**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

**FORM 10-Q**

**x QUARTERLY REPORT UNDER SECTION 13 OR15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**Forthe quarterly period ended September 30, 2006**

**OR**

**o****  TRANSITION REPORT PURSUANT TO SECTION13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**CommissionFile No. 001-33083**

**STANLEY, INC.**

(Exact name ofregistrant as specified in its charter)
| **Delaware**                                                    |   | **11-3658790**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  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)     |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes  o  No  x

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  Largeaccelerated filer  o  Acceleratedfiler  x  Non-acceleratedfiler

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

Yes  o  No  x

As of November 28,2006, there were 21,172,290 shares of our Common Stock, par value $0.01 pershare, outstanding.

 

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**STANLEY, INC. AND SUBSIDIARIESFORM 10-QFOR THE QUARTER ENDED SEPTEMBER 30, 2006INDEX**

 
| **PART 1 – FINANCIAL  INFORMATION**                                                             | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------|------------|
| ITEM 1.  FINANCIAL STATEMENTS                                                                        |       |       |       |
| ITEM  2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS |       |       |       |
| ITEM 3. QUANTITATIVE AND  QUALITATIVE DISCLOSURE ABOUT MARKET RISK                                   |       |       |       |
| ITEM 4. CONTROLS AND PROCEDURES                                                                      |       |       |       |
| **PART  II – OTHER INFORMATION**                                                                | ** ** | ** ** | ** ** |
| ITEM 1. LEGAL  PROCEEDINGS                                                                           |       |       |       |
| ITEM 1A. RISK FACTORS                                                                                |       |       |       |
| ITEM  2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS                                        |       |       |       |
| ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                                             |       |       |       |
| ITEM  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                         |       |       |       |
| ITEM 5. OTHER  INFORMATION                                                                           |       |       |       |
| ITEM 6. EXHIBITS                                                                                     |       |       |       |

 

2

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**PART 1:  FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS**

 

**STANLEY, INC. AND SUBSIDIARIES**

**CondensedConsolidated Statements of Income**

**(unaudited)**

**(in thousands, except per share amounts)**

 
| ** **                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Six Months Ended  September 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                             | ** ** | **2005**                                             | ** ** | **2006**                                           | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                   |       |                                                 |       |                                               |       |   |   |   |   |
| Revenues                               |       | $                                                    | 66,859     |                                               | $          | 98,191 |   | $ | 131,686 |   | $ | 190,746 |   |
|                                   |       |                                                 |       |                                               |       |   |   |   |   |
| Operating costs and  expenses:         |       |                                                 |       |                                               |       |   |   |   |   |
| Cost of revenues                       |       | 57,611                                               |       | 84,814                                             |       | 114,581 |   | 165,287 |   |
| Selling, general and  administrative   |       | 3,183                                                |       | 4,861                                              |       | 6,229 |   | 9,212 |   |
| Amortization of  deferred compensation |       | 184                                                  |       | 355                                                |       | 339 |   | 604 |   |
| Depreciation and  amortization         |       | 564                                                  |       | 1,306                                              |       | 1,116 |   | 2,694 |   |
| Total operating costs  & expenses  |       | 61,542                                               |       | 91,336                                             |       | 122,265 |   | 177,797 |   |
| Operating income                       |       | 5,317                                                |       | 6,855                                              |       | 9,421 |   | 12,949 |   |
|                                   |       |                                                 |       |                                               |       |   |   |   |   |
| Other income (expense):                |       |                                                 |       |                                               |       |   |   |   |   |
| Other expense                          |       | —                                               |       | (804                                               | )          | — |   | (544 | ) |
| Interest expense - net                 |       | (361                                                 | )          | (2,034                                             | )          | (699 | ) | (4,179 | ) |
| Total other expenses                   |       | (361                                                 | )          | (2,838                                             | )          | (699 | ) | (4,723 | ) |
|                                   |       |                                                 |       |                                               |       |   |   |   |   |
| Income before taxes                    |       | 4,956                                                |       | 4,017                                              |       | 8,722 |   | 8,226 |   |
|                                   |       |                                                 |       |                                               |       |   |   |   |   |
| Provision for income  taxes            |       | (2,051                                               | )          | (1,595                                             | )          | (3,447 | ) | (3,320 | ) |
|                                   |       |                                                 |       |                                               |       |   |   |   |   |
| Net income                             |       | $                                                    | 2,905      |                                               | $          | 2,422 |   | $ | 5,275 |   | $ | 4,906 |   |
|                                   |       |                                                 |       |                                               |       |   |   |   |   |
| Earning per share:                     |       |                                                 |       |                                               |       |   |   |   |   |
| Basic                                  |       | $                                                    | 0.20       |                                               | $          | 0.16 |   | $ | 0.37 |   | $ | 0.34 |   |
| Diluted                                |       | $                                                    | 0.18       |                                               | $          | 0.15 |   | $ | 0.33 |   | $ | 0.30 |   |
|                                   |       |                                                 |       |                                               |       |   |   |   |   |
| Weighted average  shares:              |       |                                                 |       |                                               |       |   |   |   |   |
| Basic                                  |       | 14,415                                               |       | 14,684                                             |       | 14,338 |   | 14,551 |   |
| Diluted                                |       | 16,159                                               |       | 16,533                                             |       | 16,071 |   | 16,435 |   |

 

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

3

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**STANLEY, INC. AND SUBSIDIARIES**

**CondensedConsolidated Balance Sheets**

**(in thousands)**

 
| ** **                                                                     | ** ** | **March 31, 2006** | ** ** | **September 30, 2006** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                                                                     | ** ** | ** **                   | ** ** | **(unaudited)**                  | ** ** |
| **Assets**                                                                     | ** ** | ** **                   | ** ** | ** **                       | ** ** |
| ** **                                                                     | ** ** | ** **                   | ** ** | ** **                       | ** ** |
| Current assets:                                                                |       |                         |       |                             |       |
| Cash and cash  equivalents                                                     |       | $                            | —     |                             | $          | 43 |   |
| Accounts  receivable - net                                                     |       | 81,732                       |       | 79,130                           |       |
| Prepaid and  other current assets                                              |       | 2,196                        |       | 4,322                            |       |
| Total current  assets                                                          |       | 83,928                       |       | 83,495                           |       |
|                                                                           |       |                         |       |                             |       |
| Property and equipment -  net                                                  |       | 10,083                       |       | 10,314                           |       |
| Goodwill                                                                       |       | 87,832                       |       | 87,698                           |       |
| Intangible assets - net                                                        |       | 12,616                       |       | 11,011                           |       |
| Other assets                                                                   |       | 5,444                        |       | 4,855                            |       |
| Total assets                                                                   |       | $                            | 199,903    |                             | $          | 197,373 |   |
|                                                                           |       |                         |       |                             |       |
| **Liabilities and Stockholders’  Equity**                                 | ** ** | ** **                   | ** ** | ** **                       | ** ** |
|                                                                           |       |                         |       |                             |       |
| Current liabilities:                                                           |       |                         |       |                             |       |
| Line of credit                                                                 |       | $                            | 10,409     |                             | $          | 673 |   |
| Accounts payable                                                               |       | 17,193                       |       | 17,024                           |       |
| Accrued expenses  and other liabilities                                        |       | 24,091                       |       | 26,574                           |       |
| Current portion  of long-term debt                                             |       | 1,000                        |       | 1,000                            |       |
| Deferred income  taxes                                                         |       | 1,225                        |       | 1,225                            |       |
| Income taxes  payable                                                          |       | 711                          |       | —                           |       |
| Total current  liabilities                                                     |       | 54,629                       |       | 46,496                           |       |
|                                                                           |       |                         |       |                             |       |
|  Long-term debt - net of current portion                                  |       | 99,000                       |       | 98,500                           |       |
|  Other long-term liabilities                                              |       | 3,514                        |       | 3,459                            |       |
|  Deferred taxes                                                           |       | 371                          |       | 371                              |       |
| Total  liabilities                                                             |       | 157,514                      |       | 148,826                          |       |
|                                                                           |       |                         |       |                             |       |
| Commitments and  contingencies:                                                |       |                         |       |                             |       |
| Stockholders’ equity:                                                     |       |                         |       |                             |       |
| Common Stock,  $0.01 par value – 200,000 shares authorized; 14,967 issued |       | 150                          |       | 150                              |       |
| Additional  paid-in capital                                                    |       | 3,858                        |       | 3,482                            |       |
| Retained  earnings                                                             |       | 47,640                       |       | 52,546                           |       |
| Less: Treasury  stock; 735 and 295 at cost, respectively                       |       | (4,791                       | )          | (1,983                           | )          |
| Deferred  compensation                                                         |       | (4,392                       | )          | (5,572                           | )          |
| Shareholder  notes receivable                                                  |       | (76                          | )          | (76                              | )          |
| Total  stockholders’ equity                                               |       | 42,389                       |       | 48,547                           |       |
|                                                                           |       |                         |       |                             |       |
| Total liabilities and stockholders’ equity                                |       | $                            | 199,903    |                             | $          | 197,373 |   |

 

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

4

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**STANLEY, INC. AND SUBSIDIARIES**

**CondensedConsolidated Statements of Cash Flows**

**(unaudited)**

**(in thousands)**

** **
| ** **                                                                         | ** ** | **Six Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                                           | ** ** | **2006** | ** ** |
| ** **                                                                         | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                         | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                                  | 5,275      |   | $ | 4,906 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                               |       |   |   |
| Depreciation and  amortization                                                     |       | 1,116                                              |       | 2,694 |   |
| Amortization of  deferred compensation                                             |       | 339                                                |       | 604 |   |
| Loss on disposal  of property and equipment                                        |       | 23                                                 |       | 92 |   |
| Stock  contributed to employee stock ownership plan                                |       | 1,041                                              |       | — |   |
| Other                                                                              |       | —                                             |       | 296 |   |
| Changes in  assets and liabilities - net of acquisition effect                     |       |                                               |       |   |   |
| (Increase)  decrease in accounts receivable                                        |       | (805                                               | )          | 2,602 |   |
| Increase in  prepaid income tax                                                    |       | (1,320                                             | )          | (1,317 | ) |
| Increase in  prepaids and other current assets                                     |       | (33                                                | )          | (809 | ) |
| (Increase)  decrease in other assets                                               |       | (295                                               | )          | 589 |   |
| Decrease in  accounts payable                                                      |       | (4,342                                             | )          | (169 | ) |
| Increase in  accrued expenses                                                      |       | 3,039                                              |       | 1,990 |   |
| Increase in  other liabilities                                                     |       | 437                                                |       | 426 |   |
| Decrease in  income taxes payable                                                  |       | (1,270                                             | )          | (711 | ) |
| Net cash provided by  operating activities                                         |       | 3,205                                              |       | 11,193 |   |
|                                                                               |       |                                               |       |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                         | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Purchase of CCI  - net of cash acquired                                            |       | (557                                               | )          | — |   |
| Purchase of  Morgan - net of cash acquired                                         |       | —                                             |       | 134 |   |
| Acquisition of  property and equipment                                             |       | (1,146                                             | )          | (1,389 | ) |
| Net cash used in  investing activities                                             |       | (1,703                                             | )          | (1,255 | ) |
|                                                                               |       |                                               |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                         | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Net borrowings  (repayments) under line-of-credit agreement                        |       | 3,147                                              |       | (9,736 | ) |
| Repayments on  long-term debt                                                      |       | (500                                               | )          | (500 | ) |
| Payments under  capital lease obligations                                          |       | (1                                                 | )          | (11 | ) |
| Purchase of  treasury stock                                                        |       | (4,182                                             | )          | (259 | ) |
| Proceeds from  exercise of stock options                                           |       | 34                                                 |       | 414 |   |
| Proceeds from  sale of treasury stock                                              |       | —                                             |       | 197 |   |
| Net cash used in  financing activities                                             |       | (1,502                                             | )          | (9,895 | ) |
|                                                                               |       |                                               |       |   |   |
| **NET INCREASE IN CASH AND CASH  EQUIVALENTS**                                     |       | —                                             |       | 43 |   |
| **CASH AND CASH EQUIVALENTS -  Beginning of year**                                 |       | —                                             |       | — |   |
| ** **                                                                         | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| **CASH AND CASH EQUIVALENTS - End  of year**                                       |       | —                                             |       | $ | 43 |   |
|                                                                               |       |                                               |       |   |   |
|                                                                               |       |                                               |       |   |   |
| **SUPPLEMENTAL DISCLOSURES OF  CASH FLOW INFORMATION:**                            | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Cash paid during the  year for:                                                    |       |                                               |       |   |   |
| Income taxes                                                                       |       | $                                                  | 3,871      |   | $ | 5,224 |   |
| Interest                                                                           |       | $                                                  | 713        |   | $ | 4,237 |   |
|                                                                               |       |                                               |       |   |   |
| **SUPPLEMENTAL DISCLOSURES OF  NONCASH FINANCING ACTIVITIES:**                     | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Assets purchased under  capital lease agreements                                   |       | $                                                  | 14         |   | $ | 22 |   |

 

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

5

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** **

**STANLEY, INC. ANDSUBSIDIARIES**

**Notes to CondensedConsolidated Financial Statements (in thousands, except share and per share data, or as otherwise noted)**

 

**1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

*** ***

***Description of Business***—Stanley, Inc., together with itssubsidiaries (“Stanley” or the “Company”), is a provider of informationtechnology services and solutions to U.S. defense and federal civiliangovernment agencies.  Stanley offers itscustomers solutions to support any stage of program, product development orbusiness lifecycle through five service areas: systems engineering, enterpriseintegration, operational logistics, business process outsourcing and advancedengineering and technology.  The Companyhas derived substantially all of its revenue from U.S. federal governmentagencies.

*** ***

***Basis of Presentation***—The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with generally acceptedaccounting principles in the United States and pursuant to the rules andregulations of the Securities and Exchange Commission.  In the opinion of management, thesestatements reflect all adjustments, which include only normal recurringadjustments, necessary to present fairly the Company’s financial position as ofSeptember 30, 2006, and its results of operations and cash flows for the threemonths and six months ended September 30, 2005 and 2006.  The results of operations for the interimperiod are not necessarily indicative of the results for the full year.  For further information, refer to thefinancial statements and notes presented in the Company’s registrationstatement on Form S-1 as amended.

*** ***

***Principles of Consolidation***—The accompanying consolidated financialstatements include the accounts of Stanley, Inc.’s wholly-ownedsubsidiaries.  All significant intercompanybalances and transactions have been eliminated in consolidation.

*** ***

***Fair Value of Financial Instruments***—The fair value of accounts receivable, accountspayable, accrued expenses, note payable, and swap contract approximates theirrespective carrying amounts.

*** ***

***Revenue Recognition***—The Company recognizes revenue under itscontracts when a contract has been executed, the contract price is fixed anddeterminable, delivery of services or products has occurred, and collectibilityis considered probable and can be reasonably estimated. Revenue is earned undercost-plus-fee, fixed-price and time-and-materials contracts. TheCompany uses a standard management process to determine whether all requiredcriteria for revenue recognition have been met, which includes regular reviewsof the Company’s contract performance. This review covers, among other matters,progress against a schedule, outstanding action items, effort and staffing,quality, risks and issues, subcontract management, costs incurred, commitments,and client satisfaction. During this review, the Company determines whether theoverall progress on a contract is consistent with the effort expended.

 

Undercost-plus-fee contracts, revenues are recognized as costs are incurredand include an estimate of applicable fees earned. The Company considers fixedfees under cost-plus-fee contracts to be earned in proportion to theallowable costs actually incurred in performance of the contract for level ofeffort 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 areperformed, using the percentage-of-completion method, applying the cost-to-costor units of delivery method, in accordance with Accounting Research BulletinNo. 45 and American Institute of Certified Public Accountants (AICPA)Statement of Position 81-1 “Accounting for Performance of Construction-Type andCertain Production-Type Contracts” (SOP 81-1).

 

Contract revenue recognition inherently involves the use of estimates.Examples of estimates include the contemplated level of effort to accomplishthe tasks under contract, the cost of the effort, and an ongoing assessment ofthe Company’s progress toward completing the contract. From time to time, aspart of the Company’s standard management process, facts develop that requirethe Company to revise its estimated total costs and revenues. To the extentthat a revised estimate affects contract profit or revenue previouslyrecognized, the Company records the cumulative effect of the revision in theperiod in which the facts requiring the revision become known. The full amountof an anticipated loss on any type of contract is recognized in the period inwhich it becomes probable and can be reasonably estimated.

 

For cost-plus-award fee type contracts, the Companyrecognizes the expected fee to be awarded by the customer at the time such feecan be reasonably estimated, based on factors such as prior award experienceand communications with the customer regarding performance, including anyinterim performance evaluations rendered by the customer. For cost-plus-incentivefee type 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. The Company preparesperiodic estimates to complete and adjusts the incentive fee as required basedon the contract incentive fee formula.

6

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The Company’s contracts with agencies of the government are subject toperiodic funding by the respective contracting agency. Funding for a contractmay be provided in full at inception of the contract or ratably throughout thecontract as the services are provided. From time to time, the Company mayproceed with work based on client direction prior to the completion and signingof formal contract documents. The Company has a formal review process forapproving any such work. Revenue associated with such work is recognized onlywhen it can be reliably estimated and realization is probable. The Companybases its estimates on previous experiences with the client, communicationswith the client regarding funding status, and its knowledge of availablefunding for the contract or program. Pre-contract costs related to unsuccessfulcontract bids are expensed in the period in which the Company is notified thatthe contract will not be issued.

 

Disputesoccasionally arise in the normal course of the Company’s business due to eventssuch as delays, charges in contracts specifications, and questions of costallowability or collectibility. Such matters, whether claims or unapprovedchange orders in the process of negotiation, are recorded at the lesser oftheir estimated net realizable value or actual costs incurred, and only whenrealization is probable and can be reliably estimated. Claims against theCompany are recognized where a loss is considered probable and can bereasonably estimated in amount.

 

Theallowability of certain costs under government contracts is subject to audit bythe government. Certain indirect costs are charged to contracts usingprovisional or estimated indirect rates, which are subject to later revisionbased on government audits of those costs. Management is of the opinion thatcosts subsequently disallowed, if any, would not be significant.

*** ***

***Concentration of Risk***—Contracts funded by federal government agenciesaccount for substantially all of our revenues. For the three months ended September 30, 2005 and 2006, we derived approximately59% and 66% of our revenues, respectively, from the Department of Defense,including agencies within the intelligence community, and approximately 41% and34% of our revenues, respectively, from federal civilian government agencies.  The Company’s contract with the Department ofState for the provision of passport processing and support services, which isour largest revenue-generating contract, accounted for approximately 19%and 14% of our revenues for the three months ended September 30, 2005 and 2006,respectively.

 

Forthe six months ended September 30, 2005 and 2006, we derived approximately 59%and 66% of our revenues, respectively, from the Department of Defense,including agencies within the intelligence community, and approximately 41% and34% of our revenues, respectively, from federal civilian governmentagencies.  The Company’s contract withthe Department of State for the provision of passport processing and supportservices, which is our largest revenue-generating contract, accounted forapproximately 20% and 15% of our revenues for the six months ended September30, 2005 and 2006, respectively.

*** ***

***Property and Equipment***—Property and equipment are carried at cost, lessaccumulated depreciation. Depreciation of property and equipment is calculatedusing the straight-line method over the useful lives, ranging from three toten years. Leasehold improvements are amortized over the lesser of theuseful life or the term of the lease. Repairs and maintenance are expensed as incurred.  Depreciation expense related to property andequipment was $0.3 million and $0.5 million for the three months endedSeptember 30, 2005 and 2006, respectively. Depreciation expense related to property and equipment was $0.5 millionand $1.1 million for the six months ended September 30, 2005 and 2006,respectively.

*** ***

***Goodwill and Intangible Assets****—*Goodwill represents the excess of cost over thefair value of net tangible and identifiable intangible assets of acquiredcompanies. In accordance with SFAS No. 142, *Goodwill and Other Intangible Assets,* the Company does notamortize goodwill; rather it tests goodwill for impairment at least on anannual basis. Testing for impairment is a two-step process as prescribed bySFAS No. 142. The first step is a test for potential impairment, while thesecond step measures the amount of impairment, if any. Under the guidelines ofSFAS No. 142, the Company is required to perform an impairment test atleast on an annual basis at any time during the fiscal year provided the testis performed at the same time every year. An impairment loss would berecognized when the assets’ fair value is below their carrying value. Stanleyhas elected December 31 as its testing date. 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 longerascribed any value to the CCI and FSC trade names and that portion of the identifiedintangibles was written off.  Customerrelationships and other intangibles are amortized on a straight-line basis overperiods ranging from one to seven years.

*** ***

***Impairment of Long-Lived Assets***—Whenever events or changes in circumstancesindicate that the carrying amount of long-lived assets may not be fullyrecoverable, Stanley evaluates the probability that future undiscounted netcash flows, without interest charges, will be less than the carrying amount ofthe assets. If any impairment were indicated as a result of this review, 

7

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Stanleywould recognize a loss based on the amount by which the carrying amount exceedsthe estimated fair value. Stanley believes that no impairments exist as ofSeptember 30, 2006.

*** ***

***Stock***-***Based Compensation***—As permitted under SFASNo. 123, *Accounting for Stock-BasedCompensation* (“SFAS No. 123”), Stanley accounted for its stock-basedcompensation plans using the intrinsic value method under the recognition andmeasurement principles of APB Opinion No. 25, *Accounting for Stock Issued to Employees* (“APB No. 25”),and related Interpretations.  Stanley hasadopted the provisions of SFAS No. 123(R), *Share-based Payments*,on a prospective basis.  No stock-basedemployee compensation cost, related to stock options, is reflected in netincome for the three or six months ended September 30, 2005.

*** ***

***Earningsper share***—Basicearnings per share has been computed by dividing net income available to commonstockholders by the weighted average number of shares of common stock outstandingduring each period.  Shares issued duringthe period and shares reacquired during the period are weighted for the portionof the period that they were outstanding. Diluted earnings per share considers the potential dilution that couldoccur if securities or other contracts to issue common stock were exercised orconverted into common stock.  Theweighted average number of common shares outstanding is computed as follows:

|                                                    | ** ** | **Three Months Ended  September 30,**     | ** ** | **Six Months Ended  September 30,**       | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                         | ** ** | **    2005    ** | ** ** | **    2006    ** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                         | ** ** | **(in thousands)**                                  | ** ** |
| Basic weighted average  common shares outstanding  |       | 14,415                                                   |       | 14,684                                                   |       | 14,338 |   | 14,551 |   |
| Effect of potential  exercise of stock options     |       | 1,744                                                    |       | 1,849                                                    |       | 1,733 |   | 1,884 |   |
| Diluted weighted average common shares outstanding |       | 16,159                                                   |       | 16,533                                                   |       | 16,071 |   | 16,435 |   |

 

Alloptions to purchase common stock are included in the computation of dilutedearnings per share because the average fair value per common share was greaterthan the options’ exercise prices.

*** ***

***Derivative Instruments and HedgingActivities***—OnMarch 15, 2004, Stanley entered into a swap agreement to reduce exposureto interest rate fluctuations on its floating rate debt commitments (Note5).  Stanley has maintained this interestrate swap agreement under which the interest rate is fixed with respect tospecified amounts of notional principal. Stanley’s exposure under thisagreement is limited to the impact of variable interest rate fluctuations andthe periodic settlement of amounts due. On March 27, 2006, Stanley entered intothree additional swap commitments (Note 5). Under the new swap agreements, which are effective April 1, 2006, theinterest rate is fixed with respect to specified amounts of notionalprincipal.  Stanley’s exposure under theseagreements is limited to the impact of variable interest rate fluctuations andthe periodic settlement of amounts due. The interest rate swap agreemententered into on March 15, 2004 has a maturity date of December 13, 2013, afixed rate of 3.49% and a notional amount of $7.3 million at September 30,2006. The interest rate swap agreements entered into on March 27, 2006 havematurity dates of April 2, 2012, April 1, 2008 and April 1, 2007, fixedinterest rates of 4.92%, 5.29%, and 5.27%, and notional amounts of $30.0million, $10.0 million and $10.0 million, respectively.  The interest rate swap agreement maturingApril 2, 2012 includes an optional termination date of April 1, 2009.

 

Inaccordance with SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities* (“SFASNo. 133”), as amended by SFAS No. 138, *Accounting for Certain Derivative Instruments and Certain HedgingActivities, an Amendment of SFAS 133* and SFAS No. 149, *Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities,* the fair value of the hedge arrangement isrecorded as an asset or a liability in the accompanying consolidated balancesheets at September 30, 2005 and 2006. For qualifying cash flow hedges, SFASNo. 133, as amended, holds that the effective portion of derivative gainsand losses be recorded as a component of other comprehensive income and bereclassified into earnings in the same period in which the hedged transactionaffects such earnings. There was no effective portion recorded as an equity componentat September 30, 2006. The ineffective portion of the change in fair value ofthe interest rate swap is recognized in the consolidated statement of income inthe period of change. The fair value of the interest rate swaps at September30, 2006 was $(0.1) million. The change in fair value for the three monthsand six months ended September 30, 2006 resulted in an unrealized loss of $0.8million and $0.5 million, respectively. The unrealized loss on the interest rate swap for the three months endedSeptember 30, 2006 was recorded as part of other expense in the consolidatedstatement of income.

*** ***

***Use of Estimates***—The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.Significant items subject to such estimates and assumptions include revenuerecognition, carrying amount and useful lives of long-lived assets, valuationallowances for 

8

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accountsreceivable and deferred tax assets, software development costs and losscontingencies, such as litigation, claims and assessments.

*** ***

***Recently Issued Accounting Standards***—In December 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 123R, *Share-Based Payment* (“SFAS No. 123R”), whichreplaces SFAS No. 123, *Accounting forStock-Based Compensation*, and supersedes APB OpinionNo. 25, *Accounting for Stock Issued toEmployees*. SFAS No. 123R requires compensation costs related toshare-based payment transactions to be recognized in the financialstatements. With limited exceptions, the amount of compensation cost ismeasured based on the grant-date fair value of the equity or liabilityinstruments issued. SFAS No. 123R requires liability awards to beremeasured each reporting period and compensation costs to be recognized overthe period that an employee provides service in exchange for the award. SFASNo. 123R was effective as of the beginning of the first annual reportingperiod that begins after December 15, 2005. The Company adopted theprovisions of SFAS No. 123R on a prospective basis. Note 6 providesadditional information regarding the adoption of SFAS No. 123(R).

*** ***

***Reclassifications***—Certain reclassifications have been made to prioryear presentations to conform to the current presentation.

*** ***

***Stock Split and Amendment of Articlesof Incorporation***— OnAugust 28, 2006, the Company increased the number of authorized shares ofcommon stock to 200,000,000 shares and on September 12, 2006, the Companycompleted a thirty-for-one stock split of its outstanding common stock.  The accompanying financial statements includethe effects of the stock split and the resulting increase in the number ofauthorized shares of common stock.  Allshare and per share amounts included in the accompanying financial statementshave been restated to reflect the stock split.

** **

**2. ACCOUNTS RECEIVABLE**

 

Accountsreceivable consists of the following:

 

|                                        | ** ** | **As of  March 31, 2006** | ** ** | **As of  September 30, 2006** | ** ** |
|----------------------------------------|------------|------------------------------------------|------------|----------------------------------------------|------------|
| ** **                             | ** ** | ** **                               | ** ** | **(unaudited)**                              | ** ** |
| Billed receivables                     |       | $                                        | 58,593     |                                         | $          | 54,856 |   |
| Unbilled receivables                   |       | 24,058                                   |       | 25,319                                       |       |
| Less: Allowance for  doubtful accounts |       | (919                                     | )          | (1,045                                       | )          |
| Total                                  |       | $                                        | 81,732     |                                         | $          | 79,130 |   |

 

Consistentwith industry practice, certain receivables related to long term contracts areclassified as current, although a portion of these amounts is not expected tobe billed and collected within one year. Unbilled accounts receivable are expected to be billed and collectedwithin one year except for $1.4 million at September 30, 2006.

** **

**3. PROPERTY AND EQUIPMENT**

 

Propertyand equipment consists of the following:

 

|                                                                                          | ** ** | **As of  March 31, 2006** | ** ** | **As of  September 30, 2006** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                               | ** ** | ** **                               | ** ** | **(unaudited)**                              | ** ** |
| Computers and  peripherals                                                               |       | $                                        | 3,379      |                                         | $          | 4,669 |   |
| Software                                                                                 |       | 1,184                                    |       | 1,307                                        |       |
| Furniture and equipment                                                                  |       | 3,671                                    |       | 4,055                                        |       |
| Leasehold improvements                                                                   |       | 4,814                                    |       | 5,087                                        |       |
|                                                                                     |       | 13,048                                   |       | 15,118                                       |       |
|                                                                                     |       |                                     |       |                                         |       |
| Less: Accumulated  depreciation and amortization                                         |       | (2,965                                   | )          | (4,804                                       | )          |
| Property and equipment  - net                                                            |       | $                                        | 10,083     |                                         | $          | 10,314 |   |
|                                                                                     |       |                                     |       |                                         |       |
| Property and equipment  included above that are under capital lease obligations include: |       |                                     |       |                                         |       |
| Software                                                                                 |       | $                                        | 225        |                                         | $          | 225 |   |
| Furniture and  equipment                                                                 |       | 58                                       |       | 80                                           |       |
| Less:  Accumulated depreciation                                                          |       | (70                                      | )          | (105                                         | )          |
|                                                                                     |       | $                                        | 213        |                                         | $          | 200 |   |

 

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**4.  ACCRUED EXPENSES AND OTHER CURRENTLIABILITIES**

Accrued expensesconsist of the following:
| ** **             | ** ** | **As of  March 31, 2006** | ** ** | **As of  September 30, 2006** | ** ** |
|------------------------|------------|------------------------------------------|------------|----------------------------------------------|------------|
| ** **             | ** ** | ** **                               | ** ** | **(unaudited)**                              | ** ** |
| Accrued payroll costs  |       | $                                        | 8,776      |                                         | $          | 7,310 |   |
| Accrued contract costs |       | 11,305                                   |       | 13,448                                       |       |
| Accrued indirect costs |       | 2,731                                    |       | 2,942                                        |       |
| Other payables         |       | 1,279                                    |       | 2,874                                        |       |
| Total accrued expenses |       | $                                        | 24,091     |                                         | $          | 26,574 |   |

 

**5.  DEBT**
| ** **                                                   | ** ** | **As of March 31,  2006** | ** ** | **As of September 30,  2006** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                   | ** ** | ** **                               | ** ** | **(unaudited)**                              | ** ** |
| Borrowing under the  term loan and revolving line of credit: |       |                                     |       |                                         |       |
| Revolving line  of credit                                    |       | $                                        | 10,409     |                                         | $          | 673 |   |
| Term loan                                                    |       | 100,000                                  |       | 99,500                                       |       |
| Total debt                                                   |       | 110,409                                  |       | 100,173                                      |       |
| Less: current  portion                                       |       | (11,409                                  | )          | (1,673                                       | )          |
| Debt — net of current  portion                          |       | $                                        | 99,000     |                                         | $          | 98,500 |   |

 

On February 16, 2006, in order to finance the acquisition of Morgan andto refinance its then-outstanding indebtedness, Stanley entered into a newsenior credit facility that included a $50.0 million revolving creditfacility.  As of September 30, 2006,Stanley had $99.5 million of term loan indebtedness outstanding under itssenior credit facility with a weighted average interest rate of 7.76% and 7.61%for the three months and six months ended September 30, 2006,respectively.  As of September 30, 2006,Stanley’s borrowing availability under its revolving credit facility was $49.2million (including outstanding letters of credit).  At September 30, 2006, the Company was incompliance with all covenants under its credit facility.

**6.  STOCKHOLDERS’EQUITY**

***Common Stock***

Stanley purchased 33,000shares of treasury stock from one of its shareholders for $0.3 million duringthe six months ended September 30, 2006. The shares were recorded at cost.

***Initial Public Offering***

On October 17, 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, aggregate net proceeds to thecompany after underwriting discounts and offering expenses were approximately$72.0 million. On October 23, 2006, the company paid down $61.5 million oflong-term debt with proceeds from the offering.

***DeferredCompensation and Stock Options***

Under the Executive Deferred Compensation and EquityIncentive Plan (the “Plan”), Stanley is authorized to provide awards for amaximum of 15,000,000 shares of common stock to key employees and non-employeedirectors.  The Plan allows for cashawards, restricted stock awards, restricted stock trust awards and optionawards.  Vesting periods of these awardsvary.  Holders of restricted stock awardshave voting rights with respect to the awards. The Trustees of the restricted stock trust awards have voting rightswith respect to the trust awards.  Theoption awards may have an exercise price that ranges from 

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85% to 110% of the fairmarket value of the common stock on the date the option is granted.  No cash awards have been awarded for theperiods presented.

Effective April 1, 2006,the Company adopted the fair value recognition provisions of SFAS No. 123(R),Share-Based Payment, ‘‘Statement 123(R)’’ using the prospective-transitionmethod.  Under that transition method,compensation cost recognized in the quarter and six months ended September 30,2006 includes compensation cost for all share-based payments granted on orafter April 1, 2006 based on the grant-date fair value estimated in accordancewith the provisions of Statement 123(R). The Company is required to account for any portion of awards outstandingat the date of adoption of Statement 123(R) using the accounting principlesoriginally applied to those awards.

As a result of adoptingStatement 123(R) on April 1, 2006, the Company’s income before income taxes andnet income for the quarter ending September 30, 2006, are $0.1 million and $0.1million lower, respectively, than if it had continued to account forshare-based compensation under APB Opinion No. 25, ‘‘Accounting for StockIssued to Employees’’ (‘‘Opinion 25’’). Basic and diluted earnings per share for the quarter ended September 30,2006 are $0.16 and $0.15, respectively, under both Statement 123(R) and Opinion25.

The Company will continueto present all tax benefits of deductions resulting from the exercise of stockoptions as operating cash flows in the Statement of Cash Flows for share-basedpayment arrangements in effect prior to the adoption of Statement 123(R).  For share-based payment arrangements awardedsubsequent to the adoption of Statement 123(R), Statement 123(R) requires the cashflows resulting from the tax benefits resulting from tax deductions in excessof the compensation cost recognized for those share-based payment arrangements(excess tax benefits) to be classified as financing cash flows.  There were no excess tax benefits associatedwith share-based payment arrangements accounted for under Statement 123(R).

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 isbased on a weighted-average of the historical volatilities of similar publicentities.  The valuation model includesan assumed forfeiture rate of 7.5 percent. The expected term of options granted is derived using the simplifiedmethod and represents the period of time that options granted are expected tobe outstanding.  Options granted meet thecriteria of “plain vanilla” for purposes of applying the simplifiedmethod.  The risk-free rate for periodswithin the contractual life of the option is based on U.S. Treasury yield curvein effect at the time of grant.

|                              | ** ** | **As of  September 30, 2006** | ** ** |
|------------------------------|------------|----------------------------------------------|------------|
| Expected  volatility         |       | 35.8                                         | %          |
| Weighted-average  volatility |       | 35.8                                         | %          |
| Expected  dividends          |       | 0.0                                          | %          |
| Expected term  (in years)    |       | 4.0-6.5                                      |       |
| Risk-free rate               |       | 4.9%-5.                                      | 1%         |

 

A summary of optionactivity under the Plan as of September 30, 2006 are presented below:
| **Options**                                                      | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual Term** | ** ** | **Aggregate  Intrinsic  Value ($000)** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|----------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------|------------|
| Outstanding at  July 1, 2006                                     |       | 2,981,460  |       | $                                      | 3.79       |                                                    |       |                                        |       |   |
| Granted                                                          |       | —     |       | —                                 |       |                                                    |       |                                        |       |
| Exercised                                                        |       | (3,900     | )          | $                                      | 3.68       |                                                    |       |                                        |       |   |
| Forfeited                                                        |       | (1,500     | )          | $                                      | 1.78       |                                                    |       |                                        |       |   |
| Outstanding at  September 30, 2006                               |       | 2,976,060  |       | $                                      | 3.79       |                                                    | 5.7        |                                        | $          | 19,307 |   |
| Vested or  expected to be vested at September 30, 2006 |       | 1,579,140  |       | 1.50                                   |       | 3.3                                                     |       | $                                           | 13,872     |   |
| Exercisable at  September 30, 2006                               |       | 1,579,140  |       | 1.50                                   |       | 3.3                                                     |       | $                                           | 13,872     |   |

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No options were granted duringthe quarter ended September 30, 2006. The total intrinsic value of options exercised and share basedliabilities paid during the quarter ended September 30, 2006 was $23,144 andzero, respectively.  There were no taxbenefits realized from options exercised during the quarter ended September 30,2006.

As of September 30, 2006,there was $2.3 million of total unrecognized compensation cost related tononvested share-based compensation arrangements granted under the Plan duringthe quarters ended June 30, 2006 and September 30, 2006. That cost is expectedto be recognized over a weighted-average period of 4.6 years.

During the six monthsended September 30, 2006, there were no modifications to share-based paymentarrangements.

During the six monthsended September 30, 2006, the Company granted 11,250 restricted stock awardsand 15,000 restricted stock trust awards at an estimated fair value of $7.54per share with a vesting period of two years. Additionally, during the six months ended September 30, 2006, theCompany granted 21,600 restricted stock awards at an estimated fair value of$10.28 per share with a vesting period of one year.  The assumed forfeiture rate applicable to therestricted shares granted in the six months ended September 30, 2006 was zeropercent.

Prior to the adoption ofStatement 123(R), the fair market value of each issuance and grant wasdetermined by the Company on a contemporaneous basis.  The Company recorded stock-based deferredcompensation of approximately $1.4 million in connection with compensatorygrants of stock options and shares of restricted stock awarded during fiscal2006 and 2007.  Approximately, $0.1million of compensation expense was recognized during the quarter endedSeptember 30, 2006.  The remainingdeferred compensation will be amortized over the remaining five year vestingperiod of the awards.

**7.  COMMITMENTS ANDCONTINGENCIES**

***Contract Cost Audits***—Substantially all payments to Stanley undercost-reimbursable contracts and subcontracts with the U.S. Government areprovisional payments, which are subject to potential adjustments upon audit bythe Defense Contract Audit Agency. Audits through December 31, 2002 have beencompleted. In the opinion of management, adjustments resulting from the auditsof all subsequent years are not expected to have a material effect on theCompany’s financial position or results of operations.

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**ITEM 2.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

*You shouldread the following discussion in conjunction with the audited and unauditedconsolidated financial statements and the accompanying notes included in thisForm 10-Q.  This discussion containsforward-looking statements that involve risks and uncertainties.  Our actual results may differ materially fromthose discussed in or implied by any of the forward-looking statements as a resultof various factors, including but not limited to those listed elsewhere in thisForm 10-Q and those listed in the sections titled “Risk Factors” and “Forward-LookingStatements” in our previously filed Form S-1, as amended.*

**Overview**

We provideinformation technology services and solutions to U.S. defense and federalcivilian 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 andtechnology.  As a systems integrator, weapply these five service areas to enable our customers to achieveinteroperability between different business processes and informationtechnology systems.

Contractsfunded by federal government agencies account for substantially all of ourrevenues.  As of September 30, 2006, wehad more than 200 active contractual engagements across 38 federal governmentagencies.  Our customers include theDepartment of Defense (including all major agencies within the Department ofDefense), the Department of Health and Human Services, the Department ofHomeland Security, the Department of Justice, the Department of State, theDepartment of Transportation, the Department of the Treasury and NASA.  We have served customers that provided over90% of our revenues for the fiscal year ended March 31, 2006, or fiscal 2006,for an average of approximately twelve years.

**Key Metrics Evaluated By Management**

We manage andassess the performance 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 most significant of these metrics arediscussed below.

***Revenue Growth***

We closelymonitor revenue growth in order to assess the performance of our business.  In monitoring our revenue growth, we focus onboth internal revenue growth and revenue growth through acquisitions.  Our internal revenue growth is drivenprimarily by two factors. First, internal revenue growth is driven by addingnew customers and by obtaining new task orders and contracts with our existingcustomers.  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, internal revenue growth is driven byincreasing revenues under existing contracts and task orders withcustomers.  For example, since theinitial award of our contract with the Department of State for the provision ofpassport processing and support services, the scope of services provided by us,and the revenues generated by those services, have grown significantly.

Our revenuegrowth strategy also includes the pursuit of strategic acquisitions.  We have completed the following fouracquisitions since 2000: our acquisition of GCI Information Services, Inc. inJanuary 2000, our acquisition of CCI, Incorporated, or CCI, in September 2002,our acquisition of FSC in December 2003 and our acquisition of Morgan inFebruary 2006.

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***Backlog***

We monitor backlog, which provides us withvisibility of our future revenues, as a measure of the strength of our targetmarkets and our ability to retain existing contracts and win newcontracts.  The following table summarizesour backlog as of the dates indicated:
| ** **    | ** ** | **As of March 31,** | ** ** | **As of September 30,** | ** ** |
|---------------|------------|------------------------------------|------------|----------------------------------------|------------|
| ** **    | ** ** | **2004**                           | ** ** | **2005**                               | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **    | ** ** | **(in millions)**             | ** ** |
| Backlog:      |       |                               |       |                                   |       |   |   |   |   |   |   |
| Funded        |       | $                                  | 147.4      |                                   | $          | 124.1 |   | $ | 160.9 |   | $ | 133.0 |   | $ | 241.0 |   |
| Unfunded      |       | 363.4                              |       | 395.6                                  |       | 684.4 |   | 394.7 |   | 708.4 |   |
| Total Backlog |       | $                                  | 510.8      |                                   | $          | 519.7 |   | $ | 845.3 |   | $ | 527.7 |   | $ | 949.4 |   |

 

Each year, asignificant portion of our revenues is derived from our backlog, and asignificant portion of our backlog represents work related to the continuationof services and solutions under contracts or projects where we are the incumbentprovider.  We expect to recognizerevenues from approximately 21.0% of our September 30, 2006, total backlogduring the fiscal year ended March 31, 2007.

We definebacklog as the amount of revenues we expect to realize (i) over the remainingbase contract performance period and (ii) from the exercise by the customer ofoption periods that we reasonably believe will be exercised, in each case fromsigned contracts in existence as of the measurement date.  We do not include contract ceiling values, whichrepresent the maximum amount of contract awards that could be awarded to allcontractors under GWAC or ID/IQ contracts, in our backlog calculation.

We also do notinclude in backlog (i) the expected amount of revenues that would be realizedif, and when, we were successful in the re-compete of signed contracts inexistence as of the measurement date or (ii) the expected amount of revenuesthat would be realized from future unidentified growth on signed contracts andtask orders in existence as of the measurement date.

We definefunded backlog as the portion of our backlog for which funding currently isappropriated and obligated to us under a signed contract or task order by thepurchasing agency, or otherwise authorized for payment to us by a customer uponcompletion of a specified portion of work, less the amount of revenue we havepreviously recognized under the contract. Our funded backlog does not include the full potential value of ourcontracts, because Congress often appropriates funds to be used by an agencyfor a particular program or contract on a yearly or quarterly basis, eventhough the contract may call for performance over a number of years.  As a result, contracts typically are onlypartially funded at any point during their term, and all or some of the work tobe performed under the contracts may remain unfunded unless and until Congressmakes subsequent appropriations and the procuring agency allocates funding tothe contract.

***Contract Mix***

We work withthe federal government under contracts employing one of three types of pricestructures: cost-plus-fee, time-and-materials and fixed-price.  Cost-plus-fee contracts are typically lowerrisk arrangements and thus yield lower profit margins than time-and-materialsand fixed-price arrangements.  Becausethe 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 theopportunity to influence the contract type, and where customer requirements areclear, we prefer time-and-materials and fixed-price arrangements rather thancost-plus-fee arrangements because time-and-materials and fixed-pricecontracts, as compared with cost-plus-fee contracts, generally provide greateropportunity for the customer to save money and for us to generate highermargins.  Our acquisition of Morgan inFebruary 2006 has resulted in a shift in our contract mix toward a greaterpercentage of time-and-materials contracts. The following table summarizes our historical contract mix, measured asa percentage of total revenues, for the periods indicated:

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| ** **         | ** ** | **Three Months Ended  September 30,**     | ** ** | **Six Months Ended  September 30,**       | ** ** |
|--------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **         | ** ** | **    2005    ** | ** ** | **    2006    ** | ** ** | **2005** | ** ** | **2006** | ** ** |
| Cost-plus-fee      |       | 61                                                       | %          | 54                                                       | %          | 63 | % | 53 | % |
| Time-and-materials |       | 19                                                       | %          | 32                                                       | %          | 18 | % | 32 | % |
| Fixed-price        |       | 20                                                       | %          | 14                                                       | %          | 19 | % | 15 | % |

 

***Headcount and Labor Utilization***

We generaterevenues primarily from services provided by our employees and subcontractors,with services provided by our employees generally yielding higher profits thanservices provided by our subcontractors. Our ability to hire and deploy additional qualified employees is a keydriver of our ability to generate additional revenues, and our successfuldeployment of existing employees on direct-billable jobs is a key driver of ourprofitability.

***Indirect Costs***

Indirect costsconstitute a substantial portion of the costs associated with our performanceof contracts for customers.  We carefullymonitor the amount by which our actual indirect costs under our contracts varyfrom those expected to be incurred, which we refer to as indirect ratevariance.  Increased indirect ratevariance can adversely affect our ability to achieve attractive contractpricing, our profitability and our competitive position, by resulting inunexpected increased costs to our customers.

***Days Sales Outstanding***

Days salesoutstanding, or DSO, is a measure of how efficiently we manage the billing andcollection of our accounts receivable, our most significant working capitalrequirement.  For the three months endedSeptember 30, 2006, we reported DSO of 72 days, a decrease from 78 days wereported for the three months ended June 30, 2006.

***Unbilled Receivables***

Unbilledreceivables are comprised of work-in-process that will be billed in accordancewith contract terms and delivery schedules, as well as amounts billable uponfinal execution of contracts, contract completion, milestones or completion ofrate 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.

Payments to usfor performance on certain of our federal government contracts are subject toaudit by the DCAA and are subject to government funding.  We provide a reserve against our receivablesfor estimated losses that may result from rate negotiations, audit adjustmentsand/or government funding availability. To the extent that actual adjustments due to rate negotiations, auditadjustments or government funding availability differ from our estimates, ourrevenue may be impacted.  Due to the factthat substantially all of our receivables come from contracts funded by thefederal government, the likelihood of a material loss on an uncollectible accountfrom this activity is low.

**Critical Accounting Policies**

The discussionand analysis of our financial condition and results of operations is based onour consolidated financial statements, which have been prepared in accordancewith GAAP.  The preparation of theseconsolidated financial statements requires management to make estimates andassumptions that affect reported amounts, and actual results may differ fromthe estimates.  Our significantaccounting policies are described in Note 1 to our audited consolidatedfinancial statements included in this filing. We consider the following accounting policies to be critical to theunderstanding of our financial condition and results of operations becausethese policies require the most difficult, subjective or complex judgments onthe part of our management in their application, often as a result of the needto make estimates about the effect of matters that are inherently uncertain,and are the most important to our financial condition and operating results.

***Revenue Recognition***

We recognizerevenue under our contracts when a contract has been executed, the contractprice is fixed and determinable, delivery of services or products has occurredand collectibility is considered probable and can be reasonably estimated. Weuse a standard management process to determine whether all required criteriafor revenue recognition have 

15

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been met, which includes regular reviews of our contract performance.This review covers, among other matters, progress against a schedule,outstanding action items, effort and staffing, quality, risks and issues,subcontract management, costs incurred, commitments and satisfaction. Duringthis review, we determine whether the overall progress on a contract isconsistent with the effort expended.

Undercost-plus-fee contracts, revenues are recognized as costs are incurred andinclude an estimate of applicable fees earned. We consider fixed fees under cost-plus-fee contracts to be earned inproportion to the allowable costs actually incurred in performance of thecontract for level of effort contracts. For completion type cost-plus-fee contracts, fixed fees are earned inproportion to the percentage of work completed. For time-and-materials contracts, revenues are computed by multiplying thenumber of direct labor-hours expended in performance of the contract by thecontractual billing rates and adding other billable direct and indirectcosts.  For fixed-price contracts,revenues are recognized as services are performed, using the percentage-of-completionmethod, applying the cost-to-cost or units of delivery method, in accordancewith Accounting Research Bulletin No. 45 and American Institute of CertifiedPublic Accountants (AICPA) Statement of Position 81-1 “Accounting forPerformance of Construction-Type and Certain Production-Type Contracts” (SOP81-1).

Contractrevenue recognition inherently involves the use of estimates.  Examples of estimates include thecontemplated level of effort to accomplish the tasks under contract, the costof the effort and an ongoing assessment of our progress toward completing thecontract.  From time to time, as part ofour standard management process, facts develop that require us to revise ourestimated total costs and revenues.  Tothe extent that a revised estimate affects contract profit or revenuepreviously recognized, we record the cumulative effect of the revision in theperiod in which the facts requiring the revision become known.  The full amount of an anticipated loss on anytype of contract is recognized in the period in which it becomes probable andcan be reasonably estimated.

Forcost-plus-award fee type contracts, we recognize the expected fee to be awardedby the customer at the time such fee can be reasonably estimated, based onfactors such as prior award experience and communication with the customerregarding performance, including any interim performance evaluations renderedby the customer.  For cost-plus-incentivefee type 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 periodic estimates to complete andadjust the incentive fee as required based on the contract incentive feeformula.

Our contractswith agencies of the government are subject to periodic funding by therespective 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, we may proceed with workbased on customer direction prior to the completion and signing of formalcontract documents.  Such situationsrequire completion of a formal internal review process and management approvalprior to commencement of work. Additionally, revenue associated with such work is recognized withoutprofit and only when it can be reliably estimated and realization isprobable.  We base our estimates onnotices to proceed from our customers, previous experience with customers,communications with customers regarding funding status, and our knowledge ofavailable funding for the contract or program. Pre-contract costs related to unsuccessful contract bids are expensed inthe period in which we are notified that the contract will not be issued.

Disputesoccasionally arise in the normal course of our business due to events such asdelays, changes in contract specifications, and questions of cost allowabilityor collectibility.  Such matters, whetherclaims or unapproved change orders in the process of negotiation, are recordedat the lesser of their estimated net realizable value or actual costs incurred,and only when the realization is probable and can be reliably estimated.  Claims against us are recognized where a lossis considered probable and can be reasonably estimated in amount.

***Contract Cost Accounting***

As acontractor providing services primarily to the federal government, we mustcategorize our costs as either direct or indirect and allowable or unallowable.  Direct costs are those costs that areidentified with specific contracts. These costs include labor, subcontractor and consultant services, thirdparty materials we purchase under a contract and other non-labor costs incurredin support of a contract.  Indirect costsare those costs not identified with specific contracts.  Rather, indirect costs are allocated tocontracts in accordance with federal government rules 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 allowable under the FederalAcquisition Regulation or specific contract provisions cannot be considered forreimbursement under our federal government contracts.  We must specifically identify these costs toensure we comply with these requirements. Our unallowable costs include a portion of our executive compensation,certain employee morale activities, certain types of legal and consulting costsand the amortization of identified intangible assets, 

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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 and Intangible Assets***

Goodwillrepresents the excess of cost over the fair value of net tangible andidentifiable intangible assets of acquired companies.  In accordance with Statement of FinancialAccounting Standards, or SFAS, No. 142, *Goodwill and OtherIntangible Assets*, or SFAS No. 142, we do not amortizegoodwill.  Rather, we test goodwill forimpairment 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 potentialimpairment, while the second step measures the amount of impairment, ifany.  Under the guidelines of SFAS No.142, we are required to perform an impairment test at least on an annual basisat any time during the fiscal year, provided that the test is performed at thesame time every year.  An impairment losswould be recognized when the assets’ fair value is below their carryingvalue.  Based on the testing performed,we believed that no impairments existed as of December 31, 2005; however, inthe quarter ended March 31, 2006, we recorded an aggregate charge of $3.6million relating to the impairment of the CCI and FSC trade names.  The impairment arose as a result of ourcompletion of substantially all of the activities in connection with novatingthe contracts previously legally held by CCI and FSC.  As such, we no longer ascribe any value tothe CCI and FSC trade names and that portion of the identified intangibles waswritten-off as impairment of intangible assets in the year ended March 31, 2006.  Customer relationships, noncompete agreementsand backlog and contracts are amortized on a straight-line basis over periodsranging from one to seven years.

**Results of Operations**

Our historicalfinancial statements reflect the operating results of our acquisitions from thedate of acquisition.  The followingtables set forth the results of operations expressed in dollars (in thousands)and as a percentage of revenues, for the periods below:
| ** **                                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Six Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| **Consolidated Statement of Income Data** | ** ** | **2005**                                             | ** ** | **2006**                                           | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                    | ** ** | **(unaudited)**                                      | ** ** | **(unaudited)**                                    | ** ** |
| Revenues                                                      |       | $                                                    | 66,859     |                                               | $          | 98,191 |   | $ | 131,686 |   | $ | 190,746 |   |
| Operating costs  and expenses:                                |       |                                                 |       |                                               |       |   |   |   |   |
| Cost of revenues                                              |       | 57,611                                               |       | 84,814                                             |       | 114,581 |   | 165,287 |   |
| Selling, general and administrative                           |       | 3,183                                                |       | 4,861                                              |       | 6,229 |   | 9,212 |   |
| Amortization of deferred compensation                         |       | 184                                                  |       | 355                                                |       | 339 |   | 604 |   |
| Depreciation and amortization                                 |       | 564                                                  |       | 1,306                                              |       | 1,116 |   | 2,694 |   |
| Total operating  costs and expenses                           |       | 61,542                                               |       | 91,336                                             |       | 122,265 |   | 177,797 |   |
| Operating income                                              |       | 5,317                                                |       | 6,855                                              |       | 9,421 |   | 12,949 |   |
| Other income  (expense):                                      |       |                                                 |       |                                               |       |   |   |   |   |
| Other expense                                                 |       | —                                               |       | (804                                               | )          | — |   | (544 | ) |
| Interest expense—net                                     |       | (361                                                 | )          | (2,034                                             | )          | (699 | ) | (4,179 | ) |
| Total other expenses                                          |       | (361                                                 | )          | (2,838                                             | )          | (699 | ) | (4,723 | ) |
| Income before  taxes                                          |       | 4,956                                                |       | 4,017                                              |       | 8,722 |   | 8,226 |   |
| Provision for  income taxes                                   |       | (2,051                                               | )          | (1,595                                             | )          | (3,447 | ) | (3,320 | ) |
| Net income                                                    |       | $                                                    | 2,905      |                                               | $          | 2,422 |   | $ | 5,275 |   | $ | 4,906 |   |

 
| ** **                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Six Months Ended  September 30,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| **As a Percentage of Revenues** | ** ** | **2005**                                             | ** ** | **2006**                                           | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                          | ** ** | **(unaudited)**                                      | ** ** | **(unaudited)**                                    | ** ** |
| Revenues                                            |       | 100.0                                                | %          | 100.0                                              | %          | 100.0 | % | 100.0 | % |
| Operating costs  and expenses:                      |       |                                                 |       |                                               |       |   |   |   |   |
| Cost of revenues                                    |       | 86.2                                                 |       | 86.4                                               |       | 87.0 |   | 86.7 |   |
| Selling, general and administrative                 |       | 4.8                                                  |       | 5.0                                                |       | 4.7 |   | 4.8 |   |
| Amortization of deferred compensation               |       | 0.3                                                  |       | 0.4                                                |       | 0.3 |   | 0.3 |   |
| Depreciation and amortization                       |       | 0.8                                                  |       | 1.3                                                |       | 0.8 |   | 1.4 |   |
| Total operating  costs and expenses                 |       | 92.0                                                 |       | 93.0                                               |       | 92.8 |   | 93.2 |   |

 

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| ** **                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Six Months Ended  September 30,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| **As a Percentage of Revenues** | ** ** | **2005**                                             | ** ** | **2006**                                           | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                          | ** ** | **(unaudited)**                                      | ** ** | **(unaudited)**                                    | ** ** |
| Operating income                                    |       | 8.0                                                  |       | 7.0                                                |       | 7.2 |   | 6.8 |   |
| Other income  (expense):                            |       |                                                 |       |                                               |       |   |   |   |   |
| Other expense                                       |       | —                                               |       | (0.8                                               | )          | — |   | (0.3 | ) |
| Interest expense—net                           |       | (0.5                                                 | )          | (2.1                                               | )          | (0.5 | ) | (2.2 | ) |
| Total other expenses                                |       | (0.5                                                 | )          | (2.9                                               | )          | (0.5 | ) | (2.5 | ) |
| Income before  taxes                                |       | 7.4                                                  |       | 4.1                                                |       | 6.6 |   | 4.3 |   |
| Provision for  income taxes                         |       | (3.1                                                 | )          | (1.6                                               | )          | (2.6 | ) | (1.7 | ) |
| Net income                                          |       | 4.3                                                  | %          | 2.5                                                | %          | 4.0 | % | 2.6 | % |

 

We generaterevenues primarily from services provided by our employees and subcontractors,with services provided by our employees generally yielding higher profits thanservices provided by our subcontractors. To a lesser degree, we earn revenues through reimbursable travel andother reimbursable direct and indirect costs to support the contractual effortand third-party hardware and software that we purchase and integrate forcustomers as part of the solutions we provide.

Our mostsignificant expense is cost of revenues, which includes the costs of directlabor, subcontractors, materials, equipment, travel and an allocation ofindirect costs (other than selling, general and administrative expenses anddepreciation).  Indirect costs consistprimarily of fringe benefits, human resources, recruiting, training, otheroverhead and certain other non-direct costs that are necessary to supportdirect labor.  The number and types ofpersonnel, their salaries and other costs, can have a significant impact on ourcost of revenues.

Our selling,general and administrative expenses include costs not directly associated withperforming work for our customers.  Thesecosts include wages plus associated fringe benefits, stock-based compensationcharges, rent, travel and insurance. Among the functions covered by these expenses are sales, businessdevelopment, contracts, purchasing, legal, finance, accounting, humanresources, information technology and general management.  Most of these costs are allowable costs underthe cost accounting standards for contracting with the federal government andare recoverable under cost-plus-fee contracts.

Ourdepreciation and amortization expenses include the amortization of purchasedintangibles in connection with acquisitions and the amortization of leaseholdimprovements and the depreciation of property and equipment purchased in theordinary course of our business.

Certain revenuesand payments we receive are based on provisional billings and payments that aresubject to adjustment after audit. Federal government agencies have the right to challenge our costestimates and allocation methodologies with respect to government contracts.  In addition, contracts with these agenciesare subject to audit and possible adjustment to give effect to unallowablecosts under cost-plus-fee contracts or to other regulatory requirementsaffecting both cost-plus-fee and fixed-price contracts.

***Comparison of Results of Operations for the Three Months EndedSeptember 30, 2005 and 2006***

***Revenues.*** Our consolidated revenues increased $31.3 million, or 46.9%, from $66.9million for the three months ended September 30, 2005, to $98.2 million for thethree months ended September 30, 2006. The increase was primarily due to $21.1 million of increased revenuesattributable to the acquisition of Morgan, and $10.2 million of increasedrevenues related to SPAWAR Corporate Production, the Department of TransportationMaritime Administration and Army LAMA contracts and certain other contracts.

***Cost of Revenues.***  Our cost of revenues increased $27.2 million,or 47.2%, from $57.6 million for the three months ended September 30, 2005, to$84.8 million for the three months ended September 30, 2006.  This increase was primarily the result ofadditional costs attributable to revenues generated by Morgan operations, inaddition to the cost of revenues associated with the increased servicesprovided under the contracts described above.

***Selling, General and Administrative.***  Our selling, general and administrativeexpense increased $1.7 million, or 52.7%, from $3.2 million for the threemonths ended September 30, 2005, to $4.9 million for the three months endedSeptember 30, 2006.  Selling, general andadministrative expense as a percentage of total revenues increased from 4.8% to

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5.0% primarily due to an increase of $0.3 million in businessdevelopment costs associated with several significant procurements.

***Depreciation and Amortization.***  Our depreciation and amortization expenseincreased $0.7 million, or 131.6%, from $0.6 million for the three months endedSeptember 30, 2005, to $1.3 million for the three months ended September 30,2006.  The increase in depreciation andamortization was primarily due to the amortization of intangible assetsassociated with the Morgan acquisition as well as additional depreciationexpense associated with increased capital expenditures during fiscal 2006.

***Other Expense.***  Ourother expense was $0.8 million for the three months ended September 30, 2006,due to an unrealized loss on the fair value of our interest rate swapagreements.

***Interest Expense, Net.***  Our net interest expense increased $1.7million from $0.3 million for the three months ended September 30, 2005, to$2.0 million for the three months ended September 30, 2006.  The increase in net interest expense was dueto the new term loan borrowings incurred to finance the acquisition of Morgan.

***Net Income.***  Our net income decreased $0.5 million from$2.9 million for the three months ended September 30, 2005, to $2.4 million forthe three months ended September 30, 2006. The primary reason for the decline in net income was higher interestexpense associated with debt financing and the unrealized loss of $0.8 millionin the fair value of our interest rate swap agreements described above.

***Comparisonof Results of Operations for the Six Months Ended September 30, 2005 and 2006***

 

***Revenues.*** Our consolidated revenues increased $59.0 million, or 44.8%, from $131.7million for the six months ended September 30, 2005, to $190.7 million for thesix months ended September 30, 2006.  Theincrease was primarily due to $41.1 million of increased revenues attributableto the acquisition of Morgan, and $18.0 million of increased revenues relatedto SPAWAR Corporate Production, the Department of Transportation MaritimeAdministration, Army LAMA and certain other contracts.

***Cost of Revenues.***  Our cost of revenues increased $50.7 million,or 44.3%, from $114.6 million for the six months ended September 30, 2005, to$165.3 million for the six months ended September 30, 2006.  This increase was primarily the result ofadditional costs attributable to revenues generated by Morgan operations, inaddition to the cost of revenues associated with the increased servicesprovided under the contracts described above. Cost of revenues as a percentage of total revenues decreased from 87.0%to 86.7% primarily due to the favorable contract mix associated with the Morganacquistion.

***Selling, General and Administrative.***  Our selling, general and administrativeexpense increased $3.0 million, or 47.9%, from $6.2 million for the six monthsended September 30, 2005, to $9.2 million for the six months ended September30, 2006.  Selling, general andadministrative expense as a percentage of total revenues increased from 4.7% to4.8% primarily due to an increase of $0.5 million in business development costsassociated with several significant procurements.

***Depreciation and Amortization.***  Our depreciation and amortization expenseincreased $1.6 million, or 141.4%, from $1.1 million for the six months endedSeptember 30, 2005, to $2.7 million for the six months ended September 30,2006.  The increase in depreciation andamortization was primarily due to the amortization of intangible assetsassociated with the Morgan acquisition as well as additional depreciationexpense associated with increased capital expenditures during fiscal 2006.

***Other Expense.***  Ourother expense was $0.5 million for the six months ended September 30,2006, resulting from a net unrealized loss in the fair value of our interestrate swap agreements.

***Interest Expense, Net.***  Our net interest expense increased $3.5million from $0.7 million for the six months ended September 30, 2005, to $4.2million for the six months ended September 30, 2006.  The increase in net interest expense was dueto the new term loan borrowings incurred to finance the acquisition of Morgan.

***Net Income.***  Our net income decreased $0.4 million from$5.3 million for the six months ended September 30, 2005, to $4.9 million forthe six months ended September 30, 2006. The primary reason for the decline in net income was

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higher interest expense associated with debt financing, as well as theunrealized loss of $0.5 million in the fair value of our interest rate swapagreements described above.

**Seasonality**

 

Our revenuesand operating income have typically been positively affected in the quarterending March 31 due to an increase in the volume of revenues generated underour contract with the Department of State for the provision of passportservices, as the demand for processing and delivery of U.S. passports typicallyincreases during this quarter.

**Inflation**

 

We do notbelieve that inflation has had a material effect on our business for the threeyears ended September 30, 2006.

**Liquidity and Capital Resources**

 

Our primaryliquidity needs are to finance the costs of operations pending the billing andcollection of accounts receivable, to service our debt, to make capitalexpenditures and to make selective strategic acquisitions.  Based upon our current operations, we expectthat our cash flow from operations, together with amounts we are able to borrowunder our credit facility, will be adequate to meet our anticipated needs forthe foreseeable future.  In addition, weexpect that our cash flow from operations will be adequate to meet allcontractual obligations under the credit facility and our operatingleases.  Although we have no specificplans to do so, to the extent we decide to pursue one or more significantstrategic acquisitions, we will likely need to incur additional debt or selladditional equity.

***CashFlow***

 

Accountsreceivable represents our largest working capital requirement.  We bill most of our customers monthly afterservices are rendered.  Our operatingcash flow is primarily affected by the overall profitability of our contracts,our ability to invoice and collect from our customers in a timely manner, andour ability to manage our vendor payments.
|                                            | ** ** | **Six Months Ended  September 30,** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                           | ** ** | **2006** | ** ** |
| ** **                                 | ** ** | **(in millions)**                             | ** ** |
| Net cash  provided by operating activities |       | $                                                  | 3.2        |   | $ | 11.2 |   |
| Net cash used in  investing activities     |       | $                                                  | (1.7       | ) | $ | (1.3 | ) |
| Net cash used in  financing activities     |       | $                                                  | (1.5       | ) | $ | (9.9 | ) |

 

Net cashprovided by operating activities of $11.2 million for the six months ended September30, 2006, primarily reflected our net income plus depreciation and amortizationexpenses for that period, a $2.6 million decrease in accounts receivable and a$2.0 million increase in accrued expenses. For the six months ended September 30, 2005, net cash provided byoperating activities of $3.2 million consisted primarily of net income and a$3.0 million increase in accrued expenses, offset by a $4.3 million decrease inaccounts payable and a $0.8 million increase in accounts receivable.

Net cash usedin investing activities of $1.3 million for the six months ended September 30,2006, consisted primarily of the purchase of equipment in the ordinary courseof business.  Net cash used in investingactivities of $1.7 million in the six months ended September 30, 2005,consisted of a $0.6 million earnout payment in connection with our acquisitionof CCI and $1.1 million to purchase equipment in the ordinary course ofbusiness.

Net cash used in financing activities of $9.9 million for the sixmonths ended September 30, 2006, consisted primarily of $9.7 million of netrepayments of our line of credit.  Netcash used in financing activities of $1.5 million for the six months endedSeptember 30, 2005, consisted primarily of $3.1 million of net borrowings underour line of credit, offset by a $4.2 million payment for the repurchase oftreasury stock.

***Credit Facility and Borrowing Capacity***

On February16, 2006, in order to finance our acquisition of Morgan and to refinance ourthen-outstanding indebtedness, we entered into a new senior credit facilitythat included a $50.0 million revolving credit facility.  As of

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September 30, 2006, we had $99.5 million of term loan indebtednessoutstanding under our senior credit facility. As of September 30, 2006, our borrowing availability under the revolvingportion of our senior credit facility was $49.2 million (including outstandingletters of credit).  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.

Under theterms of the credit facility, we are entitled to request an increase in thesize of the credit facility by an amount not greater than $75 million in theaggregate.  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 creditagreement also contains a number of affirmative and restrictive covenants,including limitations on mergers, consolidations and dissolutions; sales ofassets; investments and acquisitions; indebtedness and liens; repurchases ofshares of capital stock and options to purchase shares of capital stock;transactions with affiliates; sale and leaseback transactions; and restrictedpayments.

In addition,the credit agreement provides that we are required to meet the followingfinancial covenants:

·a fixed 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 (as definedin the credit agreement) less the actual amount paid by us and our subsidiariesin cash on account of capital expenditures and taxes over the period consistingof the four consecutive fiscal quarters ending on or immediately prior to thedetermination date to (ii) consolidated cash interest expense for such period,scheduled principal payments required to be made on consolidated total debtduring such period and certain restricted payments paid during such period;

·a maximum leverage ratio based upon the ratio of (i) consolidated total debt to(ii) consolidated EBITDA (as defined in the credit agreement), which willrequire us to maintain a ratio of 4.25 to 1.00 for each fiscal quarter endingon or prior to December 31, 2006, 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

·a minimum consolidated net worth equal to the sum of (i) 85% of ourconsolidated net worth as at December 31, 2005, (ii) 50% of consolidated netincome on a cumulative basis for all preceding fiscal quarters, commencing withthe fiscal quarter ended March 31, 2006, and (iii) 100% of the amount by whichour total stockholders’ equity is increased as result of any public or privateoffering of our common stock after the closing date of our credit agreement.

As ofSeptember 30, 2006, we were in compliance with all covenants under our debtfacility.

**Capital Expenditures**

We haverelatively low capital expenditure requirements.  Our capital expenditures were $1.1 millionand $1.4 million for the six months ended September 30, 2005 and the six monthsended September 30, 2006, respectively. Substantially all of these expenditures consisted of leaseholdimprovements and purchases of office equipment due to investments made inconnection with our relocation to a new headquarters facility in fiscal 2006.

**Off-Balance Sheet Arrangements**

We do not haveany off-balance sheet arrangements.

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**Contractual Obligations and Other Commitments**

The following table details our projectedpayments for our significant contractual obligations as of March 31,2006.  The table is based upon availableinformation and certain assumptions we believe to be reasonable.
|                                            | ** ** | **Payments due by Period** | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                 | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                   | ** ** |
| Long-term debt  obligations                |       | $                                         | 100,000    |   | $ | 1,000 |   | $ | 2,000 |   | $ | 97,000 |   | $ | — |   |
| Interest on long-term  debt obligations(1) |       | 37,395                                    |       | 7,343 |   | 15,199 |   | 14,853 |   | — |   |
| Capital lease  obligations                 |       | 136                                       |       | 104 |   | 19 |   | 13 |   | — |   |
| Operating lease  obligations               |       | 32,101                                    |       | 6,277 |   | 10,110 |   | 7,391 |   | 8,322 |   |
| Purchase  obligations                      |       | 27,436                                    |       | 26,499 |   | 937 |   | — |   | — |   |
| Total                                      |       | $                                         | 197,068    |   | $ | 41,223 |   | $ | 28,265 |   | $ | 119,257 |   | $ | 8,322 |   |

 

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(1)          For purposes of calculating interest onlong-term debt obligations, we have assumed, in light of the current risinginterest rate environment, that interest rates rise by 0.25% per year over thenext five years.

The lease ofour new headquarters facility represents $16.8 million of the total operatinglease obligations set forth above, but does not include $2.1 million that wouldbe payable by us if we exercise an option to terminate this lease in 2010.  Certain other lease obligations constitutereimbursable costs under contracts with our customers.

In the normalcourse of our business, we enter into agreements with subcontractors andvendors to provide products and services that we consume in our operations orthat are delivered to our customers. Purchase obligations set forth in the table consist of over 300outstanding purchase orders, the majority of which are with subcontractors, andnone of which exceeds $3.0 million. These products and services are not considered unconditional obligationsuntil the products and services are delivered, at which time we record aliability for our obligation.

**Recent Accounting Pronouncements**

In December2004, the Financial Accounting Standards Board, or FASB, issued SFAS No. 123R, *Share-Based Payment*, or SFAS No. 123R, which replaces SFASNo. 123, *Accounting for Stock-Based Compensation*,and supersedes APB Opinion No. 25, *Accounting for StockIssued to Employees*.  SFAS No.123R requires compensation costs related to share-based payment transactions tobe recognized in the financial statements. With limited exceptions, the amount of compensation cost is measuredbased on the grant-date fair value of the equity or liability instrumentsissued.  SFAS No. 123R requires liabilityawards to be remeasured each reporting period and compensation costs to berecognized over the period that an employee provides service in exchange forthe award.  SFAS No. 123R was effectivefor us as of the beginning of our fiscal year that begins April 1, 2006.  We have adopted the provisions of SFAS No.123R on a prospective basis.

In March 2005,the SEC issued Staff Accounting Bulletin, or SAB, No. 107, *Share-BasedPayment*, or SAB 107.  SAB 107provides guidance to assist registrants in the initial implementation of SFAS123R.  SAB 107 includes, but is notlimited to, interpretive guidance related to share-based payment transactionswith non-employees, valuation methods and underlying expected volatility andexpected term assumptions, the classification of compensation expense andaccounting for the income tax effects of share-based arrangements upon adoptingSFAS 123R.

In June 2005,the FASB approved Emerging Issues Task Force Issue No. 05-06, *Determining the Amortization Period for Leasehold Improvements*,or EITF 05-06.  EITF 05-06 providesguidance on determining the amortization period for leasehold improvementsacquired in a business combination or acquired subsequent to leaseinception.  The guidance requires thatleasehold improvements acquired in a business combination or purchasedsubsequent to the inception of a lease be amortized over the lesser of theuseful life of the assets or a term that includes renewals that are reasonablyassured at the date of the business combination or purchase.  The guidance is effective for periodsbeginning after June 29, 2005.  EITF05-06 has not had a material impact on our financial position, results ofoperations or cash flows.

In July 2006,the FASB issued Interpretation No. 48 (FIN 48), *Accountingfor Uncertainty in Income Taxes*, *an interpretation of FASBStatement No. 109*, Accounting for Income Taxes.  FIN 48 clarifies the accounting for incometaxes recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement,classification, interest and penalties, accounting in interim periods,disclosure and transition.  FIN 48 iseffective for fiscal years beginning after

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December 15, 2006.  We are in theprocess of determining what effect, if any, the adoption of this proposal willhave on our financial position, results of operations or cash flows.

In September 2006, the FASB issued Statement of Financial AccountingStandards No. 157 (SFAS 157), *Fair Value Measurements*.  SFAS 157 provides guidance for measuring thefair 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 is effective for fiscal yearsbeginning after November 15, 2007.  Weare in the process of determining what effect, if any, the adoption of SFAS 157will have on our financial position, results of operations, or cash flows.

Several other new accounting standards became effective during theperiods presented or will be effective subsequent to September 30, 2006.  None of these new standards had or isexpected to have a significant impact on our financial position, results of operationor cash flows.

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCUSSION ABOUT MARKET RISK**

Our principalexposure to market risk relates to changes in interest rates.  From time to time, we enter into interestrate swap agreements to effectively limit exposure to interest rate movementswithin the parameters of our interest rate hedging policy.  As of March 31, 2006, all of the outstandingdebt under our senior credit facility was subject to floating interest raterisk.  In March 2004, we entered into aninterest rate swap agreement covering $10.0 million of our indebtedness and, inMarch 2006, we entered into three interest rate swap agreements collectivelycovering $50.0 million of our indebtedness, with terms of one, two and sixyears, respectively.  Even after givingeffect to these agreements, we are exposed to risks due to fluctuations in themarket value of these agreements and changes in interest rates with respect tothe portion of our senior credit facility that is not covered by theseagreements.  A hypothetical change in theinterest rate of 100 basis points would have changed annual cash interestexpense by $0.4 million.

**ITEM 4. CONTROLS AND PROCEDURES**

As ofSeptember 30, 2006, under the supervision and with the participation of ourmanagement, including our chief executive officer and our chief financialofficer, we have evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures pursuant to Rule 13a of the SecuritiesExchange Act.  Based on this evaluation,our chief executive officer and our chief financial officer have concluded thatour disclosure controls and procedures are effective.

There were nochanges in the Company’s internal control over financial reporting during thethree months ended September 30, 2006 that have materially affected, orreasonably likely to materially affect, our internal control over financialreporting.

**PART 2:OTHER INFORMATION**

**ITEM 1. LEGAL PROCEEDINGS**

From time to time,we are involved in various legal matters and proceedings concerning mattersarising in the ordinary course of business. We currently believe that any ultimate liability arising out of thesematters and proceedings will not have a material adverse effect on ourfinancial position, results of operations or cash flows.

**ITEM 1A. RISK FACTORS**

*Any of therisks described below could materially adversely affect our business, financialcondition and operating results.*

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**Risks Related to Our Business**

***We depend on contracts with federalgovernment agencies for substantially all of our revenues.  If our relationships with these agencies wereharmed, our revenues and operating results could decline.***

Revenues fromfederal government contracts, either as a prime contractor or as asubcontractor, accounted for 99.9% of our revenues for the fiscal year endedMarch 31, 2006.  We believe that federalgovernment contracts will continue to be the source of substantially all of ourrevenues 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 key factors in maintaining ourrelationships with federal government agency customers are our performance onindividual contracts and task orders, the strength of our professionalreputation and the relationships of our key executives with customerpersonnel.  To the extent that ourperformance does not meet customer expectations, or our reputation orrelationships with one or more key customers are impaired, our revenues andoperating results could decline as a result.

***Changes in the spending policies or budgetpriorities of the federal government, and the Department of Defense inparticular, could cause us to lose revenues.***

Changes infederal government fiscal or spending policies, or in the Department of Defensebudget allocation, could directly affect our financial performance.  Among the factors that could harm ourbusiness are:

·                  curtailment ofthe federal government’s use of technology services firms;

·                  a significantdecline in spending by the federal government in general or by specificdepartments or agencies in particular;

·                  reductions infederal government programs or requirements;

·                  a shift inspending to federal programs and agencies that we do not support or where wecurrently do not have contracts or key relationships;

·                  delays in thepayment of our invoices by government payment offices;

·                  federalgovernmental shutdowns, such as the shutdown that occurred during the government’s1996 fiscal year, and other potential delays in the government appropriationsprocess, such as federal agencies having to operate under a continuing fundingresolution because of delays in Congressional budget appropriations;

·                  emergency spendingthat reduces funds available for other government priorities, such as theemergency 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 otherfactors could cause federal government agencies and departments to reduce theirpurchases under contracts, to exercise their right to terminate contracts ornot to exercise options to renew contracts, any of which could cause us to loserevenues.

In particular,revenues earned from contracts with the Department of Defense, including fromsubcontracts having the Department of Defense as the ultimate purchaser,represented approximately 66% of our revenues for the six months endedSeptember 30, 2006.  In the past, theU.S. defense budget has declined from time to time, resulting in a slowing ofnew program starts, program delays and program cancellations.  These reductions may cause defense-relatedgovernment contractors to experience declining revenues, increased pressure onoperating margins and, in some cases, net losses.  Current federal government spending levels ondefense-related programs are in part related to the U.S. military operations inAfghanistan and Iraq and may not be sustainable, including as a result ofchanges in government leadership, policies or priorities.  Future levels of expenditures andauthorizations for defense-related programs may decrease or shift to programsin areas where we do not provide services. Any such decline or shift in defense-related expenditures could harm ourrevenues and operating results.

In addition,any limitations 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 additionalcontracts.  Our backlog consistsexclusively of contracts with federal departments and agencies, and thecontinuation of these contracts, or award of additional contracts from theseagencies, could be materially harmed by federal government spending reductionsor budget cutbacks at these departments or agencies.

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***Our revenues may decline materially if we areunable to obtain a new award of our passport processing services contract withthe Department of State in September 2007 or if we are unable to renew any ofour other significant contracts.***

We earn asignificant portion of our revenues from the provision of passport processingand support services to the Department of State.  Revenues from these services wereapproximately 15% of our revenues for the six months ended September 30,2006.  The fixed initial term of ourcontract with the Department of State for the provision of passport processingand support services has expired, and we are currently performing theseservices pursuant to the Department of State’s exercise of a one-year renewaloption that expires in September 2007. The Department of State may not award us a new contract upon theexpiration of the current contract in September 2007.  We currently expect the Department of Stateto subject this contract to recompetition before awarding a new contract.  Our revenues may decline materially if we areunable to obtain a renewal of this contract or any of our other significantcontracts.  This contract is related butseparate from the recently awarded ten year contract worth $164 million withthe State Department to conduct passport book personalization services in up totwo contractor-supplied and operated turnkey facilities.

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

Our totalbacklog represents the amount of revenues we expect to realize over the remainingbase contract performance period and from the exercise of all option periodsthat we reasonably believe will be exercised, in each case from signedcontracts in existence as of the measurement date.  We do not include contract ceilings forgovernment-wide acquisition contracts, or GWACs, or agency-specific indefinitedelivery/indefinite quantity, or ID/IQ, contracts in our backlogcalculation.  Congress typicallyappropriates funds for our federal government customers on an annual basis,even though their contracts with us may call for performance that is expectedto 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 neverrealize some of the revenues that are included in our total backlog, and thereis a higher degree of risk in this regard with respect to unfundedbacklog.  As of September 30, 2006, ourtotal backlog was approximately $949.4 million, of which only approximately$241.0 million was funded.  In addition,there can be no assurance that our backlog will result in actual revenues inany particular period.  This is becausethe actual receipt, timing and amount of revenues under contracts included inbacklog are subject to various contingencies, many of which are beyond ourcontrol.  For example, the actual receiptof revenues from contracts included in backlog may never occur or may bedelayed because a program schedule could change or the program could becancelled, or a contract could be reduced, modified or terminated early,including as a result of a lack of appropriated funds.  In addition, the fact that our backlog maytranslate into revenue does not guarantee that the contracts will beprofitable.

***Loss of our position as a qualifiedcontractor under one or more General Services Administration schedules, or as aprime contractor on one or more of our contracts, would impair our operatingresults and our ability to win new business.***

In recentyears, the federal government has increasingly relied on General ServicesAdministration, or GSA, schedules and multi-award ID/IQ contracts for itsprocurement needs.  When using GSAschedules and multi-award ID/IQ contracts, a procuring officer choosesproviders from a pre-selected group of contractors, and contractors that arenot part of the group generally will not be notified of, and will not be ableto compete for, these contracts or task orders. Accordingly, our ability to maintain our existing business and win newbusiness depends on our ability to maintain our position as a GSA schedule contractorand a prime contractor on multi-award ID/IQ contracts.

If we were tolose any of our GSA schedules or our prime contractor position on any of ourcontracts, we could lose revenues, and our ability to win new business and ouroperating results could decline as a result. Similarly, unless we are successful in expanding our GSA schedulepresence and our base of multi-award ID/IQ contracts, our ability to grow ourbusiness may be hindered.

***Most of our revenues are earned fromcontracts with limited initial terms.  Wemay expend significant resources in connection with these contracts that we maynot recover if our customers do not exercise their contract extension options.***

Our contractstypically have a one or two year initial term, with multiple options that areexercisable by our government customers to extend the contract for one or moreadditional years.  Our customers may notexercise any of their extension options. Moreover, because we believe that our contracts with limited initialterms represent the early portion of longer customer programs, we expendsignificant financial and personnel resources and expand our operations to beable to fulfill these programs beyond the initial contract term.  If a significant number of our contracts arenot extended beyond their

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initial terms, we may be unable to recover the costs we incurred, wemay not recognize anticipated revenues and our operating results may be harmed.

***The loss of one or more members of our seniormanagement team could impair our relationships with government customers and ourability to compete and could disrupt the management of our business.***

We believethat our success depends on the continued contributions of the members of oursenior management team.  Our seniormanagement team has extensive industry experience, and the relationships andreputation that members of our senior management team have established andmaintain with government personnel contribute to our ability to maintain goodcustomer relations and to identify new business opportunities.  The loss of the services of one or more ofour senior executives could impair our ability to identify and secure newcontracts, to maintain good customer relations and to otherwise manage ourbusiness, any of which could harm our business and operating results.  We have not entered into employment ornon-competition agreements with any members of our senior management.

***If we fail to attract and retain skilledemployees, we might not be able to perform under our contracts and our abilityto maintain and grow our business could be limited.***

The growth ofour business and revenues depends in large part upon our ability to attract andretain sufficient numbers of highly qualified individuals who have advancedinformation technology skills and appropriate security clearances, and who workwell with our defense and federal civilian government customers.  Competition for such personnel is intense,and recruiting, training and retention costs place significant demands on ourresources.  If we are unable to recruitand retain a sufficient number of qualified employees, our ability to maintainand grow our business could be limited. Furthermore, we could be required to engage larger numbers of contractedpersonnel, which could reduce our profit margins.  In addition, many of our professionalpersonnel may have specific knowledge of and experience with our federalgovernment customers’ operations, and we obtain some of our contracts based onthat knowledge and experience.  The lossof services of key personnel could impair our ability to perform requiredservices under some of our contracts and to retain such contracts, as well asour ability to win new business.

***We face intense competition from manycompetitors that have greater resources than we do, which could result in pricereductions, reduced profitability and loss of market share.***

We operate inhighly competitive markets and generally encounter intense competition to wincontracts and task orders.  For example,we must often discount our GSA schedule rates in order to secure contracts frommany of our customers in competitive situations.  Many of our competitors have greaterfinancial, technical, marketing and public relations resources, larger customerbases and greater brand or name recognition than we do.  We expect that the number of such competitorswill grow through industry consolidation and the increasing participation inthe federal government services market by traditional consulting andoutsourcing providers and hardware and software manufacturers that seek toincrease their service offerings.  Thesecompetitors could, among other things:

·                  divert salesfrom us by winning very large-scale government contracts due to different orgreater technical capabilities, past performance on large-scale contracts,geographic presence, price and the availability of key professional personnel;

·                  force us tocharge lower prices in order to win or maintain contracts;

·                  harm ourrelationships; and

·                  seekto hire our employees.

If we losebusiness to our competitors or are forced to lower our prices, our revenues andour operating profits could decline and we could suffer a loss of market share.

In addition,we may face competition from our subcontractors who, from time to time, seek toobtain prime contractor status on contracts for which they currently serve as asubcontractor for us.  If one or more ofour current subcontractors are awarded prime contractor status on suchcontracts in the future, it would divert sales from us and could force us tocharge lower prices in order to ensure that we retain our prime contractorstatus.

***We derive substantially all of our revenuesfrom contracts awarded through competitive procurement processes, which canimpose substantial costs upon us and negatively impact our operating results.***

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

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·                  the need to bidon engagements in advance of knowing the complete design or full requirements,which may result in unforeseen difficulties in executing the engagement andcost overruns;

·                  the substantialcost and managerial time and effort that we spend to prepare bids and proposalsfor contracts that may not be awarded to us and schedules that may not be used;

·                  the expense anddelay that we may face if our competitors protest or challenge contract awardsmade to us pursuant to competitive procedures, and the risk that any suchprotest or challenge could result in the resubmission of offers, or intermination, reduction or modification of the awarded contract; and

·                  theopportunity cost of not bidding on and winning other contracts we might haveotherwise pursued.

The costs weincur in the competitive procurement process may be substantial, and, to theextent we participate in competitive procurements and are unable to winparticular contracts, these costs could negatively affect our operatingresults.  In addition, GSA schedulecontracts, GWACs, blanket purchase agreements and other ID/IQ contracts do notguarantee more than a minimal amount of work for us, but instead provide usaccess to work generally through further competitive procedures.  The increasing reliance by the federalgovernment on GSA schedules, GWACs and other multi-award ID/IQ contracts forits procurement needs has led to increased competition and pricing pressure,requiring that we make sustained post-award efforts to realize revenues underthese contracts.

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

We provideservices to the federal government under contracts with three basic types ofprice structure: cost-plus-fee, time-and-materials and fixed-price.  For the six months ended September 30, 2005,we derived approximately 63%, 18% and 19% of revenues from cost-plus-fee,time-and-materials and fixed-price contracts, respectively.  For the six months ended September 30, 2006,we derived approximately 53%, 32% and 15% of revenues from cost-plus-fee,time-and-materials and fixed-price contracts, respectively.  Each of these types of contracts, to varyingdegrees, involves the risk that we underestimate our cost of fulfilling the contract,and we occasionally have suffered in the past, and may suffer in the future,reduced profits or financial losses on our contracts, thereby causing ouroperating results to decline as a result. This risk is greater for fixed-price contracts, where we bear the fullimpact of cost overruns, and an increase of fixed-price contracts in ourcontract mix would increase our exposure to this risk.

***Our margins and operating results may sufferif we experience unfavorable changes in the proportion of cost-plus-fee orfixed-price contracts in our total contract mix.***

Althoughfixed-price contracts entail a greater risk of a reduced profit or financialloss on a contract compared to other types of contracts we enter into,fixed-price contracts typically provide higher profit opportunities because wereceive the benefit of cost savings.  Incontrast, cost-plus-fee contracts are subject to statutory limits on profitmargins, and generally are the least profitable of our contract types.  Our federal government customers typicallydetermine what type of contract we enter into. Cost-plus-fee and fixed-price contracts accounted for approximately 63%and 19%, respectively, of our revenues for the six months ended September 30,2005, and approximately 53% and 15%, respectively, of our revenues for the sixmonths ended September 30, 2006.  To theextent that we enter into more cost-plus-fee or less fixed-price contracts inproportion to our total contract mix in the future, our margins and operatingresults may suffer.

***Our cash flow and profitability could be reducedif expenditures are incurred prior to the final receipt of a contract.***

We providevarious professional services and sometimes procure equipment and materials onbehalf of our federal government customers under various contractualarrangements.  From time to time, inorder to ensure that we satisfy our customers’ delivery requirements andschedules, we may elect to initiate procurement in advance of receiving finalauthorization from the government customer or a prime contractor.  If our government or prime contractorcustomers’ requirements should change or if the government or the primecontractor should direct the anticipated procurement to a contractor other thanus or if the equipment or materials become obsolete or require modificationbefore we are under contract for the procurement, our investment in theequipment or materials might be at risk if we cannot efficiently resellthem.  This could reduce anticipatedearnings or result in a loss, negatively affecting our cash flow andprofitability.

***Failure to maintain strong relationships withother contractors could result in a decline in our revenues.***

We estimatethat revenues derived from contracts in which we acted as a subcontractor toother companies represented approximately 21% of our revenues for the sixmonths ended September 30, 2006.  As asubcontractor, we often lack control over fulfillment of a contract, and poorperformance on the contract could tarnish our reputation, even when we performas required.  As a prime contractor, weoften rely on other companies to perform some of the work under acontract.  We expect to continue todepend on relationships with other contractors for portions of our delivery ofservices and revenues

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in the foreseeable future.  Ourbusiness, prospects, financial condition and operating results could be harmedif other contractors eliminate or reduce their subcontract relationships withus, whether because they choose to establish relationships with our competitorsor because they choose to directly offer services that compete with ourbusiness, or if the government terminates or reduces other prime contractors’programs or does not award them new contracts.

***If our subcontractors fail to perform theircontractual obligations, our performance and reputation as a prime contractorand our ability to obtain future business could suffer.***

As a primecontractor, we often rely significantly upon other companies as subcontractorsto perform work we are obligated to perform for our customers.  We estimate that revenues derived from workperformed by our subcontractors represented approximately 26% of our revenuesfor fiscal 2006.  If one or more of oursubcontractors fail to perform satisfactorily the agreed-upon services on atimely basis, or violate government contracting policies, laws or regulations,our ability to perform our obligations or meet our customers’ expectations as aprime contractor may be compromised.  Insome cases, we have limited involvement in the work performed by thesubcontractors but are nevertheless responsible for the work performed.  In extreme cases, performance or otherdeficiencies on the part of our subcontractors could result in a customerterminating our contract for default.  Adefault termination could expose us to liability for the agency’s costs ofreprocurement, damage our reputation and hurt our ability to compete for futurecontracts and task orders.

***Unfavorable government audit results couldsubject us to a variety of penalties and sanctions, and could harm ourreputation and relationships with our customers.***

The federalgovernment audits and reviews our performance on contracts, pricing practices,cost structure and compliance with applicable laws, regulations andstandards.  Like most large governmentcontractors, our contracts are audited and reviewed on a continual basis byfederal agencies, including the Defense Contract Audit Agency, or theDCAA.  An unfavorable audit of us,including any companies we have acquired or may acquire, or any of oursubcontractors could have a substantial adverse effect on our operatingresults.  For example, any costs thatwere previously reimbursed could subsequently be disallowed.  In this case, cash we have already collectedmay need to be refunded and future operating margins may be reduced.

Our incurredcost submissions have been audited by the DCAA through December 31, 2004, forMorgan Research Corporation, or Morgan, through March 31, 2004, for Stanley,CCI, Incorporated, or CCI, and GCI Information Services, Inc., or GCI, andthrough December 31, 2002, for Fuentez Systems Concepts, Inc., or FSC.  Costs for which Morgan was reimbursed afterDecember 31, 2004, costs for which Stanley, CCI and GCI were reimbursed afterMarch 31, 2004, and costs for which FSC was reimbursed after December 31, 2002,may be subsequently disallowed upon the completion of future audits.  In addition, non-audit reviews by the U.S.government may still be conducted on all of our government contracts.

If agovernment audit uncovers improper or illegal activities, we may be subject tocivil and criminal penalties and administrative sanctions, includingtermination of contracts, forfeiture of profits, suspension of payments, finesand suspension or debarment from doing business with government agencies.  In addition, we could suffer serious harm toour reputation if allegations of impropriety were made against us, whether ornot true.

***If we experience systems or servicesfailures, our reputation could be harmed and our customers could assert claimsagainst 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 in the future experience some systems orservices failures, schedule or delivery delays, and other problems inconnection with our work.  If oursolutions, services, products, including third-party products we may resell toour customers, or other applications have significant defects or errors, aresubject to delivery delays or fail to meet our customers’ expectations, we may:

·                  lose revenuesdue to adverse customer reactions;

·                  be required toprovide additional services to customers at no charge;

·                  receive negativepublicity, which could damage our reputation and harm our ability to attract orretain customers; or

·                  sufferclaims for substantial damages.

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The successfulassertion of any large claims against us could seriously harm ourbusiness.  Even if not successful, theseclaims could result in significant legal and other costs, may be a distractionto our management and may harm our reputation.

***Security breaches in sensitive governmentsystems could result in the loss of customers and negative publicity.***

Many of thesystems we develop, integrate and maintain involve managing and protectinginformation involved in intelligence, national security and other sensitive orclassified government functions.  Asecurity breach in one of these systems could cause serious harm to ourbusiness, damage our reputation and prevent us from being eligible for furtherwork on sensitive or classified systems for federal government customers.  We could incur losses from such a securitybreach that could exceed the policy limits under our professional liabilityinsurance program.  Damage to our reputationor limitations on our eligibility for additional work resulting from a securitybreach in one of the systems we develop, install and maintain could materiallyreduce our revenues.

***Our failure to obtain and maintain necessarysecurity clearances may limit our ability to perform classified work forgovernment customers, which could cause us to lose business.***

Somegovernment contracts require us to maintain facility security clearances andrequire some of our employees to maintain individual security clearances.  Obtaining and maintaining security clearancesfor employees involves a lengthy process, and it is difficult to identify,recruit and retain employees who already hold security clearances.  If our employees lose or are unable to timelyobtain security clearances or we lose a facility clearance, the governmentcustomer may terminate the contract or decide not to renew it upon itsexpiration.  As a result, to the extentwe cannot obtain or maintain the required security clearances for a particularcontract, or we fail to obtain them on a timely basis, we may not derive the revenuesanticipated from the contract, which could 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 quarterly operating results may fluctuatesignificantly as a result of factors outside of our control, which could causethe market price of our common stock to decline.***

Our revenuesand operating 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.  Factors that may affect our operating resultsinclude those listed in this “Risk Factors” section and others that arespecific to our industry such as:

·                  fluctuations inrevenues 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;

·                  changes incontract requirements by our government agency customers;

·                  changes in theextent to which we use subcontractors; and

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

Reductions inrevenues in a particular quarter could lead to lower profitability in thatquarter because a relatively large amount of our expenses are fixed in theshort-term.  We may incur significantoperating expenses during the start-up and early stages of large contracts andmay not receive corresponding payments in the same quarter.  We may also incur additional expenses whencontracts expire or are terminated or not renewed.  In addition, payments due to us fromgovernment agencies may be delayed due to billing cycles or as a result offailures of governmental budgets to gain Congressional and administrationapproval in a timely manner.

***We may be harmed by intellectual propertyinfringement claims.***

Many of theservices and solutions that we provide to our customers involve extensive useof software and other intellectual property. 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 theseinfringement claims are

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ultimately successful, in addition to paying damages, we could berequired to take any of the following actions, each of which could entailsignificant expenses or result in a significant reduction in revenues:

·                  cease selling orusing services or solutions that incorporate the challenged software ortechnology;

·                  obtain a licenseor additional licenses from third parties; or

·                  redesignour services and solutions that rely on the challenged software or technology.

***We may incur substantial costs andliabilities in connection with acquisitions.***

We havecompleted four acquisitions since 2000, including the acquisition of Morgan inFebruary 2006, and expect to consider further acquisitions and investments inthe future.  If we make an acquisition orinvestment, we may:

·                  issue stock thatwould dilute your stock ownership;

·                  incur debt thatwould restrict our cash flow;

·                  assumeliabilities;

·                  incur large andimmediate write-offs;

·                  incurunanticipated costs;

·                  incurunanticipated liabilities under purchase and sale agreements with targetcompanies;

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

·                  experience risksassociated with entering markets in which we have no or limited priorexperience; and

·                  losekey employees from the acquired operations.

In connectionwith any acquisition we make, there may be liabilities that we fail to discoveror that we inadequately assess.  Inaddition, acquired operations may not perform according to the forecasts thatwe used to determine the purchase price. If the acquired entity fails to achieve these forecasts, or if we arenot successful in offering our services to the customer base of the acquiredentity or otherwise do not achieve the anticipated benefits of the acquisition,our financial condition and operating results may decline as a result.  In addition, if we incur a substantial amountof indebtedness in order to finance one or more acquisitions, our increasedleverage may restrict our business and operations, reduce our cash flows orrestrict our future access to sufficient funding to finance desired growth.

***We may not successfully integrate companieswe may acquire in the future.***

The process ofintegrating companies requires a significant amount of resources and managementattention which detracts from attention to our business, and we expect that anyfuture acquisitions would demand resources and management attention.  If we are unable to integrate any company weacquire in the future as planned, our management’s attention may continue to bediverted from the operation of our business, our operations could be disruptedand we may be unable to deliver our services to our customers as planned, anyof which would hinder implementation of our business plan, harm ourrelationships with our customers and force us to incur unanticipated expenses.

***A preference for minority-owned, small andsmall disadvantaged businesses could impact our ability to be a primecontractor on certain governmental procurements.***

As a result ofthe Small Business Administration, or SBA, set-aside program, the federalgovernment may decide to restrict certain procurements only to bidders thatqualify as minority-owned, small or small disadvantaged businesses.  As a result, we would not be eligible toperform as a prime contractor on those programs and would be restricted to amaximum of 49% of the work as a subcontractor on those programs.  An increase in the amount of procurementsunder the SBA set-aside program may impact our ability to bid on newprocurements as a prime contractor or restrict our ability to recompete onincumbent work that is placed in the set-aside program.

***Our employees may engage in misconduct orother improper activities, which could harm our business.***

A significantnumber of our employees are involved in government contracting and billingprocesses, which require compliance with a number of procurement laws andregulations.  In addition, in the courseof our business, our employees routinely obtain access to sensitive orclassified government information.  As aresult, we are exposed to the risk that employee fraud or other misconductcould occur.  Misconduct by employeescould include intentional or unintentional failures to comply with federalgovernment procurement regulations, engaging in unauthorized activities orfalsifying time records.  Employeemisconduct could also involve the improper use of our customers’ sensitive orclassified information, which could result in regulatory sanctions against usand serious harm to our reputation.  Itis not always possible to deter

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employee misconduct, and the precautions we take to prevent and detectthis activity may not be effective in controlling unknown or unmanaged risks orlosses, which could materially harm our business.

***Our business commitments require ouremployees to travel to potentially dangerous places, which may result in injuryto our employees.***

Our businessinvolves providing services that require some of our employees to operate incountries that may be experiencing political unrest, war or terrorism,including Afghanistan and Iraq.  Certainsenior level employees or executives may, on occasion, be part of the teamsdeployed to provide services in these countries.  As a result, it is possible that certain ofour employees or executives will suffer injury or bodily harm in the course ofthese deployments.  It is also possiblethat we will encounter unexpected costs in connection with additional risksinherent in sending our employees to dangerous locations, such as increasedinsurance costs, as well as the repatriation of our employees or executives forreasons beyond our control.  Theseproblems could cause our actual results to differ materially from thoseanticipated.

**Risks Related to Our Industry**

***Federal government contracts containprovisions giving government customers a variety of rights that are unfavorableto us, including the ability to terminate a contract at any time forconvenience.***

Federalgovernment contracts contain provisions and are subject to laws and regulationsthat provide government customers with rights and remedies not typically foundin commercial contracts.  These rightsand remedies allow government customers, among other things, to:

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

·                  reduce ordersunder or otherwise modify contracts;

·                  for contracts subjectto the Truth in Negotiations Act, reduce the contract price or cost where itwas increased because a contractor or subcontractor during negotiationsfurnished cost or pricing data that was not complete, accurate and current;

·                  for somecontracts, 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;

·                  terminate ourfacility security clearances and thereby prevent us from receiving classifiedcontracts;

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

·                  decline to exercisean option to renew a multi-year contract or issue task orders in connectionwith ID/IQ contracts;

·                  claim rights insolutions, systems and technology produced by us;

·                  prohibit futureprocurement awards with a particular agency due to a finding of organizationalconflict of interest based upon prior related work performed for the agencythat would give a contractor an unfair advantage over competing contractors orthe existence of conflicting roles that might bias a contractor’s judgment;

·                  subject theaward of contracts to protest by competitors, which may require the contractingfederal agency or department to suspend our performance pending the outcome ofthe protest and may also result in a requirement to resubmit offers for thecontract or in the termination, reduction or modification of the awardedcontract; and

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

If a federalgovernment customer terminates one of our contracts for convenience, we mayrecover only a portion of our incurred or committed costs, settlement expensesand profit on work completed prior to the termination.  If a federal government customer were tounexpectedly terminate, cancel or decline to exercise an option to renew one ormore of our significant contracts or suspend or debar us from doing businesswith the federal government, our revenues and operating results would bematerially harmed.

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***Our failure to comply with complexprocurement laws and regulations could cause us to lose business and subject usto a variety of penalties.***

We must complywith laws and regulations relating to the formation, administration andperformance of federal government contracts, which affect how we do businesswith our federal government customers and may increase our expenses.  Among the most significant laws andregulations are:

·                  the FederalAcquisition Regulation, and agency regulations analogous or supplemental to theFederal Acquisition Regulation, which comprehensively regulate the formation,administration, and performance of government contracts, including provisionsrelating to the avoidance of conflicts of interest and intra-organizationalconflicts of interest;

·                  the Truth inNegotiations Act, which requires certification and disclosure of all cost andpricing data in connection with some contract negotiations;

·                  the ProcurementIntegrity Act, which requires evaluation of ethical conflicts surroundingprocurement activity and establishing certain employment restrictions forindividuals who participate in the procurement process;

·                  the CostAccounting 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 of informationclassified for national security purposes and the exportation of specifiedproducts, technologies, and technical data; and

·                  compliancewith antitrust laws.

If agovernment review or investigation uncovers improper or illegal activities, wemay be subject to civil and criminal penalties and administrative sanctions,including the termination of our contracts, the forfeiture of profits, thesuspension of payments owed to us, fines and our suspension or debarment fromdoing business with 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 the governmentfor payment or approval, or makes a false statement in order to get a false orfraudulent claim paid or approved by the government.  Actions under the civil False Claims Act maybe brought by the government or by other persons on behalf of the government.  These provisions of the civil False ClaimsAct permit parties, such as our employees, to sue us on behalf of thegovernment and share a portion of any recovery. Any failure to comply with applicable laws and regulations could resultin contract termination, damage to our reputation, price or fee reductions orsuspension or debarment from contracting with the government, each of whichcould lead to a material reduction in our revenues.

***The failure by Congress to timely approvebudgets for the federal agencies we contract with could delay or reducespending and cause us to lose revenues.***

On an annualbasis, Congress must approve budgets that govern spending by each of thefederal agencies we contract with.  WhenCongress is unable to agree on budget priorities, and thus is unable to passthe annual budget on a timely basis, Congress typically enacts a continuingresolution that allows federal government agencies to operate at spendinglevels approved in the previous budget cycle. For example, Congress did not pass a defense spending bill for thefederal fiscal year 2006 until November 15, 2005, during which time themilitary branches operated under a continuing resolution.  Operation by government agencies on the basisof a continuing resolution may delay or cancel funding we expect to receivefrom customers on work we are already performing and is likely to result in newinitiatives being delayed, and in some cases being cancelled.

***The adoption of new procurement laws orregulations could reduce the amount of services that are outsourced by thefederal government and could cause us to lose future revenues.***

Newlegislation or procurement regulations could cause federal agencies to adoptrestrictive procurement practices regarding the use of outside serviceproviders.  For example, the American Federationof Government Employees, the largest federal employee union, strongly endorseslegislation that may restrict the procedure by which services are outsourced togovernment contractors.  If suchlegislation were to be enacted, it would likely reduce the amount ofinformation technology services that could be outsourced by the federalgovernment, which could materially reduce our future expected revenues.

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***The Office of Management and Budget processfor ensuring 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 ofManagement and Budget, or OMB, supervises spending by federal agencies and enforcesthe Government Performance Results Act. This Act requires, among other things, that federal agencies make anadequate business justification to support capital planning initiatives,including all information technology investments.  The factors considered by the OMB include,among others, whether the proposed information technology investment isexpected to achieve an appropriate return on investment, whether relatedprocesses are contemporaneously reviewed, whether interoperability with existingsystems and the capacity for these systems to share data across governmentagencies has been considered and whether existing commercial off-the-shelfproducts are being utilized to the extent possible.  If our customers do not adequately justifyproposed information technology investments to the OMB, the OMB may refusefunding for their new or continuing information technology investments, and wemay lose revenue as a result.

**Risks Related to Our Common Stock**

***Our executive officers and directors as agroup and our Employee Stock Ownership Plan, or ESOP, own a significantpercentage of our common stock, and as a result have significant influence overour affairs and policies.***

After givingeffect to our initial public offering, our executive officers and directorsbeneficially owned approximately 29% of our outstanding common stock.  For so long as our executive officers anddirectors continue to own a significant portion of our outstanding commonstock, they will have significant influence over matters submitted to ourstockholders for approval and exercise significant control over our businesspolicies and affairs, including the election of directors, amendments to ourcertificate of incorporation and determinations with respect to mergers andother business combinations, including those that may result in a change ofcontrol.  In addition, after givingeffect to our initial public offering, the ESOP beneficially ownedapproximately 35% of our outstanding common stock.  Substantially all of the participants in theESOP 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 our executive officers anddirectors and the ESOP participants may conflict with your interests as astockholder.

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

Provisions ofour certificate of incorporation and by-laws, as amended and restated, maydeter, delay or prevent a third-party from acquiring us.  These provisions include:

·                  limitations onwho may call special meetings of stockholders;

·                  the absence ofcumulative voting in the election of directors;

·                  the inability ofstockholders to act by written consent;

·                  advance noticerequirements for nominations for election to the board of directors and forstockholder 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.

Theseprovisions could have the effect of delaying, deferring or preventing a changein control of our company, discourage others from making tender offers for ourshares, lower the market price of our stock or impede the ability of ourstockholders to change our management, even if such changes would be beneficialto our stockholders.

***A substantial number of shares will beeligible for sale in the near future, which could cause our common stock priceto decline.***

Prior to ourinitial public offering in October 2006, substantially all of our common stockwas held by our employees, including through our ESOP.  If our existing stockholders sell, or themarket perceives that our stockholders intend to sell, substantial amounts ofour common stock in the public market, the market price of our common stockcould decline significantly.  These salesalso might make it more difficult for us to sell equity or equity-relatedsecurities in the future at a time 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-upagreements.  In 

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accordance with these lock-up agreements, 589,656shares of common stock will be available for sale in the public market 180 daysafter October 17, 2006, and an additional 5,306,904 shares of common stock willbe available for sale in the public market 360 days after October 17,2006.  These lock-up agreements aresubject to a number of exceptions and Citigroup Global Markets Inc., on behalfof the underwriters in the initial public offering, may release these stockholdersfrom their lock-up agreements with the underwriters at any time and withoutnotice, which would allow for earlier sale of shares in the public market.  As restrictions on resale end, the marketprice of our common stock could drop significantly if the holders of restrictedshares sell them or are perceived by the market as intending to sell them.  In addition, after completion of the initialpublic offering, our ESOP held 7,326,660 shares of our common stock, all ofwhich was allocated to employee accounts. Under certain circumstances, such as the termination of an employee’semployment with us, the ESOP may distribute shares to ESOP participants (orsell shares in the market), depending on the elections of ESOPparticipants.  In addition, pursuant tocertain diversification rights that will be available to ESOP participantspursuant to instructions given during the 90-day period beginning March 31,2007, up to an additional 1,831,665 shares held by the ESOP may be sold in thepublic market at that time.

**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

**Recent Sales of Unregistered Securities**

The followinginformation relates to all securities issued or sold by us within the threemonths ended September 30, 2006, and not registered under the SecuritiesAct.  The transactions described belowwere conducted in reliance upon the exemptions from registration provided inRule 701 promulgated under Section 3(b) of the Securities Act and/or Section4(2) of the Securities Act and the rules and regulations promulgated thereunder. There were no underwriters employed inconnection with these transactions.  Allinformation reflects the 30-for -1 stock split, which took effect on September12, 2006.

During thequarter ended September 30, 2006, the Company issued to five members of theCompany’s board of directors an aggregate of 21,600 shares of the Company’scommon stock as compensation for their service on our board of directors. Theseshares were valued at the time of issuance at $10.28 per share, for anaggregate value of $222,048.

During thequarter ended September 30, 2006, one employee exercised options to purchase3,900 shares of the Company’s common stock at an aggregate exercise price of$14,335.

**Use of Proceeds**

On October 23,2006, we received the proceeds from our initial public offering of6,234,720 shares of our common stock at a price of $13.00 per share.Our net proceeds from the initial public offering, after deducting theunderwriting discount of $5.7 million and estimated offering expenses of $3.4million, were $72.0 million. Selling shareholders offered and sold a total of1,010,280 shares of our common stock in the initial public offering at aprice of $13.00 per share. Net proceeds to the selling shareholders, afterdeducting the underwriting discount of $0.9 million, were$12.2 million. The lead managers for the initial public offering wereCitigroup Global Markets Inc, (Citigroup) and Wachovia Capital Markets, LLC,with Citigroup acting as sole book-runner. Payments of expenses were to personsother than our directors or officers (or their associates), persons owning 10%or more of our common stock, or our affiliates. The offer and sale of all ofthe shares in the initial public offering were registered under the SecuritiesAct pursuant to a registration statement on Form S-1 (FileNo. 333-134053), which was declared effective by the SEC on October 17,2006.

The netoffering proceeds to us were used in October 2006 to repay approximately$61.5 million of debt under our senior credit facility.

**Purchases of Equity Securities**

A summary ofour repurchases (in thousands, except average price per share) during thequarter ended September 30, 2006 is as follows:
| Period                | ** ** | **Shares Repurchased** | ** ** | **Average Price Per Share** | ** ** | **Total Shares Purchased as  Part of Publicly  Announced Plans** | ** ** | **Maximum Number of  Shares that May Yet Be  Purchased Under the Plan** | ** ** |
|-----------------------|------------|-----------------------------|------------|--------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| 8/1/06 – 8/30/06 |       | 33                          |       | $                                          | 7.86       |                                                                                           | 0          |                                                                                                                 | 0          |   |
|                       |            |                             |            |                                            |            |                                                                                                |            |                                                                                                                      |            |  |

 

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**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

None.

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

The annualmeeting of the Stanley, Inc. Shareholders was held on Tuesday, July 11, 2006. Amajority of the shareholders were represented and unanimously re-elected thefollowing nine persons as members of the Stanley Board for the 2007 fiscal year– Lawrence A. Gallagher, Philip O. Nolan, William E. Karlson, George H. Wilson,John P. “Jack” Riceman, James C. Hughes, General Jimmy D. Ross, USA (Ret.), Lt.General Richard L. Kelly, USMC (Ret.), and Charles S. Ream. Additionally, themajority of shareholders unanimously approved the Amendment and Restatement ofCertificate of Incorporation, 2006 Omnibus Incentive Compensation Plan andEmployee Stock Purchase Plan.

**ITEM 5. OTHER INFORMATION**

None.

**ITEM 6. EXHIBITS**
| Exhibit No. | ** ** | **Description**                                                                                                                                                                              |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1        |       | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.                                                                     |
| 31.2        |       | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.                                                                     |
| 32.1        |       | Certification of Chief Executive Officer and Chief  Financial Officer pursuant to U.S.C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**signatures**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned.
|        | **STANLEY, INC.**                                                                        |
|--------|------------------------------------------------------------------------------------------|
|   |                                                                                     |
|   |                                                                                     |
|   | /s/ PHILIP O.  NOLAN                                                                     |   |
|   | Philip O. Nolan  Chairman, President and Chief Executive Officer  November 29, 2006 |
|   |                                                                                     |
|   |                                                                                     |
|   | /s/ BRIAN J.  CLARK                                                                      |   |
|   | Brian J. Clark  Chief Financial Officer  November 29, 2006                          |

 

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