total costs andrevenues. To the extent that a revised estimate affects contract profit orrevenue previously recognized, the Company records the cumulative effect of therevision in the period in which the 

F-7

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facts requiring therevision become known. The full amount of an anticipated loss on any type ofcontract is recognized in the period in which it becomes probable and can bereasonably estimated.

For cost-plus-award fee type contracts,the Company recognizes the expected fee to be awarded by the customer at thetime such fee can be reasonably estimated, based on factors such as prior awardexperience and communications with the customer regarding performance,including any interim performance evaluations rendered by the customer. Forcost-plus-incentive fee type contracts, the method of calculatingincentive fee is specified in the contract and it is typically based onmeasuring actual costs to perform the contract against a target cost to performthe contract. The Company prepares periodic estimates to complete and adjuststhe incentive fee as required based on the contract incentive fee formula.

The Company’s contracts with agencies of the governmentare subject to periodic funding by the respective contracting agency. Fundingfor a contract may be provided in full at inception of the contract or ratablythroughout the contract as the services are provided. From time to time, theCompany may proceed with work based on customer direction prior to thecompletion and signing of formal contract documents. The Company has a formalreview process for approving any such work. Revenue associated with such workis recognized only when it can be reliably estimated and realization isprobable. The Company bases its estimates on previous experiences with thecustomer, communications with the customer regarding funding status, and itsknowledge of available funding for the contract or program. Pre-contract costsrelated to unsuccessful contract bids are expensed in the period in which theCompany is notified that the contract will not be issued.

Disputes occasionally arise in the normal course ofthe Company’s business due to events such as delays, changes in contractspecifications, and questions of cost allowability or collectibility. Suchmatters, whether claims or unapproved change orders in the process ofnegotiation, are recorded at the lesser of their estimated net realizable valueor actual costs incurred, and only when realization is probable and can bereliably estimated. Claims against the Company are recognized where a loss isconsidered probable and can be reasonably estimated in amount.

The allowability of certain costs under governmentcontracts is subject to audit by the government. Certain indirect costs arecharged to contracts using provisional or estimated indirect rates, which aresubject to later revision based on government audits of those costs. TheCompany is of the opinion that costs subsequently disallowed, if any, would notbe significant.

***Concentration ofRisk******—Contracts***fundedby federal government agencies account for substantially all of our revenues. Forthe fiscal years ended March 31,   2005, 2006 and 2007, we derived approximately70%, 61% and 65% of our revenues, respectively, from the Department of Defense,including agencies within the intelligence community, and approximately 30%,39% and 35% of our revenues, respectively, from federal civilian governmentagencies. The Company’s contract with the Department of State for the provisionof passport processing and support services, which is our largest revenue-generatingcontract, accounted for approximately 15%, 19% and 15% of our revenues for thefiscal years ended March 31, 2005, 2006 and 2007, respectively.

***Property andEquipment******—Property***andequipment are carried at cost, less accumulated depreciation. Depreciation ofproperty and equipment is calculated using the straight-line method over theuseful lives, ranging from three to ten years. Leasehold improvements areamortized over the lesser of the useful life or the term of the lease. Repairsand maintenance are expensed as incurred. Depreciation expense related toproperty and equipment was $1.0 million, $1.6 million and $2.2 million forthe fiscal years ended March 31,2005, 2006 and 2007, respectively.

***Goodwill andIntangible Assets******—Goodwill***representsthe excess of cost over the fair value of net tangible and identifiableintangible assets of acquired companies. During the fiscal year ended March 31,2007, the Company continued its evaluation of the purchase price allocationrelated to the acquisition of Morgan Research Corporation, or Morgan, in February 2006.In connection with this evaluation, the 

F-8

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Company determined thatcertain contracts required adjustment in order to reflect the fair value of thecontracts acquired. In addition, a working capital adjustment was requiredassociated with the closing escrow. Accordingly, an adjustment was recordedduring the fiscal year ended March 31, 2007 which resulted in an increaseto goodwill of $0.4 million.

In accordance with SFAS No. 142, *Goodwill and Other Intangible Assets,* theCompany does not amortize goodwill; rather it tests goodwill for impairment atleast on an annual basis. Testing for impairment is a two-step process asprescribed by SFAS No. 142. The first step is a test for potentialimpairment, while the second step measures the amount of impairment, if any.Under the guidelines of SFAS No. 142, the Company is required to performan impairment test at least on an annual basis at any time during the fiscalyear provided the test is performed at the same time every year. An impairmentloss would be recognized when the assets’ fair value is below their carryingvalue. Stanley has elected December 31 as its testing date. Based on thetesting performed as of December 31, 2006, the Company determined that noimpairments existed as of December 31, 2006. Based on the testingperformed as of December 31, 2005, the Company believed that noimpairments existed as of December 31, 2005; however, in the quarter endedMarch 31, 2006, the Company recorded an aggregate charge of $3.6 millionrelating to the impairment of the CCI and FSC trade names. The impairment aroseas a result of the Company having completed substantially all of the activitiesin connection with novating the contracts previously legally held by CCI andFSC. As such, the Company no longer ascribed any value to the CCI and FSC tradenames and that portion of the identified intangibles was written off. Customerrelationships and other intangibles are amortized on a straight-line basis overperiods ranging from one to seven years.

***Impairment ofLong-Lived Assets******—Whenever***eventsor changes in circumstances indicate that the carrying amount of long-livedassets may not be fully recoverable, Stanley evaluates the probability thatfuture undiscounted net cash flows, without interest charges, will be less thanthe carrying amount of the assets. If any impairment were indicated as a resultof this review, Stanley would recognize a loss based on the amount by which thecarrying amount exceeds the estimated fair value. Stanley believes that noimpairments exist as of March 31, 2007.

***Income Taxes******—The***provisionfor income taxes includes federal and state income taxes currently payable plusthe net change during the year in the deferred tax liability or asset. Thecurrent or deferred tax consequences of all events that have been recognized inthe financial statements are measured based on provisions of enacted tax law todetermine the amount of taxes payable or refundable in future periods.

***UnbilledReceivables******—Unbilled***receivablesinclude certain costs and a portion of the fee or expected profit, which isbillable upon completion or closeout of the contract. Amounts not billablewithin one year are not significant.

***Stock-BasedCompensation******—As***permittedunder SFAS No. 123, *Accounting forStock-Based Compensation* (“SFAS No. 123”), Stanleyaccounted for its stock-based compensation plans using the intrinsicvalue method under the recognition and measurement principles of APB Opinion No. 25,*Accounting for Stock Issued to Employees*(“APB No. 25”), and related Interpretations. Stanley adopted SFAS No. 123(R),*Share-based Payment*(“SFAS No. 123(R)”),on a prospective basis during the fiscal year beginning April 1, 2006. Nostock-based employee compensation cost, related to stock options, is reflectedin net income for the fiscal years ended March 31, 2005 and 2006. Theeffect of SFAS No. 123(R) is further described in Note 11.

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***Earnings per share******—Basic***earningsper share has been computed by dividing net income available to commonstockholders by the weighted average number of shares of common stockoutstanding during each period. Shares issued during the period and sharesreacquired during the period are weighted for the portion of the period thatthey were outstanding. Diluted earnings per share considers the potentialdilution that could occur if securities or other contracts to issue common stockwere exercised or converted into common stock. The weighted average number ofcommon shares outstanding is computed as follows:

| ** **                                                    | ** ** | **Fiscal Year Ended** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                    | ** ** | **March 31,**              | ** ** |
| ** **                                                    | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2007** | ** ** |
| Basic weighted  average common shares outstanding             |       | 14,446                          |       | 14,202 |   | 17,567 |   |
| Effect of stock  options and unvested restricted stock grants |       | 1,671                           |       | 1,894 |   | 1,891 |   |
| Diluted weighted average  common shares outstanding           |       | 16,117                          |       | 16,096 |   | 19,458 |   |

 

***Derivative Instruments and Hedging Activities***—Inaccordance with SFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities* (“SFAS No. 133”), as amendedby SFAS No. 138, *Accounting for CertainDerivative Instruments and Certain Hedging Activities, an Amendment ofSFAS 133* and SFAS No. 149, *Amendment ofStatement 133 on Derivative Instruments and Hedging Activities*, thefair value of the hedge arrangement is recorded as an asset or a liability inthe accompanying consolidated balance sheets at March 31, 2007. For qualifying cash flow hedges, SFAS No. 133,as amended, holds that the effective portion of derivative gains and losses berecorded as a component of other comprehensive income and be reclassified intoearnings in the same period in which the hedged transaction affects suchearnings. Any ineffectiveness is reported currently in earnings.

On March 15,2004, Stanley entered into a swap agreement to reduce exposure to interest ratefluctuations on our floating rate debt commitments. Under this interest rateswap agreement, the interest rate is fixed with respect to specified amounts ofnotional principal. Stanley’s exposure under this agreement was limited to theimpact of variable interest rate fluctuations and the periodic settlement ofamounts due. On March 27, 2006, Stanley entered into three additional swapcommitments. Under these swap agreements, which became effective April 1,2006, the interest rate was fixed with respect to specified amounts of notionalprincipal. Stanley’s exposure under these agreements was limited to the impactof variable interest rate fluctuations and the periodic settlement of amountsdue. The interest rate swap agreement entered into on March 15, 2004 had amaturity date of December 13, 2013, a fixed rate of 3.49% and a notionalamount of $7.3 million prior to its termination effective October 25,2006. The interest rate swap agreements entered into on March 27, 2006with maturity dates of April 1, 2007, April 1, 2008 and April 2,2012, fixed interest rates of 5.27%, 5.29% and 4.92%, and notional amounts of$10.0 million, $10 million, and $30.0 million, respectively, were terminatedeffective October 25, 2006 resulting in a combined net realized gain of$0.1 million.

Asrequired by its senior credit facility, Stanley entered into an interest rateswap agreement on October 27, 2006 with a maturity date of January 31,2012, an annual fixed rate of 5.28% and a notional amount of $19.0 million. TheCompany designated this swap agreement, at its inception, as a qualifying cashflow hedge. The fair value of the swap at March 31, 2007 of $0.3 millionhas been reported in “Accrued expenses and other liabilities” with an offset,net of tax, included in “Accumulated other comprehensive income” in theConsolidated Balance Sheet. None of the $0.3 million unrealized loss wasrecognized in earnings during the year ended March 31, 2007 based on hedgeineffectiveness and none of the swap’s unrealized loss was excluded from theassessment of hedge effectiveness. Amounts in accumulated other comprehensiveincome will be reclassified into earnings in the period in which variableinterest payments (the hedged transaction) are made under the senior creditfacility. There are currently no losses as of March 31, 2007 expected tobe reclassified into earnings within the next 12 months.

***Segment Reporting******—Operating***segmentsare defined as components of an enterprise for which separate financialinformation is available and evaluated regularly by the chief operatingdecision maker, 

F-10

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ordecision making group, in deciding how to allocate resources and assessperformance. The Company currently has one reportable segment for financialreporting purposes, which represents the Company’s core business of providinginformation technology solutions and services for federal government customers.The Company does not report revenue by product or service or groups of productsor services because it is impracticable to do so. Additionally, substantiallyall of Stanley’s revenues and long-lived assets for the fiscal years ended March 31,2005, 2006 and 2007 are related to operations in the United States.

***Use of Estimates******—The***preparationof financial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates. Significant items subject to such estimatesand assumptions include revenue recognition, carrying amount and useful livesof long-lived assets, valuation allowances for accounts receivable and deferredtax assets and loss contingencies, such as litigation, claims and assessments.

***Recently Issued Accounting Standards******—In***June 2006,the FASB issued Financial Interpretation No. 48 (FIN 48), *Accounting for Uncertainty in Income Taxes—an interpretation of FASBStatement No. 109*. FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statements.The interpretation prescribes a recognition threshold and measurement attributefor the financial statement recognition and measurement of a tax position takenor expected to be taken in a tax return. The Company is required to adopt FIN48 beginning fiscal year 2008 and the impact that the adoption of FIN 48 willhave on our financial statements and notes thereto is currently being evaluated.

In September 2006,the FASB issued Statement of Financial Accounting Standards No. 157 (SFAS157), *Fair Value Measurements*. SFAS 157provides guidance for measuring the fair value of assets and liabilities. Itrequires additional disclosures related to the extent to which companiesmeasure assets and liabilities at fair value, the information used to measurefair value, and the effect of fair value measurements on earnings. SFAS 157 iseffective for fiscal years beginning after November 15, 2007. The Companyis in the process of determining what effect, if any, the adoption of SFAS 157will have on our financial position or results of operations.

In February 2007,the FASB issued Statement of Financial Accounting Standards No. 159 (SFAS159),*The Fair Value Option for Financial Assets andFinancial Liabilities—Including an Amendment of FASB Statement No. 115*.SFAS 159 permits entities to measure many financial instruments andcertain other items at fair value to improve financial reporting by providingentities with the opportunity to mitigate volatility in reported earningscaused by measuring related assets and liabilities differently without havingto apply complex hedge accounting. Most of the provisions in SFAS 159 areelective. This statement will be effective for us in fiscal 2009, and may beapplied prospectively. Early adoption is permitted provided we also elect toapply the provisions of SFAS 157. We are in the process of determining whateffect, if any, the application of the provisions of SFAS 159 will have on ourfinancial position and results of operations.

***Reclassifications******—Certain***reclassificationshave been made to prior year presentations to conform to the currentpresentation. In fiscal year 2007, the Company reviewed the mapping of itsoperating expenses relative to cost of revenues, and Selling, General &Administrative expenses, or SG&A. Cost of revenues are direct and indirectcontract costs, while SG&A expenses are period costs related to sellingactivities and overall support and management of the business as a whole. As aresult of this review, certain expenses previously classified as cost ofrevenues were reclassified to SG&A to more closely align such costs withthe income statement captions that best capture the nature of the expenses. Inthe consolidated statements of income for the fiscal years ended March 31,2005 and 2006, the Company reclassified $6.4 million and $6.9 million,respectively, from cost of revenues to SG&A. This reclassification had noeffect on previously reported net operating expenses, net income or earningsper share.

F-11

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***Stock Split and Amendment of Articles of Incorporation******—On***August 28,2006, the Company increased the number of authorized shares of common stock to200,000,000 shares and on September 12, 2006, the Company completed athirty-for-one stock split of its outstanding common stock. The accompanyingfinancial statements include the effects of the stock split and the resultingincrease in the number of authorized shares of common stock. All share and pershare amounts included in the accompanying financial statements for periodsprior to the stock split have been restated to reflect the stock split.

**2.**                 ACCOUNTSRECEIVABLE

Accountsreceivable consists of the following:

| ** **                       | ** ** | **As of March 31,** | ** ** |
|----------------------------------|------------|------------------------------------|------------|
| ** **                       | ** ** | **2006**                           | ** ** | **2007** | ** ** |
| Billed  receivables              |       | $                                  | 58,593     |   | $ | 73,676 |   |
| Unbilled  receivables            |       | 24,058                             |       | 36,962 |   |
| Allowance for  doubtful accounts |       | (919                               | )          | (609 | ) |
| Total                            |       | $                                  | 81,732     |   | $ | 110,029 |   |

 

Unbilled accountsreceivable at March 31, 2007 are expected to be billed and collectedwithin one year except for $0.5 million.

**3.**                 PROPERTYAND EQUIPMENT

Propertyand equipment consists of the following:

| ** **                                                                               | ** ** | **As of March 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                               | ** ** | **2006**                           | ** ** | **2007** | ** ** |
| Computers and  peripherals                                                               |       | $                                  | 3,379      |   | $ | 4,008 |   |
| Software                                                                                 |       | 1,184                              |       | 1,882 |   |
| Furniture and  equipment                                                                 |       | 3,671                              |       | 3,630 |   |
| Leasehold  improvements                                                                  |       | 4,814                              |       | 6,417 |   |
|                                                                                     |       | 13,048                             |       | 15,937 |   |
| Less: Accumulated  depreciation and amortization                                         |       | (2,965                             | )          | (4,201 | ) |
| Property and  equipment—net                                                         |       | $                                  | 10,083     |   | $ | 11,736 |   |
| Property and equipment  included above that are under capital lease obligations include: |       |                               |       |   |   |
| Software                                                                                 |       | $                                  | 225        |   | $ | 569 |   |
| Furniture and equipment                                                                  |       | 58                                 |       | 80 |   |
| Less: Accumulated depreciation                                                           |       | (70                                | )          | (158 | ) |
| Total                                                                                    |       | $                                  | 213        |   | $ | 491 |   |

 

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**4.**                 GOODWILLAND INTANGIBLE ASSETS

Thechanges in the carrying amount of goodwill for the fiscal years ended March 31,2006 and 2007 are as follows:

| ** **                                                                   | ** ** | **FY 2006** | ** ** | **FY 2007** | ** ** |
|------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| Balance as of  April 1                                                  |       | $                | 17,974     |             | $          | 87,832 |   |
| Goodwill acquired  during the year in connection with the CCI acquisition    |       | 27               |       | —           |       |
| Goodwill acquired  during the year in connection with the Morgan acquisition |       | 69,831           |       | 417              |       |
| Balance as of  March 31                                                 |       | $                | 87,832     |             | $          | 88,249 |   |

 

Thecomponents of acquired other intangible assets as of March 31, 2006, areas follows:

| ** **                       | ** ** | **As of March 31, 2006** | ** ** |
|----------------------------------|------------|----------------------------------------------|------------|
| ** **                       | ** ** | **Gross Carrying  Amount**              | ** ** | **Accumulated  Amortization** | ** ** | **Total** | ** ** |
| Assets subject to  amortization: |       |                                         |       |   |   |   |   |   |   |   |   |
| Customer relationships           |       |                                         | $          | 6,580 |   |   |   | $ | (2,674 | ) |   | $ | 3,906 |   |
| Noncompete agreements            |       |                                         | 1,910      |   |   |   | (551 | ) |   | 1,359 |   |
| Backlog and contracts            |       |                                         | 7,540      |   |   |   | (189 | ) |   | 7,351 |   |
| Total                            |       |                                         | $          | 16,030 |   |   |   | $ | (3,414 | ) |   | $ | 12,616 |   |

 

Thecomponents of acquired other intangible assets as of March 31, 2007, areas follows:

| ** **                       | ** ** | **As of March 31, 2007** | ** ** |
|----------------------------------|------------|----------------------------------------------|------------|
| ** **                       | ** ** | **Gross Carrying  Amount**              | ** ** | **Accumulated  Amortization** | ** ** | **Total** | ** ** |
| Assets subject to  amortization: |       |                                         |       |   |   |   |   |   |   |   |   |
| Customer relationships           |       |                                         | $          | 6,580 |   |   |   | $ | (3,707 | ) |   | $ | 2,873 |   |
| Noncompete agreements            |       |                                         | 1,910      |   |   |   | (1,210 | ) |   | 700 |   |
| Backlog and contracts            |       |                                         | 7,540      |   |   |   | (1,696 | ) |   | 5,844 |   |
| Total                            |       |                                         | $          | 16,030 |   |   |   | $ | (6,613 | ) |   | $ | 9,417 |   |

 

Aggregate amortization expense of other intangibleassets was $1.3 million, $1.5 million and $3.2 million for the years ended March 31,2005, 2006 and 2007, respectively. Other intangible assets are being amortizedon a straight-line basis over a period of 1 to 7 years.

Estimatedamortization expense is as follows for the periods indicated:

| **Years Ending March 31,** |   |   |   |
|---------------------------------|--------|--------|--------|
| 2008                            |   | $      | 3,076  |   |
| 2009                            |   | 2,552  |   |
| 2010                            |   | 2,277  |   |
| 2011                            |   | 1,512  |   |
| Thereafter                      |   | 0      |   |
| Total                           |   | $      | 9,417  |   |

 

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**5.**                 ACCRUEDEXPENSES AND OTHER CURRENT LIABILITIES

Accruedexpenses and other current liabilities consist of the following:

| ** **              | ** ** | **As of March 31,** | ** ** |
|-------------------------|------------|------------------------------------|------------|
| ** **              | ** ** | **2006**                           | ** ** | **2007** | ** ** |
| Accrued payroll  costs  |       | $                                  | 8,776      |   | $ | 9,778 |   |
| Accrued contract  costs |       | 11,305                             |       | 19,131 |   |
| Accrued indirect  costs |       | 2,731                              |       | 2,807 |   |
| Other payables          |       | 1,279                              |       | 2,722 |   |
| Total accrued expenses  |       | $                                  | 24,091     |   | $ | 34,438 |   |

 

**6.**                 DEBT

| ** **                                                    | ** ** | **As of March 31,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                           | ** ** | **2007** | ** ** |
| Borrowings under the  term loan and revolving line of credit: |       |                               |       |   |   |
| Revolving line of  credit                                     |       | $                                  | 10,409     |   | $ | — |   |
| Term loan                                                     |       | 100,000                            |       | 37,750 |   |
| Total debt                                                    |       | 110,409                            |       | 37,750 |   |
| Less: Current  portion                                        |       | (11,409                            | )          | (1,000 | ) |
| Debt—net of current  portion                             |       | $                                  | 99,000     |   | $ | 36,750 |   |

 

On February 16, 2006,in order to finance the acquisition of Morgan and to refinance itsthen-outstanding indebtedness, Stanley entered into a new senior creditfacility that included a $50.0 million revolving credit facility. As of March 31,2007, Stanley had $36.8 million of term loan indebtedness outstanding under itssenior credit facility with a weighted average interest rate of 7.77% for theyear ended March 31, 2007. As of March 31, 2007, Stanley’s borrowingavailability under its revolving credit facility was $49.9 million (includingoutstanding letters of credit). At March 31, 2007, the Company was incompliance with all covenants under its senior credit facility. The obligationsunder our senior credit facility are unconditionally guaranteed by each of ourexisting and subsequently acquired or organized subsidiaries and secured on afirst-priority basis by security interests (subject to permitted liens) insubstantially all assets owned by us and each of our subsidiaries, includingthe shares of capital stock of our subsidiaries, subject to certain exceptions.

**7.**                 ACQUISTIONS

On February 16, 2006, Stanley acquired MorganResearch Corporation, a privately-held technology company providing engineeringand technology services to the federal government, for $76.0 million in cash atclosing plus an additional $6.2 million in working capital and other purchaseprice adjustments. Stanley financed the acquisition through term loanborrowings under a new senior credit facility.

On December 31, 2003, Stanley completed theacquisition of Fuentez Systems Concepts, Inc., an information technologycompany based in Charleston, South Carolina, for $27.2 million, net ofcash acquired. In accordance with SFAS No. 141, *Business Combinations* (“SFAS No. 141”), the acquisitionwas accounted for under the purchase method of accounting. The purchase pricehas been allocated to the assets acquired and liabilities assumed based uponthe estimated fair values. Of the purchase consideration, $10.1 millionhas been allocated to goodwill, based upon the excess of the purchase price overthe $8.5 million estimated fair value of net tangible assets and the$9.1 million assigned to other identifiable intangible assets. Goodwill of$10.1 million is deductible for tax purposes.

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Then on September 1, 2002, the Company purchasedall the outstanding capital stock of CCI, Incorporated for $5.5 million,net of cash acquired. The acquisition was accounted for under the purchasemethod of accounting, and accordingly, the results of CCI have been included inthe consolidated financial statements beginning September 2, 2002. Thepayment was financed through Stanley’s then existing credit facility. Duringthe years ended March 31, 2004, and March 31, 2005, Stanley paid$1.3 million and accrued $0.5 million, respectively, in additionalconsideration. The amount accrued as of March 31, 2005, was paid on June 16,2005. Of the purchase consideration, $5.3 million has been allocated togoodwill, based upon the excess of the purchase price over the$1.9 million estimated fair value of net tangible assets, $2.2 millionassigned to other identifiable intangible assets, and $1.8 million inadditional payments subsequent to the acquisition date.

Thefollowing table summarizes the estimated fair values of the assets acquired andliabilities assumed, at the date of the acquisition.

| ** **                   | ** ** | **CCI** | ** ** | **FSC** | ** ** | **Morgan** | ** ** |
|------------------------------|------------|---------|------------|---------|------------|------------|------------|
| Current assets               |       | $       | 4,305      |    | $          | 14,724     |       | $ | 15,606 |   |
| Property and  equipment, net |       | 134     |       | 322     |       | 448        |       |
| Other assets                 |       | 86      |       | 51      |       | 183        |       |
| Goodwill                     |       | 3,490   |       | 10,115  |       | 69,831     |       |
| Identified  intangibles      |       | 2,170   |       | 9,100   |       | 8,350      |       |
| Total assets acquired        |       | 10,185  |       | 34,312  |       | 94,418     |       |
| Current  liabilities         |       | 1,953   |       | 6,564   |       | 9,792      |       |
| Other liabilities            |       | 658     |       | —  |       | 4,067      |       |
| Total liabilities assumed    |       | 2,611   |       | 6,564   |       | 13,859     |       |
| Net assets acquired          |       | $       | 7,574      |    | $          | 27,748     |       | $ | 80,559 |   |

 

Included in identifiedintangibles arising from the CCI acquisition is $1.6 million related tocustomer relationships which is being amortized over a period of 6 years.Included in identified intangibles arising from the FSC acquisition are$5.0 million and $1.1 million related to customer contracts and non-competeagreements, respectively, which are being amortized over periods of6.5 years and 5 years, respectively. Included in identifiedintangibles arising from the Morgan acquisition are $7.5 million and $0.8million related to customer contracts and non-compete agreements, respectively,which are being amortized over periods of 5 years and 2 years, respectively.

**8.**                 INCOMETAXES

Theprovision for Federal and State income taxes for fiscal years ended March 31consists of the following:

| ** **             | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current income taxes:  |       |     |       |     |       |     |       |
| Federal                |       | $        | 6,835      |     | $          | 7,001    |       | $ | 7,560 |   |
| State                  |       | 1,422    |       | 1,562    |       | 769      |       |
|                   |       | 8,257    |       | 8,563    |       | 8,329    |       |
| Deferred income taxes: |       |     |       |     |       |     |       |
| Federal                |       | (885     | )          | (2,174   | )          | (1,150   | )          |
| State                  |       | (188     | )          | (681     | )          | 297      |       |
|                   |       | (1,073   | )          | (2,855   | )          | (853     | )          |
|                   |       | $        | 7,184      |     | $          | 5,708    |       | $ | 7,476 |   |

 

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Thetax effects of temporary differences that give rise to significant deferred taxassets and deferred tax liabilities at March 31 are as follows:

| ** **               | ** ** | **2006**   | ** ** | **2007**        | ** ** |
|--------------------------|------------|------------|------------|-----------------|------------|
| ** **               | ** ** | **Assets** | ** ** | **Liabilities** | ** ** | **Assets** | ** ** | **Liabilities** | ** ** |
| Current:                 |       |       |       |            |       |   |   |   |   |   |   |   |   |
| Accrued vacation         |       | $          | 1,434      |            |       | $ | — |   |   | $ | 1,202 |   |   | $ | — |   |   |
| Bad debts                |       | 370        |       |            | —     |   |   | 253 |   |   | — |   |   |
| Unbilled revenue         |       | —     |       |            | (2,450     | ) |   | — |   |   | (4,113 | ) |   |
| Prepaids                 |       | —     |       |            | (615       | ) |   | — |   |   | (230 | ) |   |
| Other                    |       | 36         |       |            | —     |   |   | 242 |   |   | — |   |   |
| Total current            |       | 1,840      |       |            | (3,065     | ) |   | 1,697 |   |   | (4,343 | ) |   |
| Noncurrent:              |       |       |       |            |       |   |   |   |   |   |   |   |   |
| Equity compensation      |       | 472        |       |            | —     |   |   | 2,160 |   |   | — |   |   |
| Depreciation             |       | —     |       |            | (606       | ) |   | — |   |   | (1,636 | ) |   |
| Deferred Rent            |       | 503        |       |            | —     |   |   | 579 |   |   | — |   |   |
| Intangibles              |       | —     |       |            | (2,201     | ) |   | — |   |   | (1,588 | ) |   |
| Morgan contracts         |       | 312        |       |            | —     |   |   | 391 |   |   | — |   |   |
| Leasehold improvements   |       | 1,136      |       |            | —     |   |   | 2,104 |   |   | — |   |   |
| State net operating loss |       | 212        |       |            | —     |   |   | — |   |   | — |   |   |
| Interest rate swap       |       | —     |       |            | (189       | ) |   | — |   |   | — |   |   |
| Other                    |       | —     |       |            | (10        | ) |   | — |   |   | — |   |   |
| Total noncurrent         |       | 2,635      |       |            | (3,006     | ) |   | 5,234 |   |   | (3,224 | ) |   |
| Total                    |       | $          | 4,475      |            |       | $ | (6,071 | ) |   | $ | 6,931 |   |   | $ | (7,567 | ) |   |

 

Areconciliation of the statutory Federal income tax rate with Stanley’seffective income tax rate at March 31 is as follows:

| ** **                                                 | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory Federal  rate                                    |       | 35.00    | %          | 35.00    | %          | 35.00    | %          |
| State income  taxes—net of Federal income tax benefit |       | 4.36     |       | 4.91     |       | 4.07     |       |
| Equity  Compensation                                       |       | —   |       | —   |       | 1.65     |       |
| Other                                                      |       | (0.35    | )          | 0.98     |       | 0.40     |       |
| Effective tax rates                                        |       | 39.01    | %          | 40.89    | %          | 41.12    | %          |

 

**9.**                 EMPLOYEESTOCK OWNERSHIP PLAN

Stanley maintains an Employee Stock Ownership Plan(“ESOP”) designed to provide employee ownership of the Company’s stock. TheESOP is generally available to all U.S. employees and is funded by periodicdiscretionary contributions approved by the Board of Directors.

Contributions to the ESOP for the year endedMarch 31, 2005, were $2.0 million, of which $0.8 million wascontributed in cash and the remainder was contributed in the form of 150,000shares and 75,000 shares of Stanley’s common stock with a fair value, at thedate of the contribution, of $5.37 and $5.59 per share, respectively.

Contributions to the ESOP for the year endedMarch 31, 2006, were $2.5 million, all of which was contributed inthe form of 150,000 shares, 75,000 shares and 75,000 shares of Stanley’s commonstock with a fair value, at the date of the contribution, of $7.83, $8.26 and$9.93 per share, respectively.

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Contributions to the ESOP for the year ended March 31,2007 , were $0.2 million, all ofwhich was contributed in the form of 10,000 shares of Stanley’s common stockwith a fair value, at the date of the contribution, of $15.47 per share.

Prior to its initialpublic offering,  Stanley determined thefair market value of its stock utilizing various methods, including obtaining athird-party valuation specialist. The fair market value per common shareheld by the ESOP was $6.94 and $9.93 as of March 31, 2005 and 2006,respectively. The fair market value per common share held by the ESOP was$15.60 as of March 31, 2007.

**10.**          401(K) PLAN

Stanley maintains a 401(k) plan for substantiallyall its employees. Employees may elect to defer up to the maximum amount permissibleunder the IRS code. After employees have completed a year of service, theCompany matches 100% of the first 3% deferred and 50% of the next 2% deferred.Company matching contributions are immediately vested.

Contributions by theCompany to the 401(k) plan were $2.0 million, $2.3 million and$3.3 million for the years ended March 31, 2005, 2006 and 2007,respectively.

**11.**          STOCKHOLDERS’EQUITY

***Common Stock***

Stanley has one class of common stock, with each shareof common stock having one vote per share. Holders of common stock shareequally in any dividends declared by the board of directors.

Stanley purchased 600 shares from two of itsshareholders, 327,060 shares from fifteen of its shareholders and 33,000 sharesfrom one of its shareholders during the years ended March 31, 2005, 2006and 2007, respectively. The shares were recorded at cost.

Stanley exchanged 909,450and 338,250 shares from the ESOP for cash during the years ended March 31,2005 and 2006, respectively.

***Initial Public Offering***

On October 23, 2006,Stanley completed its initial public offering of 5.3 million shares (6.3million shares including shares sold by selling stockholders) at a price of$13.00 per share. After full exercise of the underwriters’ over-allotmentoption to purchase an additional 945,000 shares from the Company, aggregate netproceeds to the Company after underwriting discounts and offering expensesborne by the Company were approximately $71.8 million. On October 23,2006, the Company paid down $61.5 million of long-term debt with a portion ofthe net proceeds from the offering.

***Deferred Compensation and Stock Options***

Under the 2006 Omnibus Incentive Compensation Plan(the “Omnibus Plan”), Stanley is authorized to provide awards for a maximum of4,000,000 shares of common stock to any director, officer, employee orconsultant. The Omnibus Plan allows for cash awards, restricted stock awards,restricted stock units, stock appreciation rights, performance units, fullyvested shares, option awards and other equity-related awards. Vesting periodsof these awards vary. Except as otherwise determined by the board of directors,the option awards may not have an exercise price less than the fair marketvalue of the common stock on the date the option is granted. No cash awardshave been awarded for the periods presented.

Prior to July 2006, under the Executive DeferredCompensation and Equity Incentive Plan (the “Executive Plan”), Stanley wasauthorized to provide awards for a maximum of 15,000,000 shares of common stockto key employees and non-employee directors. The Executive Plan allowed forcash awards, 

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restricted stock awards,restricted stock trust awards and option awards. Vesting periods of theseawards vary. Holders of restricted stock awards have voting rights with respectto the awards. The Trustees of the restricted stock trust awards have votingrights with respect to the trust awards. The option awards may have an exerciseprice that ranges from 85% to 110% of the fair market value of the common stockon the date the option is granted.

Fordisclosure purposes, the fair value of each stock option grant is estimated onthe date of grant using the Black-Scholes option-pricing model.Under the Black-Scholes model, the total value of options granted in 2005and 2006 was $0.1 million and $0.1 million, respectively. Theseoptions would be amortized on a pro forma basis based upon the vesting schedulespecified in the option agreement. The weighted average fair value of anindividual option granted in 2005 and 2006 was $0.90 and $1.57, respectively.The fair value of Stanley’s stock-based option awards to employees wasestimated assuming no expected dividends and the following weighted-averageassumptions:

| ** **               | ** ** | **March 31,** | ** ** |
|--------------------------|------------|--------------------|------------|
| ** **               | ** ** | **2005**           | ** ** | **2006** | ** ** |
| Volatility               |       | 0%                 |       | 0% |   |
| Risk-free  interest rate |       | 4.23%              |       | 4.76% |   |
| Expected life (years)    |       | 7.5 years          |       | 7.5 years |   |

 

Asummary of stock option activity during the years ended March 31 is asfollows:

| ** **                        | ** ** | **2005**   | ** ** | **2006**                               | ** ** | **2007**   | ** ** |
|-----------------------------------|------------|------------|------------|----------------------------------------|------------|------------|------------|
| ** **                        | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Outstanding,  beginning of year   |       | 2,319,840  |       |                                   | $          | 1.39       |       |   | 2,279,940 |   |   | $ | 1.47 |   |   | 2,584,620 |   |   | $ | 2.10 |   |   |
| Granted during  the year          |       | 133,500    |       |                                   | $          | 3.37       |       |   | 445,500 |   |   | $ | 5.17 |   |   | 813,750 |   |   | $ | 8.00 |   |   |
| Exercised during  the year        |       | (126,300   | )          |                                   | $          | 1.76       |       |   | (109,020 | ) |   | $ | 1.03 |   |   | (1,365,384 | ) |   | $ | 1.48 |   |   |
| Forfeited during  the year        |       | (47,100    | )          |                                   | $          | 1.99       |       |   | (31,800 | ) |   | $ | 3.46 |   |   | (18,000 | ) |   | $ | 5.77 |   |   |
| Outstanding, end  of year         |       | 2,279,940  |       |                                   | $          | 1.47       |       |   | 2,584,620 |   |   | $ | 2.10 |   |   | 2,014,986 |   |   | $ | 4.87 |   |   |
| Options exercisable, end  of year |       | 1,701,540  |       |                                   |       |       |       | 1,807,920 |   |   |   |   |   | 1,231,986 |   |   |   |   |   |

 

Anoption summary as of March 31, 2007 is presented below:

| **Options**                                       | ** ** | ** ** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value ($000)** | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------|------------|
| Outstanding at  March 31, 2007               |       | 2,014,986  |       |       | $          | 4.87                                   |       |                                                |       | 6.5                                         |       |   |   | $ | 21,615 |   |   |
| Exercisable at  March 31, 2007               |       | 1,231,986  |       |       | $          | 2.85                                   |       |                                                |       | 5.4                                         |       |   |   | $ | 15,706 |   |   |
| Unvested expected to  vest at March 31, 2007 |       | 724,275    |       |       | $          | 8.05                                   |       |                                                |       | 8.3                                         |       |   |   | $ | 5,465 |   |   |

 

During the year ended March 31, 2007, the Companygranted 813,750 stock option awards with a vesting period of five years. Theoptions were issued with a weighted-average exercise price of $8.00. The totalintrinsic value of options exercised during the year ended March 31, 2007was $16.6 million.

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Thefollowing table summarizes information about stock options outstanding at March 31,2007:

| **Exercise Price** | ** ** | ** ** | ** ** | **Number  Outstanding  at  3/31/2007** | ** ** | **Weighted  Average  Remaining Life (years)** | ** ** | **Number  Exercisable  at  3/31/2007** | ** ** |
|-------------------------|------------|------------|------------|----------------------------------------|------------|---------------------------------------------------------|------------|----------------------------------------|------------|
| 0.53                    |       |       | 121,120    |                                   |       |                                                    | 1.0        |                                   |       | 121,120 |   |
| 1.44                    |       |       | 136,800    |                                   |       |                                                    | 2.0        |                                   |       | 136,800 |   |
| 1.78                    |       |       | 215,400    |                                   |       |                                                    | 3.2        |                                   |       | 215,400 |   |
| 1.68                    |       |       | 5,940      |                                   |       |                                                    | 4.6        |                                   |       | 5,940 |   |
| 2.05                    |       |       | 4,890      |                                   |       |                                                    | 5.5        |                                   |       | 4,890 |   |
| 2.35                    |       |       | 183,600    |                                   |       |                                                    | 6.1        |                                   |       | 183,600 |   |
| 2.59                    |       |       | 108,000    |                                   |       |                                                    | 6.1        |                                   |       | 108,000 |   |
| 2.80                    |       |       | 3,570      |                                   |       |                                                    | 6.3        |                                   |       | 3,570 |   |
| 3.33                    |       |       | 9,600      |                                   |       |                                                    | 6.9        |                                   |       | 9,600 |   |
| 3.33                    |       |       | 114,000    |                                   |       |                                                    | 7.1        |                                   |       | 114,000 |   |
| 3.72                    |       |       | 2,700      |                                   |       |                                                    | 7.3        |                                   |       | 2,700 |   |
| 4.22                    |       |       | 177,116    |                                   |       |                                                    | 8.1        |                                   |       | 177,116 |   |
| 4.22                    |       |       | 3,000      |                                   |       |                                                    | 8.2        |                                   |       | 3,000 |   |
| 5.50                    |       |       | 13,500     |                                   |       |                                                    | 8.6        |                                   |       | 13,500 |   |
| 6.56                    |       |       | 102,000    |                                   |       |                                                    | 8.9        |                                   |       | 102,000 |   |
| 6.56                    |       |       | 30,750     |                                   |       |                                                    | 9.0        |                                   |       | 30,750 |   |
| 7.86                    |       |       | 645,000    |                                   |       |                                                    | 9.1        |                                   |       | — |   |
| 8.65                    |       |       | 123,750    |                                   |       |                                                    | 4.1        |                                   |       | — |   |
| 7.86                    |       |       | 7,500      |                                   |       |                                                    | 3.2        |                                   |       | — |   |
| 15.90                   |       |       | 6,750      |                                   |       |                                                    | 9.8        |                                   |       | — |   |
|                    |       |       | 2,014,986  |                                   |       |                                                    |       |                                   |       | 1,231,986 |   |

 

Effective April 1, 2006, the Company adopted SFASNo. 123(R) using the prospective-transition method. Under thattransition method, compensation cost recognized in the year ended  March 31, 2007 includes compensation costfor all share-based payment transactions granted on or after April 1, 2006based on the grant-date fair value estimated in accordance with the provisionsof SFAS No. 123(R). The Company is required to account for any portion ofawards outstanding at the date of adoption of SFAS No. 123(R) usingthe accounting principles originally applied to those awards.

As a result of adopting SFAS No. 123(R) on April 1,2006, the Company’s income before income taxes and net income for the yearended March 31, 2007, are $0.5 million and $0.3 million lower,respectively, than if it had continued to account for share-based paymenttransactions under APB No. 25. Basic and diluted earnings per share forthe year ended March 31, 2007 are $0.61 and $0.55, respectively, underSFAS No. 123(R). Basic and diluted earnings per share for the year ended March 31,2007 would have been $0.63 and $0.57, respectively, under APB No. 25.

The Company has presented all tax benefits resultingfrom stock based compensation as operating cash flows in the Statement of CashFlows prior to the adoption of SFAS No. 123(R). The tax benefitsassociated with stock based compensation in effect prior to the adoption ofSFAS No. 123(R) were $1.6 million for the year ended March 31,2007. For share-based payment transactions awarded subsequent to the adoptionof SFAS No.123(R), the tax benefits in excess of the compensation costrecognized should be classified as financing cash flows. There were no excesstax benefits associated with share-based payment transactions accounted forunder SFAS No. 123(R).

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The fair value of eachoption award is estimated on the date of grant using the Black-Scholes-Mertonclosed-form option-pricing model that uses the assumptions noted in thefollowing table. Expected volatility is based on a weighted-average of thehistorical volatilities of similar public entities. The valuation modelincludes an assumed forfeiture rate of 7.5 percent. The expected term ofoptions granted is derived using the simplified method and represents theperiod of time that options granted are expected to be outstanding. Optionsgranted meet the criteria of “plain vanilla” for purposes of applying thesimplified method. The risk-free rate for periods within the contractual lifeof the option is based on U.S. Treasury yield curve in effect at the time ofgrant.

| ** **                | ** ** | **As of**               | ** ** |
|---------------------------|------------|------------------------------|------------|
| ** **                | ** ** | **March 31, 2007** | ** ** |
| Expected  volatility      |       |                         | 35.8%      |   |   |
| Expected  dividends       |       |                         | 0.0%       |   |   |
| Expected term (in  years) |       |                         | 3.3-6.5    |   |   |
| Risk-free rate            |       |                         | 4.6%-5.1%  |   |   |

 

During the year ended March 31, 2007, the Companyrecognized $0.5 million of share-based employee compensation costs related tostock option awards. No share-based employee compensation cost, related tostock option awards, is reflected in net income for the years ended March 31,2005 and 2006. As of March 31, 2007, there was $2.1 million of totalunrecognized compensation cost related to nonvested share-based compensationarrangements granted under the Omnibus Plan during the year ended March 31,2007. That cost is expected to be recognized over a weighted-average period of4.1 years.

Thefollowing table illustrates, in accordance with the provisions of SFAS No. 123(R),the effect on net income and earnings per share if the Company had applied thefair value recognition provision of SFAS No. 123(R) to stock-basedemployee compensation for stock option awards granted prior to April 1,2006.

| ** **                                                                                                                                     | ** ** | **Year Ended**          | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                     | ** ** | **March 31, 2007** | ** ** |
| Net income, as  reported                                                                                                                       |       |                         | $          | 10,705 |   |   |
| Add: stock-based  compensation, included in net income as reported, net of related tax effects                                                 |       |                         | —     |   |   |
| Deduct: Total  stock-based employee compensation expense as determined under the fair value  method for all awards, net of related tax effects |       |                         | (423       | ) |   |
| Pro forma net  income                                                                                                                          |       |                         | $          | 10,282 |   |   |
| Basic earnings  per share:                                                                                                                     |       |                         |       |   |   |
| As reported                                                                                                                                    |       |                         | $          | 0.61 |   |   |
| Pro forma                                                                                                                                      |       |                         | $          | 0.59 |   |   |
| Diluted earnings  per share:                                                                                                                   |       |                         |       |   |   |
| As reported                                                                                                                                    |       |                         | $          | 0.55 |   |   |
| Pro forma                                                                                                                                      |       |                         | $          | 0.53 |   |   |

 

During the year endedMarch 31, 2007, there were no modifications to share-based paymenttransactions.

During the year ended March 31, 2007, the Companygranted 11,250 restricted stock awards and 15,000 restricted stock trust awardsat a fair market value of $7.54 per share with a vesting period of two years.Additionally, during the year ended  March 31,2007, the Company granted 21,600 restricted stock awards at a fair market valueof $10.28 per share with a vesting period of one year. The assumed forfeiturerate applicable to the restricted shares granted in the year ended March 31,2007 was zero percent.

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Prior to the adoption of SFAS No. 123(R), thefair market value of each issuance and grant was determined by the Company on acontemporaneous basis. The Company recorded stock-based deferred compensationof approximately $1.4 million in connection with compensatory grants of stockoptions and shares of restricted stock awarded during fiscal 2006 and 2007. Approximately,$0.4 million of compensation expense, which includes the $0.1 million below,was recognized during the year ended March 31, 2007. The remainingdeferred compensation will be amortized over the remaining four year vesting periodof the awards.

In connection with thecompletion of the Company’s initial public offering in the year ended March 31,2007, 1,377,210 shares of restricted stock grants and 640,050 employee stockoptions became fully-vested. Accordingly, the Company recorded acharge of $4.1 million and $0.1 million, respectively, related to thevesting of the restricted shares and certain of the employee stock optionswhich had been granted at less than fair market value within one year of thecompletion of the offering. This charge has been reflected in theaccompanying statement of income as amortization of deferred compensationduring the year ended March 31, 2007.

**12.**          COMMITMENTSAND CONTINGENCIES

***Operating Leases******—Stanley***leasesbuildings and equipment under various operating leases with lease terms rangingfrom one month to ten years. The rental payments under certain of the leasesare based on a minimum rental plus a percentage of the operating expenses. Thefollowing is a schedule of the future minimum lease payments required underoperating leases that have initial non-cancelable lease terms in excess of oneyear as of March 31, 2007:

| **Fiscal Year Ending March 31,** | ** ** | ** ** | ** ** | **Minimum Lease  Commitments** | ** ** |
|------------------------------------------------------|------------|------------|------------|-------------------------------------|------------|
| 2008                                                 |       |       | $          | 7,382                               |       |   |
| 2009                                                 |       |       | 6,198      |                                |       |
| 2010                                                 |       |       | 5,739      |                                |       |
| 2011                                                 |       |       | 4,575      |                                |       |
| 2012                                                 |       |       | 2,605      |                                |       |
| Thereafter                                           |       |       | 9,257      |                                |       |
| Total                                                |       |       | $          | 35,756                              |       |   |

 

Total rent expense for the fiscal years ended March 31,2005, 2006 and 2007 was $4.1 million, $5.6 million and$6.8 million, respectively.

***Capital Leases******—Stanley***hascapital lease arrangements for certain office equipment and software licensesthat are included in property and equipment in the accompanying balance sheetsin the amount of less than $0.2 million and $0.5 million, net ofaccumulated depreciation, at March 31, 2006 and March 31, 2007,respectively. The assets under capital leases are amortized on a straight-linebasis over the shorter of the respective useful lives or the lease term. Theobligations are collateralized by the related leased equipment.

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Futureminimum lease payments required under the capital leases at March 31,2007, are as follows:

| **Fiscal Year Ending March 31,** | ** ** | ** ** | ** ** | **Minimum  Lease Commitments** | ** ** |
|------------------------------------------------------|------------|------------|------------|-------------------------------------|------------|
| 2008                                                 |       |       | $          | 150                                 |       |   |
| 2009                                                 |       |       | 144        |                                |       |
| 2010                                                 |       |       | 92         |                                |       |
| Total Minimum  lease payments                        |       |       | 386        |                                |       |
| Less: Amount  representing interest                  |       |       | (39        | )                                   |       |
| Present value of  minimum lease payments             |       |       | 347        |                                |       |
| Less: Current  portion                               |       |       | (127       | )                                   |       |
| Long-term portion                                    |       |       | $          | 220                                 |       |   |

 

***Contract Cost Audits******—Substantially***allpayments to Stanley under cost-reimbursable contracts and subcontracts with theU.S. Government are provisional payments, which are subject to potentialadjustments upon audit by the Defense Contract Audit Agency. Audits through March 31,2004 have been completed. In the opinion of management, adjustments resultingfrom the audits of all subsequent years are not expected to have a materialeffect on the Company’s financial position, results of operations or cashflows.

**13.**          UNAUDITEDQUARTERLY FINANCIAL DATA

Unauditedsummarized financial data by quarter for the fiscal years ended March 31,2006 and 2007 is presented in the table below.

| ** **       | ** ** | **June 30**                                                   | ** ** | **September 30** | ** ** | **December 31** | ** ** | **March 31** | ** ** |
|------------------|------------|--------------------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|-------------------|------------|
| ** **       | ** ** | **(in thousands, except per share data)** | ** ** |
| **Fiscal 2007**  |       |                                                               |       |                  |       |                 |       |              |       |   |   |   |   |
| Revenues         |       | $                                                                  | 92,555     |                  |       | $                    | 98,191     |              |       |   | $ | 102,023 |   |   | $ | 116,642 |   |
| Operating income |       | 6,095                                                              |       |                  | 6,855      |                 |       |              | 3,083      |   |   | 8,544 |   |
| Net income       |       | 2,484                                                              |       |                  | 2,422      |                 |       |              | 1,260      |   |   | 4,539 |   |
| Basic EPS        |       | $                                                                  | 0.17       |                  |       | $                    | 0.16       |              |       |   | $ | 0.06 |   |   | $ | 0.21 |   |
| Diluted EPS      |       | $                                                                  | 0.15       |                  |       | $                    | 0.15       |              |       |   | $ | 0.06 |   |   | $ | 0.20 |   |
| **Fiscal  2006** |       |                                                               |       |                  |       |                 |       |              |       |   |   |   |   |
| Revenues         |       | $                                                                  | 64,827     |                  |       | $                    | 66,859     |              |       |   | $ | 68,936 |   |   | $ | 84,179 |   |
| Operating income |       | 4,104                                                              |       |                  | 5,317      |                 |       |              | 5,382      |   |   | 1,495 |   |
| Net income       |       | 2,370                                                              |       |                  | 2,905      |                 |       |              | 2,956      |   |   | 19 |   |
| Basic EPS        |       | $                                                                  | 0.17       |                  |       | $                    | 0.20       |              |       |   | $ | 0.22 |   |   | $ | 0.00 |   |
| Diluted EPS      |       | $                                                                  | 0.15       |                  |       | $                    | 0.18       |              |       |   | $ | 0.19 |   |   | $ | 0.00 |   |

 

**14.**          SUBSEQUENTEVENT

On April 1, 2007, Stanley purchased all of theoutstanding membership interests of Techrizon, LLC for $30.3 million.Techrizon is a software, simulation and information security services companybased in Lawton, OK. The acquisition was financed with cash and borrowingsunder our senior credit facility.

F-22

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**STANLEY, INC.AND SUBSIDIARIESSchedule II—Valuation and Qualifying Accounts(in thousands)**

**Allowancefor Doubtful Accounts**

| ** ** | ** ** | **Balance at  beginning of  period** | ** ** | **Charged to  costs and  expenses** | ** ** | **Acquired in  business  combinations** | ** ** | **Deductions** | ** ** | **Balance at  end of  period** | ** ** |
|------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|----------------|------------|------------------------------------------|------------|
| 2005       |       |                                           | 699        |                                          |       |                                         | 148        |           |       |                                     | —     |   |   |   | — |   |   |   | 847 |   |   |
| 2006       |       |                                           | 847        |                                          |       |                                         | 322        |           |       |                                     | —     |   |   |   | (250 | ) |   |   | 919 |   |   |
| 2007       |       |                                           | 919        |                                          |       |                                         | 247        |           |       |                                     | 20         |   |   |   | (577 | ) |   |   | 609 |   |   |

 

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