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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 
| **x**                                                       | ** ** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES   EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
|                                                        |       |                                                                                                     |
| **For the quarterly period ended September 26,  2008** |
|                                                        |       |                                                                                                     |
| **OR**                                                      |
|                                                        |       |                                                                                                     |
| **o**                                                       | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |

 

**Commission File No. 001-33083**

 

**STANLEY,INC.**

(Exact name of registrant as specified in itscharter)

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

 

**(703) 684-1125**

(Registrant’s telephone number,  including area code)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes  x  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 
| o  Large accelerated filer | x  Accelerated filer | o  Non-accelerated filer             | o  Smaller reporting company |
|--------------------------------------|--------------------------------|------------------------------------------------|----------------------------------------|
|                                 |                           | (do  not check if a smaller reporting company) |
|                                 |                           |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of October 27, 2008, there were 23,501,596 shares of our CommonStock, par value $0.01 per share, outstanding.

 

 

 

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**STANLEY, INC.**

**FORM 10-Q**

**FOR THE QUARTER ENDED SEPTEMBER 26, 2008**

**INDEX**

 
|                                              | ** **                                                                                  | ** ** | **Page** |
|----------------------------------------------|---------------------------------------------------------------------------------------------|------------|----------|
| **PART I — FINANCIAL INFORMATION** |                                                                                        |       |
| ITEM 1.                                      | FINANCIAL STATEMENTS                                                                        |       | 1        |
| ITEM 2.                                      | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS |       | 15       |
| ITEM 3.                                      | QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK                                 |       | 24       |
| ITEM 4.                                      | CONTROLS AND PROCEDURES                                                                     |       | 24       |
| **PART II — OTHER INFORMATION**    |                                                                                        |       |
| ITEM 1.                                      | LEGAL PROCEEDINGS                                                                           |       | 26       |
| ITEM 1A.                                     | RISK FACTORS                                                                                |       | 26       |
| ITEM 2.                                      | UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS                                |       | 26       |
| ITEM 3.                                      | DEFAULTS UPON SENIOR SECURITIES                                                             |       | 26       |
| ITEM 4.                                      | SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS                                        |       | 26       |
| ITEM 5.                                      | OTHER INFORMATION                                                                           |       | 27       |
| ITEM 6.                                      | EXHIBITS                                                                                    |       | 27       |
|                                              |                                                                                             |            |          |  |

 

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** **

**FORWARD-LOOKINGSTATEMENTS**

 

ThisQuarterly Report on Form 10-Q contains certain “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995. Such statements include, in particular, statements about our plans,strategies and prospects. Forward-looking statements are generally identifiableby use of forward-looking terminology such as “may,” “will,” “should,”“potential,” “intend,” “expect,” “endeavor,” “seek,” “anticipate,” “estimate,”“overestimate,” “underestimate,” “believe,” “could,” “project,” “predict,”“continue” or other similar words or expressions. References to “we,” “our” andthe “Company” refer to Stanley, Inc., together in each case with ourconsolidated subsidiaries unless the context suggests otherwise.

 

Theforward-looking statements contained in this Quarterly Report on Form 10-Qare based on current expectations, estimates, forecasts and projections aboutthe industry in which we operate and management’s beliefs and assumptions. Thesestatements are not guarantees of future performance and involve risks,uncertainties and assumptions that are difficult to predict. Therefore, actualoutcomes and results may differ materially from what is expressed or forecastedin such forward-looking statements, including as a result of risks discussed in“Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K forthe fiscal year ended March 31, 2008 and in this Quarterly Report on Form 10-Q.  These forward-looking statements include, butare not limited to, statements relating to:

 

·      our ability to retain customers andcontracts, as well as our ability to win new customers and engagements;

 

·      our backlog;

 

·      risks associated with the acquisition andintegration of new companies, including our recent acquisition of OberonAssociates, Inc.;

 

·      our beliefs about trends in our market,available government contracts and outsourcing to companies like ours;

 

·      expected spending on information technologyand other professional services by federal government agencies, including theDepartment of Defense; and

 

·      other risks discussed in our Annual Report onForm 10-K for the fiscal year ended March 31, 2008  in the sections entitled “Risk Factors” and“Management’s Discussion and Analysis of Financial Condition and Result ofOperations,” and in any other documents we file with the Securities andExchange Commission.

 

We are under no duty to update any of theforward-looking statements after the date of this Quarterly Report on Form 10-Qto conform these statements to actual results.

 

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**PART I: FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS**

 

**STANLEY, INC. AND SUBSIDIARIESCondensed Consolidated Statements of Income(unaudited)(in thousands, except per share data)**

** **
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | **September 26,**           | ** ** | **September 30,**         | ** ** | **September 26,** | ** ** | **September 30,** | ** ** |
| ** **                            | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues                              |       | $                                | 191,078    |                           | $          | 150,239 |   | $ | 363,645 |   | $ | 283,720 |   |
|                                  |       |                             |       |                           |       |   |   |   |   |
| Operating costs and expenses:         |       |                             |       |                           |       |   |   |   |   |
| Cost of revenues                      |       | 159,925                          |       | 127,556                        |       | 305,684 |   | 239,879 |   |
| Selling, general and administrative   |       | 12,224                           |       | 9,322                          |       | 22,883 |   | 18,750 |   |
| Amortization of deferred compensation |       | 62                               |       | 67                             |       | 125 |   | 142 |   |
| Depreciation and amortization         |       | 2,524                            |       | 1,702                          |       | 4,303 |   | 3,312 |   |
| Total operating costs and expenses    |       | 174,735                          |       | 138,647                        |       | 332,995 |   | 262,083 |   |
| Operating income                      |       | 16,343                           |       | 11,592                         |       | 30,650 |   | 21,637 |   |
|                                  |       |                             |       |                           |       |   |   |   |   |
| Other income (expense):               |       |                             |       |                           |       |   |   |   |   |
| Other income                          |       | 1                                |       | 6                              |       | 3 |   | 6 |   |
| Interest expense – net           |       | (1,759                           | )          | (1,138                         | )          | (2,171 | ) | (2,200 | ) |
| Total other expenses                  |       | (1,758                           | )          | (1,132                         | )          | (2,168 | ) | (2,194 | ) |
| Income before taxes                   |       | 14,585                           |       | 10,460                         |       | 28,482 |   | 19,443 |   |
|                                  |       |                             |       |                           |       |   |   |   |   |
| Provision for income taxes            |       | (5,857                           | )          | (4,125                         | )          | (11,437 | ) | (7,744 | ) |
| Net income                            |       | $                                | 8,728      |                           | $          | 6,335 |   | $ | 17,045 |   | $ | 11,699 |   |
|                                  |       |                             |       |                           |       |   |   |   |   |
| Earnings per share:                   |       |                             |       |                           |       |   |   |   |   |
| Basic                                 |       | $                                | 0.38       |                           | $          | 0.29 |   | $ | 0.75 |   | $ | 0.53 |   |
| Diluted                               |       | $                                | 0.37       |                           | $          | 0.27 |   | $ | 0.72 |   | $ | 0.50 |   |
|                                  |       |                             |       |                           |       |   |   |   |   |
| Weighted-average shares:              |       |                             |       |                           |       |   |   |   |   |
| Basic                                 |       | 22,793                           |       | 22,034                         |       | 22,760 |   | 21,966 |   |
| Diluted                               |       | 23,817                           |       | 23,591                         |       | 23,763 |   | 23,478 |   |

 

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

 

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**STANLEY, INC. AND SUBSIDIARIES**

**Condensed Consolidated Balance Sheets**

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

**(unaudited)**

 
| ** **                                                                                                           | ** ** | **September 26, 2008** | ** ** | **March 31, 2008** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------------------------|------------|
| **Assets**                                                                                                           | ** ** | ** **                       | ** ** | ** **                   | ** ** |
|                                                                                                                 |       |                             |       |                         |       |
| Current assets:                                                                                                      |       |                             |       |                         |       |
| Cash                                                                                                                 |       | $                                | 13,531     |                         | $          | 271 |   |
| Accounts receivable - net                                                                                            |       | 164,040                          |       | 160,928                      |       |
| Prepaid and other current assets                                                                                     |       | 7,383                            |       | 4,644                        |       |
| Total current assets                                                                                                 |       | 184,954                          |       | 165,843                      |       |
|                                                                                                                 |       |                             |       |                         |       |
| Property and equipment - net                                                                                         |       | 18,282                           |       | 12,894                       |       |
| Goodwill                                                                                                             |       | 262,513                          |       | 113,615                      |       |
| Intangible assets - net                                                                                              |       | 18,769                           |       | 8,088                        |       |
| Deferred taxes                                                                                                       |       | —                           |       | 3,343                        |       |
| Other assets                                                                                                         |       | 2,727                            |       | 2,272                        |       |
| Total assets                                                                                                         |       | $                                | 487,245    |                         | $          | 306,055 |   |
|                                                                                                                 |       |                             |       |                         |       |
| **Liabilities and Stockholders’ Equity**                                                                        | ** ** | ** **                       | ** ** | ** **                   | ** ** |
|                                                                                                                 |       |                             |       |                         |       |
| Current liabilities:                                                                                                 |       |                             |       |                         |       |
| Line of credit                                                                                                       |       | $                                | 152,207    |                         | $          | — |   |
| Accounts payable                                                                                                     |       | 27,237                           |       | 29,628                       |       |
| Accrued expenses and other liabilities                                                                               |       | 67,439                           |       | 62,649                       |       |
| Current portion of long-term debt                                                                                    |       | 1,000                            |       | 1,000                        |       |
| Income taxes payable                                                                                                 |       | 1,733                            |       | 5,836                        |       |
| Total current liabilities                                                                                            |       | 249,616                          |       | 99,113                       |       |
|                                                                                                                 |       |                             |       |                         |       |
| Long-term debt — net of current portion                                                                         |       | 35,250                           |       | 35,500                       |       |
| Other long-term liabilities                                                                                          |       | 11,899                           |       | 4,738                        |       |
| Total liabilities                                                                                                    |       | 296,765                          |       | 139,351                      |       |
|                                                                                                                 |       |                             |       |                         |       |
| Commitments and contingencies:                                                                                       |       |                             |       |                         |       |
| Stockholders’ equity                                                                                            |       |                             |       |                         |       |
| Common stock, $0.01 par value — 200,000,000  shares authorized;  23,486,122 and 22,822,697 issued, respectively |       | 235                              |       | 228                          |       |
| Additional paid-in capital                                                                                           |       | 90,058                           |       | 83,970                       |       |
| Retained earnings                                                                                                    |       | 101,249                          |       | 84,204                       |       |
| Accumulated other comprehensive loss                                                                                 |       | (417                             | )          | (929                         | )          |
| Deferred compensation                                                                                                |       | (645                             | )          | (769                         | )          |
| Total stockholders’ equity                                                                                      |       | 190,480                          |       | 166,704                      |       |
| Total liabilities and stockholders’ equity                                                                      |       | $                                | 487,245    |                         | $          | 306,055 |   |

 

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

 

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**STANLEY, INC. AND SUBSIDIARIES**

**Condensed Consolidated Statements of CashFlows**

**(unaudited)**

**(in thousands)**

 
| ** **                                                                         | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **September 26,**         | ** ** | **September 30,** | ** ** |
| ** **                                                                         | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                              | 17,045     |   | $ | 11,699 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                      |       | 4,303                          |       | 3,312 |   |
| Amortization of deferred compensation                                              |       | 125                            |       | 142 |   |
| Loss on disposal of property and equipment                                         |       | 137                            |       | 18 |   |
| Deferred taxes                                                                     |       | 98                             |       | (361 | ) |
| Income tax benefit from stock-based  compensation                                  |       | 2,201                          |       | 1,519 |   |
| Stock compensation expense                                                         |       | 2,789                          |       | 923 |   |
| Changes in assets and liabilities – net of  acquisition effects:              |       |                           |       |   |   |
| Decrease (increase) in accounts receivable                                         |       | 18,474                         |       | (16,232 | ) |
| Decrease (increase) in prepaid expenses and  other current assets                  |       | 612                            |       | (3,160 | ) |
| (Increase) decrease in other assets                                                |       | (357                           | )          | 324 |   |
| Decrease in accounts payable                                                       |       | (4,205                         | )          | (3,620 | ) |
| (Decrease) increase in accrued expenses                                            |       | (6,301                         | )          | 6,600 |   |
| Increase in other liabilities                                                      |       | 4,399                          |       | 387 |   |
| Decrease in income taxes payable                                                   |       | (6,102                         | )          | (817 | ) |
| Net cash provided by operating activities                                          |       | 33,218                         |       | 734 |   |
|                                                                               |       |                           |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Purchase of Techrizon – net of cash  acquired                                 |       | —                         |       | (30,558 | ) |
| Purchase of Oberon – net of cash acquired                                     |       | (167,824                       | )          | — |   |
| Acquisition of property and equipment                                              |       | (5,050                         | )          | (1,709 | ) |
| Net cash used in investing activities                                              |       | (172,874                       | )          | (32,267 | ) |
|                                                                               |       |                           |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net borrowings under line-of-credit agreements                                     |       | 152,207                        |       | 18,494 |   |
| Repayments on long-term debt                                                       |       | (250                           | )          | (500 | ) |
| Payments under capital lease obligations                                           |       | (145                           | )          | (69 | ) |
| Purchase of treasury stock                                                         |       | (196                           | )          | (260 | ) |
| Proceeds from exercise of stock options                                            |       | 795                            |       | 1,147 |   |
| Other                                                                              |       | 505                            |       | (15 | ) |
| Net cash provided by financing activities                                          |       | 152,916                        |       | 18,797 |   |
|                                                                               |       |                           |       |   |   |
| **NET INCREASE (DECREASE) IN CASH**                                                |       | 13,260                         |       | (12,736 | ) |
| **CASH — Beginning of period**                                                |       | 271                            |       | 12,736 |   |
| **CASH — End of period**                                                      |       | $                              | 13,531     |   | $ | — |   |
|                                                                               |       |                           |       |   |   |
| **SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION:**                            | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Cash paid during the period for:                                                   |       |                           |       |   |   |
| Income taxes                                                                       |       | $                              | 13,328     |   | $ | 9,375 |   |
| Interest                                                                           |       | $                              | 1,736      |   | $ | 2,041 |   |
| ** **                                                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **SUPPLEMENTAL DISCLOSURE OF NONCASH  INVESTING ACTIVITIES:**                      | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Lease incentive                                                                    |       | $                              | 942        |   | $ | — |   |

 

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

 

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**STANLEY, INC. AND SUBSIDIARIES**

**Condensed Consolidated Statements ofComprehensive Income**

**(unaudited)**

**(in thousands)**

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **September 26,**           | ** ** | **September 30,**         | ** ** | **September 26,** | ** ** | **September 30,** | ** ** |
| ** **                                    | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net income                                    |       | $                                | 8,728      |                           | $          | 6,335 |   | $ | 17,045 |   | $ | 11,699 |   |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Other comprehensive income:                   |       |                             |       |                           |       |   |   |   |   |
| Unrealized (loss) gain on interest rate  swap |       | (44                              | )          | (251                           | )          | 358 |   | 40 |   |
| Translation adjustments                       |       | (6                               | )          | —                         |       | 154 |   | — |   |
| Total other comprehensive income              |       | (50                              | )          | (251                           | )          | 512 |   | 40 |   |
| Comprehensive income                          |       | $                                | 8,678      |                           | $          | 6,084 |   | $ | 17,557 |   | $ | 11,739 |   |

 

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

 

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

 

**1.  DESCRIPTION OF BUSINESS**

 

Stanley, Inc., together with its subsidiaries (“Stanley” or the “Company”),is a provider of information technology services and solutions to U.S. defenseand federal civilian government agencies. Stanley offers its customerssolutions to support any stage of program, product development or businesslifecycle through five service areas: systems engineering, enterpriseintegration, operational logistics, business process outsourcing and advancedengineering and technology. The Company derives substantially all of itsrevenue from U.S. federal government agencies.

 

**2.  SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

***Basis ofPresentation***—The accompanying unaudited condensedconsolidated financial statements have been prepared in accordance withgenerally accepted accounting principles (“GAAP”) in the United States andpursuant to the rules and regulations of the Securities and ExchangeCommission (“SEC”). In the opinion of management, these statements reflect alladjustments necessary to fairly present the Company’s financial position as of September 26,2008, and its results of operations for the three and six months ended September 26,2008 and September 30, 2007, and its cash flows for the six months endedSeptember 26, 2008 and September 30, 2007.  The results of operations for the interimperiods are not necessarily indicative of the results for the full year. Forfurther information, refer to the financial statements and footnotes presentedin the Company’s Annual Report on Form 10-K for the fiscal year ended March 31,2008.

 

***Reporting Periods***—TheCompany’s fiscal year begins on April 1 and ends on March 31. For thefiscal years ending prior to April, 1, 2008, the Company’s fiscal quartersended on the last day of the third calendar month. For fiscal years beginningafter April 1, 2008, the Company’s first three fiscal quarters end on the13th Friday after the first day of the quarter and the fourth quarter will endon March 31. Fiscal quarters will typically be 13 weeks. The secondquarter of fiscal year 2009 ended on September 26, 2008. The Company doesnot believe that there is a material impact to the comparability of the periodspresented.

 

***Principles ofConsolidation***—The accompanying condensedconsolidated financial statements include the accounts of Stanley’swholly-owned subsidiaries. All intercompany balances and transactions have beeneliminated in consolidation.

 

***Fair Value ofFinancial Instruments***—The fair value of accountsreceivable, accounts payable, accrued expenses, debt, and the swap contractapproximates their respective carrying amounts.

 

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

 

Contract revenue recognition inherently involves the use of estimates.Examples of estimates include the contemplated level of effort to accomplishthe tasks under the contract, the cost of the effort, and an ongoing assessmentof the 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.

 

Under cost-plus-fee contracts, revenues are recognized as costsare incurred and include an estimate of applicable fees earned. For level ofeffort or term cost-plus-fee contracts, fixed fees are earned in proportion tothe percentage of required effort delivered. The Company considers fixedfees under cost-plus-fee contracts to be earned in proportion to the allowablecosts actually incurred in performance of the contract for level of effortcontracts. For completion type cost-plus-fee contracts, fixed fees are earnedin proportion to the percentage of work completed. For time-and-materialscontracts, revenues are computed by multiplying the number of directlabor-hours expended in performance of the contract by the contractual billingrates and adding other billable direct and indirect costs. For fixed-pricecontracts, revenues are recognized as services are performed, using thepercentage-of-completion method, applying the cost-to-cost or units of deliverymethod, in 

 

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accordance with Accounting Research Bulletin No. 45, *Accounting for Long-Term Construction-Type Contracts* (“ARB45”) and American Institute of Certified Public Accountants (“AICPA”) Statementof Position 81-1, *Accounting for Performance ofConstruction-Type and Certain Production-Type Contracts* (“SOP 81-1”).

 

For cost-plus-award fee type contracts, the Company recognizes theexpected fee to be awarded by the customer at the time such fee can bereasonably estimated, based on factors such as prior award experience andcommunications with the customer regarding performance, including any interimperformance evaluations rendered by the customer. For cost-plus-incentive feetype contracts, the method of calculating the 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 the contract and adjusts the incentive fee asrequired based on the contract incentive fee formula.

 

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 customer direction prior to the completion andsigning of formal contract documents. The Company has a formal internal reviewprocess and management approval prior to commencement of work. Revenueassociated with such work is recognized without profit and only when it can bereliably estimated and realization is probable. The Company bases its estimateson notices to proceed from its customers, previous experiences with thecustomer, communications with the customer regarding funding status, and itsknowledge of available funding for the contract or program.

 

Disputes occasionally arise in the normal course of the Company’sbusiness due to events such as delays, changes in contract specifications, andquestions of cost allowability or collectibility. Such matters, whether claimsor unapproved change orders in the process of being negotiated, are recorded atthe lesser of their estimated net realizable value or actual costs incurred,and only when realization is probable and can be reliably estimated.

 

The allowability of certain costs under government contracts is subjectto audit by the government. Certain indirect costs are charged to contractsusing provisional or estimated indirect rates, which are subject to laterrevision based on government audits of those costs. Management is of theopinion that costs subsequently disallowed, if any, would not be significant.

 

***Concentration ofRisk***—Contracts funded by federal governmentagencies account for substantially all of our revenues. For the three monthsended September 26, 2008 and September 30, 2007, we derivedapproximately 71% and 68% of our revenues, respectively, from the Department ofDefense, including agencies within the intelligence community, and approximately29% and 32% of our revenues, respectively, from federal civilian governmentagencies. The Company’s contracts with the Department of State for theprovision of passport processing and support services, which is our largestrevenue-generating contract, and with the Department of the Navy for productionengineering and integration services under various SPAWAR programs, accountedfor approximately 11% and 10% of our revenues for the three months ended September 26,2008, respectively.

 

For the six months ended September 26, 2008 and September 30,2007, we derived approximately 67% and 68% of our revenues, respectively, fromthe Department of Defense, including agencies within the intelligencecommunity, and approximately 33% and 32% of our revenues, respectively, fromfederal civilian government agencies. The Company’s contracts with theDepartment of State for the provision of passport processing and supportservices, which is our largest revenue-generating contract, and with theDepartment of the Navy for production engineering and integration servicesunder various SPAWAR programs, accounted for approximately 13% and 10% of ourrevenues for the six months ended September 26, 2008, respectively.

 

***Property andEquipment***—Property and equipment are carried atcost, less accumulated depreciation. Depreciation of property and equipment iscalculated using the straight-line method over the useful lives. The estimateduseful lives of computers, peripherals and software typically range from threeto five years. The estimated useful lives of furniture and equipment typicallyrange from five to ten years. Leasehold improvements are amortized over thelesser of the useful life or the term of the lease. Repairs and maintenance areexpensed as incurred. Depreciation expense related to property and equipmentwas $1.0 million and $0.7 million for the three months ended September 26,2008 and September 30, 2007, respectively and $1.9 million and $1.4million for the six months ended September 26, 2008 and September 30,2007, respectively.

 

***Goodwill andIntangible Assets****—*Goodwillrepresents the excess of cost over the fair value of net tangible andidentifiable intangible assets of acquired companies. In accordance with SFAS No. 142,*Goodwill and Other Intangible Assets* (“SFASNo. 142”), the Company does not amortize goodwill; rather it testsgoodwill for impairment at least on an annual basis. Testing for impairment isa two-step process as prescribed by SFAS No. 142. The first step is a testfor potential impairment, 

 

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while the second step measures the amount of impairment, if any. Underthe guidelines of SFAS No. 142, the Company is required to perform animpairment test at least on an annual basis at any time during the fiscal yearprovided the test is performed at the same time every year. An impairment losswould be recognized when the assets’ fair value is below their carrying value.Stanley has elected December 31 as its testing date. Based on the testingperformed as of December 31, 2007, the Company determined that noimpairments existed as of December 31, 2007. Customer relationships areamortized on a straight-line basis over periods ranging from five to sevenyears. Non-competition agreements are amortized on a straight-line basis overperiods ranging from one to five years. Backlog and contracts are amortized ona straight-line basis over periods ranging from two to five years.

 

***Impairment ofLong-Lived Assets***—Whenever events or changes incircumstances indicate that the carrying amount of long-lived assets may not befully recoverable, Stanley evaluates the probability that future undiscountednet cash flows, without interest charges, will be less than the carrying amountof the assets. If any impairment were indicated as a result of this review,Stanley would recognize a loss based on the amount by which the carrying amountexceeds the estimated fair value. Stanley believes that no impairments existedas of September 26, 2008.

 

***Earnings per share***—Basicearnings per share has been computed by dividing net income available to commonstockholders by the weighted-average number of shares of common stockoutstanding during each period. Restricted shares of common stock that vestbased on the satisfaction of certain conditions are treated as contingentlyissuable shares until the conditions are satisfied. These shares are includedin the computation of basic earnings per share only after the shares vest.Shares issued during the period and shares reacquired during the period areweighted for the portion of the period that they were outstanding. Dilutedearnings per share consider the potential dilution that could occur ifsecurities or other contracts to issue common stock were exercised or convertedinto common stock. Shares that are anti-dilutive are not included in thecomputation of diluted earnings per share. The weighted-average number ofcommon shares outstanding is computed as follows:

 
| ** **                                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                    | ** ** | **September 26,  2008**     | ** ** | **September 30,  2007**   | ** ** | **September 26,   2008** | ** ** | **September 30,   2007** | ** ** |
| ** **                                                    | ** ** | **(in thousands)**          | ** ** |
| Basic weighted-average common shares  outstanding             |       | 22,793                           |       | 22,034                         |       | 22,760 |   | 21,966 |   |
| Effect of stock options and unvested  restricted stock grants |       | 1,024                            |       | 1,557                          |       | 1,003 |   | 1,512 |   |
| Diluted weighted-average common shares  outstanding           |       | 23,817                           |       | 23,591                         |       | 23,763 |   | 23,478 |   |

 

All options to purchase common stock are included in the computation ofdiluted earnings per share because the average fair value per common share wasgreater than the options’ exercise prices.

 

***DerivativeInstruments and Hedging Activities***— In accordancewith SFAS No. 133,*Accounting forDerivative Instruments and Hedging Activities* (“SFAS No. 133”),as amended by SFAS No. 138,*Accountingfor Certain Derivative Instruments and Certain Hedging Activities, an Amendmentof SFAS 133* and SFAS No. 149,*Amendment of Statement 133 on Derivative Instruments and HedgingActivities,* the fair value of the hedge arrangement is recorded asan asset or a liability in the accompanying unaudited condensed consolidatedbalance sheet at September 26, 2008. 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. Any ineffectiveness is reported currently in earnings.

 

Stanley entered into an interest rate swap agreement on October 27,2006 with a maturity date of January 31, 2012, an annual fixed rate of5.28% and a notional amount of $19.0 million. The Company designated this swapagreement, at its inception, as a qualifying cash flow hedge. The fair value ofthe swap at September 26, 2008 of $0.9 million has been reported in “Accruedexpenses and other liabilities” with an offset, net of tax, included in “Accumulatedother comprehensive loss” in the accompanying unaudited condensed consolidatedbalance sheets. None of the $ 0.9 million unrealized loss was recognized inearnings during the six months ended September 26, 2008 based on hedgeineffectiveness and none of the swap’s unrealized loss was excluded from theassessment of hedge effectiveness. Amounts in accumulated other comprehensiveloss will be reclassified into earnings in the period in which variableinterest payments (the hedged transaction) are made under the Senior CreditFacility. As of September 26, 2008, the estimated net amount of existinglosses expected to be reclassified into earnings within the next 12 months iszero.

 

***Segment Reporting***—Operatingsegments are defined as components of an enterprise for which separatefinancial information is available and evaluated regularly by the chiefoperating decision maker, or decision making group, in deciding how to allocateresources and assess performance. The Company currently has one reportablesegment for financial reporting purposes, which represents the Company’s core businessof providing information technology solutions and services for federalgovernment customers. The Company does not report revenue by product or serviceor groups of products or services because it is impracticable to do so.

 

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***Use of Estimates***—Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and the disclosure of contingent assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from thoseestimates. Significant items subject to such estimates and assumptions includerevenue recognition, carrying amount and useful lives of long-lived assets,valuation allowances for accounts receivable and deferred tax assets, softwaredevelopment costs and loss contingencies such as litigation, claims andassessments.

 

***Recently AdoptedAccounting Pronouncements***— In September 2006,the FASB issued Statement of Financial Accounting Standards No. 157,*Fair Value Measurements* (“SFAS 157”).SFAS 157 provides guidance for measuring the fair value of assets andliabilities and expands related disclosures. SFAS 157 defines fair value as theprice that would be received to sell an asset or paid to transfer a liability(exit price) in the principal or most advantageous market for the asset orliability in an orderly transaction between market participants at themeasurement date. SFAS 157 establishes market or observable inputs as thepreferred source of values, followed by assumptions based on hypotheticaltransactions in the absence of market inputs.

 

EffectiveApril 1, 2008, the Company adopted SFAS 157 for all financial instrumentsaccounted for at fair value on a recurring basis. SFAS 157 established a threelevel fair value hierarchy to classify the inputs used in measuring fair valueas follows:

 

Level1: Quoted prices for identical instruments in active markets.

 

Level2: Quoted prices for similar instruments in active markets; quoted prices foridentical or similar instruments in markets that are not active; andmodel-driven valuations whose inputs are observable or whose significant valuedrivers are observable.

 

Level3: Significant inputs to the valuation model are unobservable.

 

Asof September 26, 2008, the financial liability measured at fair valueconsisted of an interest rate swap agreement. The value is based onmodel-driven valuations whose inputs are observable. The following tablesummarizes the financial liability measured at fair value on a recurring basisas of September 26, 2008 and the level it falls within the fair valuehierarchy:

 
| ** **         | ** ** | **Fair Value Measurement Using:**                                    | ** ** | ** **                                         | ** ** |
|--------------------|------------|-------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **         | ** ** | **Quoted Prices in  Active Markets for  Identical Assets** | ** ** | **Significant Other  Observable Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** | **Total  September** | ** ** |
| ** **         | ** ** | **(Level 1)**                                                                  | ** ** | **(Level 2)**                                 | ** ** | **(Level 3)** | ** ** | **26, 2008** | ** ** |
| Liabilities:       |       |                                                                                |       |                                               |       |   |   |   |   |
| Interest rate swap |       | $                                                                                   | —     |                                               | $          | 865 |   | $ | — |   | $ | 865 |   |
|                    |            |                                                                                     |            |                                                    |            |  |  |  |  |  |  |  |  |

 

InFebruary 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2deferring the effective date of SFAS 157 for nonfinancial assets andliabilities to fiscal years beginning after November 15, 2008. The Companyis assessing the impact that the adoption of SFAS 157 for nonfinancial assetsand liabilities will have on its financial position, results of operations orcash flows.

 

***Recently IssuedAccounting Standards***— In December 2007, the FASB issued Statement of FinancialAccounting Standards No. 141 (revised 2007), *Business Combinations,*(“SFAS 141R”). SFAS 141R moves closer to a fair value model byrequiring the acquirer to measure all assets acquired and all liabilitiesassumed at their respective fair values at the date of acquisition, includingthe measurement of noncontrolling interests at fair value. The Statement alsoestablishes principles and requirements as to how the acquirer recognizes andmeasures goodwill acquired in a business combination or a gain from a bargainpurchase and determines what information to disclose to enable users of thefinancial statements to evaluate the nature and financial effects of thebusiness combination. In addition, SFAS 141R significantly changes theaccounting for business combinations in a number of areas, including thetreatment of contingent consideration, preacquisition contingencies, in-processresearch and development, restructuring costs, and requires the expensing ofacquisition-related costs as incurred.

 

Theeffective date of SFAS 141R is for fiscal years beginning after December 15,2008. For transactions consummated after the effective date of SFAS 141R,prospective application of the new standard is applied. For businesscombinations consummated prior to the effective date of SFAS 141R, the guidancein SFAS 141 is applied.

 

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InDecember 2007, the FASB issued Statement of Financial Accounting StandardsNo. 160, *Noncontrolling Interests in ConsolidatedFinancial Statements – An Amendment of ARB No. 51* (“SFAS 160”).SFAS 160 establishes new accounting and reporting standards for thenon-controlling interest in a subsidiary and for the deconsolidation of asubsidiary. SFAS 160 is effective for fiscal years beginning on or after December 15,2008. The Company does not currently expect the adoption of SFAS 160 to have amaterial impact on its consolidated financial statements.

 

InMarch 2008, the FASB issued Statement of Financial Accounting Standards No. 161,*Disclosures about Derivative Instruments andHedging Activities – An Amendment of FASB Statement No. 133* (“SFAS161”). SFAS 161 expands and amends the disclosure requirements for derivativeinstruments and hedging activities. SFAS 161 is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008. The Company is in the process of determining what effect, if any, theapplication of the provisions of SFAS 161 will have on its financial position,results of operations or cash flows.

 

**3****.  ACCOUNTSRECEIVABLE**

 

Accounts receivable consists of the following:

 
| ** **                                       | ** ** | **As of**                   | ** ** | **As of**               | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|------------------------------|------------|
| ** **                                       | ** ** | **September 26, 2008** | ** ** | **March 31, 2008** | ** ** |
| Billed receivables                               |       | $                                | 113,045    |                         | $          | 120,504 |   |
| Unbilled receivables:                            |       |                             |       |                         |       |
| Amounts billable                                 |       | 46,277                           |       | 35,259                       |       |
| Revenues recorded in excess of contract  funding |       | 4,957                            |       | 5,410                        |       |
| Retainage and contract fee withholding           |       | 427                              |       | 415                          |       |
| Allowance for doubtful accounts                  |       | (666                             | )          | (660                         | )          |
| Total                                            |       | $                                | 164,040    |                         | $          | 160,928 |   |

 

Amounts billable consist primarily of amounts to be billed within amonth. Revenues recorded in excess of contract funding are billable uponreceipt of contractual amendments or modifications adding additional funding.The retainage and fee withholding is billable upon completion of the contractperformance and approval of final indirect expense rates by the government.Consistent with industry practice, certain receivables related to long-termcontracts are classified as current, although a portion of these amounts is notexpected to be billed and collected within one year. Unbilled accountsreceivable at September 26, 2008 are expected to be billed and collectedwithin one year except for approximately $0.4 million.

 

**4.  PROPERTY AND EQUIPMENT**

 

Property and equipment consists of the following:

 
| ** **                                                                               | ** ** | **As of**                   | ** ** | **As of**               | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------------------------|------------|
| ** **                                                                               | ** ** | **September 26, 2008** | ** ** | **March 31, 2008** | ** ** |
| Computers and peripherals                                                                |       | $                                | 5,242      |                         | $          | 4,554 |   |
| Software                                                                                 |       | 3,737                            |       | 2,429                        |       |
| Furniture and equipment                                                                  |       | 5,449                            |       | 4,390                        |       |
| Leasehold improvements                                                                   |       | 12,119                           |       | 8,270                        |       |
|                                                                                     |       | 26,547                           |       | 19,643                       |       |
|                                                                                     |       |                             |       |                         |       |
| Less: Accumulated depreciation and  amortization                                         |       | (8,265                           | )          | (6,749                       | )          |
| Property and equipment — net                                                        |       | $                                | 18,282     |                         | $          | 12,894 |   |
|                                                                                     |       |                             |       |                         |       |
| Property and equipment included above that  are under capital lease obligations include: |       |                             |       |                         |       |
| Software                                                                                 |       | $                                | 637        |                         | $          | 637 |   |
| Furniture and equipment                                                                  |       | 170                              |       | 176                          |       |
| Less: Accumulated depreciation                                                           |       | (409                             | )          | (328                         | )          |
| Total                                                                                    |       | $                                | 398        |                         | $          | 485 |   |

 

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**5.  ACCRUED EXPENSES AND OTHERLIABILITIES**

 

Accrued expenses and other liabilities consist of the following:

 
| ** **                    | ** ** | **As of**                   | ** ** | **As of**               | ** ** |
|-------------------------------|------------|----------------------------------|------------|------------------------------|------------|
| ** **                    | ** ** | **September 26, 2008** | ** ** | **March 31, 2008** | ** ** |
| Accrued payroll-related costs |       | $                                | 21,033     |                         | $          | 20,534 |   |
| Accrued contract costs        |       | 31,858                           |       | 34,759                       |       |
| Accrued indirect costs        |       | 6,503                            |       | 3,923                        |       |
| Other payables                |       | 8,045                            |       | 3,433                        |       |
| Total accrued expenses        |       | $                                | 67,439     |                         | $          | 62,649 |   |

 

**6.  DEBT**

 

On October 10, 2007, Stanley entered into an Amended and RestatedRevolving Credit and Term Loan Agreement (“Senior Credit Facility” or “AmendedCredit Agreement”) with a group of lenders for which SunTrust Robinson Humphrey, Inc.acted as sole book manager and lead arranger, SunTrust Bank acted asadministrative agent and M&T Bank and BB&T Bank acted asco-documentation agents. The Amended Credit Agreement amends and restates theprevious credit agreement entered into in February 2006. The AmendedCredit Agreement increased the amount of the lenders’ aggregate commitmentunder the Senior Credit Facility from $87.0 million to $187.0 million, whichincludes a $150.0 million revolving credit facility (“Revolver”) and a $37.0million term loan (“Term Loan”). The Term Loan matures on January 31, 2012and the Revolver matures on October 31, 2012. The Amended Credit Agreementalso increased the letter of credit commitment from $5.0 million to $10.0million and increased the swing line facility from $5.0 million to $20.0million, both of which are part of the Revolver and have the same maturity dateas the Revolver.  The Amended CreditAgreement also eliminated the requirement to hedge a portion of the Company’soutstanding indebtedness under its Senior Credit Facility. In connection withthe Amended Credit Agreement, Stanley paid fees of approximately $0.5 million.

 

On July 15, 2008, Stanley exercised, in part, the accordion optionfeature under the Senior Credit Facility to increase the aggregate commitmentunder the Revolver contemplated by the Senior Credit Facility by $69.1million.  The exercise of the accordion feature increased the amount ofthe lenders’ current aggregate commitment under the Senior Credit Facility from$186.5 million to $255.6 million, which is comprised of a $219.1 millionRevolver and a $36.3 million Term Loan. Stanley paid aggregate lender fees equal to $0.6 million in connectionwith the exercise of the accordion feature.

 

Immediately following the exercise of the accordion feature under theSenior Credit Facility, Stanley borrowed under the Revolver to fund thepurchase price for its acquisition of Oberon (see Note 7).

 

As of September 26, 2008, Stanley had $36.3 million of Term Loanindebtedness and $152.2 million of Revolver indebtedness outstanding under itsSenior Credit Facility, with a weighted-average interest rate of approximately3.75% and 7.37% for the six months ended September 26, 2008 and September 30,2007, respectively. As of September 26, 2008, Stanley’s borrowing availabilityunder its $219.1 million Revolver was $66.7 million (including outstandingletters of credit). At September 26, 2008, the Company was in compliancewith all covenants under its Senior Credit Facility. The obligations under theSenior Credit Facility are unconditionally guaranteed by each of Stanley’sexisting and subsequently acquired or organized subsidiaries and are secured ona first-priority basis by security interests (subject to permitted liens) insubstantially all assets owned by the Company and each of its subsidiaries,including the shares of capital stock of its subsidiaries, subject to certainexceptions.

 

**7.  ACQUISITIONS**

 

***Oberon Associates, Inc.***

 

On July 15, 2008, Stanley acquired Oberon Associates, Inc. (“Oberon”),an engineering, intelligence operations and information technology servicescompany for approximately $167.8 million at closing, net of cash acquired, plusan additional $2.8 million in post closing net working capital and otherpurchase price adjustments. Stanley financed the acquisition with borrowingsunder its Senior Credit Facility.

 

Oberon provides engineering, operational intelligence and informationtechnology support to multiple elements of the U.S. Army, in addition to theU.S. Air Force, Defense Information Systems Agency, Transportation SecurityAdministration and several agencies throughout the intelligence community.Oberon’s areas of expertise include biometrics systems engineering, integrationand operational deployment; intelligence community support; communicationsengineering; and information technology and enterprise data management. Theacquisition of Oberon expands the range of solutions offered to the Company’s customers,bringing to Stanley biometric applications experts, functional experts withinthe intelligence community, and expertise in communications and informationmanagement systems.

 

In accordance with SFAS No. 141,*Business Combinations* (“SFAS No. 141”), the acquisition wasaccounted for under the purchase method of accounting. Accordingly, the resultsof Oberon have been included in the accompanying condensed consolidatedfinancial statements since the date of acquisition. The purchase price has beenallocated to the assets acquired and liabilities assumed based upon theirestimated fair values. Of the purchase consideration, $148.9 million has been 

 

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allocated to goodwill, based upon the excess of the purchase price overthe $5.8 million estimated fair value of net tangible assets and $13.1 millionhas been assigned to other identifiable intangible assets. The Company iscontinuing to evaluate the fair value of the assets and liabilities of Oberonand will complete the purchase accounting entries relating to the acquisitionprior to the end of the Company’s fiscal 2010 second quarter. None of theamount allocated to goodwill is expected to be deductible for tax purposes.

 

Included in identifiable intangibles arising from the Oberonacquisition are $10.5 million, $1.9 million and $0.7 million related tocustomer contracts and relationships, order backlog and non-compete agreements,respectively. The amortization period for customer contracts and relationships,order backlog and non-compete agreements is five years, two years and threeyears, respectively. No residual value has been assumed at the end of theiruseful lives.

 

The following unaudited pro forma financial information presentsconsolidated results of operations data for the three and six months ended September26, 2008 and September 30, 2007, respectively, as if the acquisition ofOberon had occurred on April 1, 2007. The pro forma information isprovided based on historical data that does not necessarily reflect the actualresults that would have occurred, nor is it necessarily indicative of thefuture results of operations of the combined entity.

 
| ** **                 | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                 | ** ** | **September 26,  2008**     | ** ** | **September 30,  2007**   | ** ** | **September 26,  2008** | ** ** | **September 30,  2007** | ** ** |
| Revenues                   |       | $                                | 195,690    |                           | $          | 165,841 |   | $ | 394,309 |   | $ | 313,488 |   |
| Net income                 |       | $                                | 7,791      |                           | $          | 7,828 |   | $ | 18,958 |   | $ | 14,810 |   |
| Basic earnings per share   |       | $                                | 0.34       |                           | $          | 0.36 |   | $ | 0.83 |   | $ | 0.67 |   |
| Diluted earnings per share |       | $                                | 0.33       |                           | $          | 0.33 |   | $ | 0.80 |   | $ | 0.63 |   |

 

***Techrizon, LLC***

 

On April 1, 2007, Stanley acquired 100 percent of the outstandingmembership interests in Techrizon, LLC (“Techrizon”), a provider of software,training, simulation and information security solutions, for $30.3 million, netof cash acquired.  Stanley financed theacquisition with a combination of existing cash and borrowings under the SeniorCredit Facility. Additionally, acquisition related costs of $0.3 million wereincurred.

 

The acquisition combined the specialized expertise of Techrizon withStanley’s proven systems integration capabilities. The two companies providecomplementary information technology services and together offer an expandedsuite of solutions for the Company’s combined customer base. Techrizon providessupport to the U.S. Army’s Communications-Electronics Life Cycle ManagementCommand and Fires Center of Excellence. Techrizon has also provided support tothe U.S. Army’s Field Artillery School since 1976.

 

In accordance with SFAS No. 141, the acquisition was accounted forunder the purchase method of accounting. Accordingly, the results of Techrizonhave been included in the accompanying condensed consolidated financialstatements since the date of acquisition. The purchase price has been allocatedto the assets acquired and liabilities assumed based upon their estimated fairvalues. Of the purchase consideration, $25.4 million has been allocated togoodwill, based upon the excess of the purchase price over the $2.7 millionestimated fair value of net tangible assets and $2.5 million has been assignedto other identifiable intangible assets. The entire amount allocated togoodwill is expected to be deductible for tax purposes.

 

Included in identifiable intangibles arising from the Techrizonacquisition are $1.6 million, $0.8 million and $0.1 million related to customercontracts and relationships, order backlog and non-compete agreements,respectively. The amortization period for customer contracts and relationships,order backlog and non-compete agreements is five years, two years and threeyears, respectively. No residual value has been assumed at the end of theiruseful lives.

 

**8****.  STOCKHOLDERS’EQUITY**

 

***Common Stock***

 

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

 

Stanley repurchased 7,715 shares of stock from its employees for $0.2million during the six months ended September 26, 2008. The repurchaseswere made to satisfy certain employees’ tax obligations upon the vesting of restrictedstock on May 3, 2008. The shares were recorded at market price using the costmethod of accounting.

 

***DeferredCompensation and Stock Options***

 

Under the 2006 Omnibus Incentive Compensation Plan (the “Omnibus Plan”),Stanley is authorized to provide awards for a maximum of 4,000,000 shares ofcommon stock to directors, officers, employees or consultants. The Omnibus Planallows for cash awards, restricted stock awards, restricted stock units, stockappreciation rights, performance units, fully vested 

 

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shares, option awards and other equity-related awards. Vesting periodsof these awards vary. Except as otherwise determined by the board of directors,the option awards may not have an exercise price less than the fair marketvalue of the common stock on the date the option is granted.

 

Prior to July 2006, under the Executive Deferred Compensation andEquity Incentive Plan (the “Executive Plan”), Stanley was authorized to provideawards for a maximum of 15,000,000 shares of common stock to key employees andnon-employee directors. The Executive Plan allowed for cash awards, restrictedstock awards, restricted stock trust awards and option awards. Vesting periodsof these awards varied. Holders of restricted stock awards have voting rightswith respect to the awards. The trustee of the restricted stock trust awards hasvoting rights with respect to the trust awards. The option awards granted underthe Executive Plan have exercise prices that range from 100% to 110% of thefair market value of the common stock on the date the option was granted.  No further grants under the Executive Planwill be made.

 

Effective April 1, 2006, the Company adopted the provisions ofSFAS No. 123(R) using the prospective-transition method. Under thattransition method, compensation cost recognized in the six months ended September 26,2008 includes compensation cost for all share-based payments granted on orafter April 1, 2006, based on the grant-date fair value estimated inaccordance with the provisions of SFAS No. 123(R). The Company is requiredto account for any portion of awards outstanding at the date of adoption ofSFAS No.123(R) using the accounting principles originally applied to thoseawards.

 

The Company has presented all tax benefits resulting from stock-basedcompensation awarded prior to the adoption of SFAS No. 123(R) as operatingcash flows in the accompanying unaudited condensed consolidated statements ofcash flows. The tax benefits associated with share-based compensation in effectprior to the adoption of SFAS No. 123(R) were $2.2 million and $1.5million for the six months ended September 26, 2008 and September 30,2007, respectively. For share-based payment transactions awarded subsequent tothe adoption of SFAS No. 123(R), the tax benefits in excess of thecompensation cost recognized are classified as financing cash flows. The excesstax benefits associated with share-based payment transactions accounted forafter the adoption of SFAS No. 123(R) were $0.5 million and five thousanddollars for the six months ended September 26, 2008 and September 30,2007, respectively, and are included within the financing activities in theaccompanying Condensed Consolidated Statements of Cash Flows.

 

The fair value of each option award is estimated on the date of grantusing the Black-Scholes-Merton closed-form option-pricing model that uses theassumptions noted in the following table. Expected volatility is based on aweighted-average of the historical volatilities of similar public entities. Theexpected term of options granted is derived using the simplified method andrepresents the period of time that options granted are expected to beoutstanding. Options granted meet the criteria of “plain vanilla” for purposesof applying the simplified method. The risk-free rate for periods within thecontractual life of the option is based on the U.S. Treasury yield curve ineffect at the time of grant. The Company has not issued dividends in the pastnor does it currently intend to issue dividends in the near future.

 

A summary of the weighted average assumptions is presented below.

 
| ** **               | ** ** | **Six Months Ended**   | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **September 26, 2008** | ** ** | **September 30, 2007** | ** ** |
| Expected volatility      |       | 32.3                             | %          | 34.5 | % |
| Expected dividends       |       | 0.0                              | %          | 0.0 | % |
| Expected term (in years) |       | 3.5                              |       | 3.5 |   |
| Risk-free rate           |       | 2.6                              | %          | 4.6 | % |

 

During the six months ended September 26, 2008, the Companygranted 440,210 stock option awards at a weighted-average exercise price of$26.39, which reflects the fair market value of the shares on the date ofgrant. These options vest ratably over three years and have a contractual termof five years. The options have a weighted-average fair value of $7.22 pershare. The weighted-average fair value of stock option awards granted duringthe six months ended September 26, 2008 and September 30, 2007, asdetermined by the Black-Scholes-Merton closed-form option-pricing model, was$7.22 and $4.21, respectively. The stock option awards that vested during thesix months ended September 26, 2008 and September 30, 2007 had acombined fair value of $1.2 million and $0.5 million, respectively.

 

A summary of option activity for the year ended March 31, 2008 andthe six months ended September 26, 2008 is presented below.

 
| **Options**                            | ** ** | **Number of  Underlying Shares** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Aggregate Intrinsic  Value (in thousands)** | ** ** |
|----------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|--------------------------------------------------------------|------------|
| Outstanding at April 1, 2007      |       | 2,014,986                                  |       | $                                         | 4.87       |                                                         |       |   |
| Granted                                |       | 570,125                                    |       | $                                         | 16.21      |                                                         |       |   |
| Exercised                              |       | (784,636                                   | )          | $                                         | 3.14       |                                                         | $          | 16,998 |   |
| Forfeited                              |       | (191,000                                   | )          | $                                         | 9.83       |                                                         |       |   |
| Outstanding at April 1, 2008      |       | 1,609,475                                  |       | $                                         | 9.15       |                                                         |       |   |
| Granted                                |       | 440,210                                    |       | $                                         | 26.39      |                                                         |       |   |
| Exercised                              |       | (81,649                                    | )          | $                                         | 9.74       |                                                         | $          | 1,744 |   |
| Forfeited                              |       | (64,714                                    | )          | $                                         | 13.98      |                                                         |       |   |
| Outstanding at September 26, 2008 |       | 1,903,322                                  |       | $                                         | 12.94      |                                                         | $          | 43,426 |   |

 

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A summary of nonvested stock option activity for the six months ended September 26,2008 is presented below.

 
| **Nonvested Options**             | ** ** | **Number of  Underlying Shares** | ** ** | **Weighted-Average  Fair Value** | ** ** |
|----------------------------------------|------------|--------------------------------------------|------------|---------------------------------------|------------|
| Outstanding at April 1, 2008      |       | 1,010,625                                  |       | $                                     | 4.30       |   |
| Granted                                |       | 440,210                                    |       | $                                     | 7.22       |   |
| Vested                                 |       | (282,027                                   | )          | $                                     | 4.22       |   |
| Forfeited                              |       | (63,364                                    | )          | $                                     | 4.71       |   |
| Outstanding at September 26, 2008 |       | 1,105,444                                  |       | $                                     | 5.46       |   |

 

A summary of vested stock options and stock options expected to vest atSeptember 26, 2008 is presented below.

 
| **Options**                      | ** ** | **Number of  Underlying  Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-Average  Remaining  Contractual Term  (years)** | ** ** | **Aggregate  Intrinsic  Value (in  thousands)** | ** ** |
|----------------------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------------------------------|------------|
| Exercisable                      |       | 797,878                                |       | $                                       | 6.15       |                                                            | 4.6        |                                                 | $          | 23,624 |   |
| Expected to vest                 |       | 1,022,536                              |       | $                                       | 17.85      |                                                            | 4.9        |                                                 | $          | 18,317 |   |
| Exercisable and expected to vest |       | 1,820,414                              |       |                                    |       |                                                            |       |                                                 |       |

 

Prior to fiscal 2009, the Company primarily granted restricted stockawards to employees that vest ratably over the service period. Beginning infiscal 2009, in addition to time vested awards, the Company granted certainrestricted stock awards that vest only if the Company meets certain revenue andearnings targets determined by the Board of Directors. During the six monthsended September 26, 2008, the Company granted 543,714 of suchperformance-based restricted stock awards at a weighted-average fair value of$25.12 per share with a vesting period of four years subject to the Companymeeting the revenue and earnings targets. 

 

Additionally, during the six months ended September 26, 2008, theCompany granted 53,686 restricted stock awards at a weighted-average fair valueof $27.99 per share that vest ratably over periods of one to three years. Theweighted-average fair value of restricted stock awards granted during the sixmonths ended September 26, 2008 and September 30, 2007 was $25.38 and$15.69, respectively. The restricted stock awards that vested during the sixmonths ended September 26, 2008 and September 30, 2007 had a combinedfair value of $0.9 million and $0.2 million, respectively.

 

A summary of restricted stock activity for the six months ended September 26,2008 is presented below.

 
| **Restricted Stock**              | ** ** | **Number of Shares** | ** ** | **Weighted-Average  Fair Value** | ** ** |
|----------------------------------------|------------|--------------------------------|------------|---------------------------------------|------------|
| Outstanding at April 1, 2008      |       | 149,967                        |       | $                                     | 16.17      |   |
| Granted                                |       | 597,400                        |       | $                                     | 25.38      |   |
| Vested                                 |       | (57,024                        | )          | $                                     | 16.35      |   |
| Forfeited                              |       | (7,909                         | )          | $                                     | 16.64      |   |
| Outstanding at September 26, 2008 |       | 682,434                        |       | $                                     | 24.21      |   |

 

During the six months ended September 26, 2008 and September 30,2007, the Company recognized $2.8 million and $0.9 million of share-basedcompensation costs, respectively. As of September 26, 2008, there was$19.4 million of total unrecognized compensation cost related to nonvestedshare-based compensation arrangements granted under the Omnibus Plan. That costis expected to be recognized over a weighted-average period of 3.1 years.

 

Prior to the adoption of SFAS No. 123(R), the fair market value ofeach issuance and grant was determined by the Company on a contemporaneousbasis. The Company recorded stock-based deferred compensation in aggregate ofapproximately $1.4 million in connection with compensatory grants of stockoptions and shares of restricted stock awarded during fiscal 2006 and 2007.Approximately $0.1 million of compensation expense was recognized during thesix months ended September 26, 2008. The remaining deferred compensationof $0.7 million will be amortized over the final three years of the vestingperiod of the awards.

 

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**9.  COMMITMENTS AND CONTINGENCIES**

 

***Contract Cost Audits***—Substantially all payments to Stanley under cost-reimbursable contracts andsubcontracts with the U.S. Government are provisional payments, which aresubject to potential adjustments upon audit by the Defense Contract AuditAgency (“DCAA”). Audits through December 31, 2005 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, results of operations, or cash flows.

 

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**ITEM 2.  MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*You should read the following discussion inconjunction with the unaudited and audited consolidated financial statements andthe accompanying notes included in this Form 10-Q and our Annual Report onForm 10-K for the fiscal year ended March 31, 2008,**filed by us with the Securities and Exchange Commission on May 28,2008. This discussion containsforward-looking statements that involve risks and uncertainties. Our actualresults may differ materially from those discussed in or implied by any of theforward-looking statements as a result of various factors, including but notlimited to, those listed in the “Risk Factors” section of this Report,as well as in our Annual Report on Form 10-K for the year ended March 31,2008. We caution readers not to placeundue reliance on any such forward-looking statements, which speak only as ofthe date made. We undertake no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise, after the date of the filing of this Form 10-Q.*

 

**Overview**

 

We provide information technology services and solutions to U.S.defense and federal civilian government agencies. We offer our customerssolutions and expertise to support their mission-essential needs at any stageof program, product development or business lifecycle through five serviceareas: systems engineering, enterprise integration, operational logistics,business process outsourcing and advanced engineering and technology. As asystems integrator, we apply these five service areas to enable our customersto achieve interoperability between different business processes andinformation technology systems.

 

Contracts funded by federal government agencies account forsubstantially all of our revenues. As of September 26, 2008, we had morethan 250 active contractual engagements across 50 federal government agencies.Our customers include the Department of Defense (including all major agencieswithin the Department of Defense), the Department of State, the Department ofHomeland Security, the Department of Transportation, the Department of theTreasury, NASA, the Department of Justice and the Department of Health andHuman Services.

 

**Key Metrics Evaluated By Management**

 

We manage and assess the performance of our business by evaluating avariety of financial and non-financial metrics derived from and in addition toour United States generally accepted accounting principles, or GAAP, results.The most significant of these metrics are discussed below.

 

***Revenue Growth***

 

We closely monitor revenue growth in order to assess the performance ofour business. In monitoring this growth, we focus on both internal revenuegrowth and revenue growth through acquisitions. Our internal revenue growth isdriven primarily by two factors. First, internal revenue growth is driven byadding new customers. For example, over the past several years we have addedthe Department of the Treasury’s Office of the Comptroller of the Currency, theNational Guard Bureau, the Department of Transportation and agencies in theintelligence community as new customers. Second, internal revenue growth is driven by increasing revenueswith existing customers by adding new contracts or expanding existingcontracts.  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 revenue growth strategy also includes the pursuit of strategicacquisitions. We have completed the following six acquisitions since 2000:

 
| **Acquired Company**           | ** ** | **Date of Acquisition** |
|-------------------------------------|------------|-----------------------------------|
|                                |       |                              |
| GCI Information Services, Inc. |       | January 2000                 |
| CCI, Incorporated                   |       | September 2002               |
| Fuentez Systems Concepts, Inc. |       | December 2003                |
| Morgan Research Corporation         |       | February 2006                |
| Techrizon, LLC                      |       | April 2007                   |
| Oberon Associates, Inc.        |       | July 2008                    |

 

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***Backlog***

 

We monitor backlog, which provides us with visibility of our futurerevenues, as a measure of the strength of our target markets and our ability toretain existing contracts and win new contracts. The following table summarizesour backlog as of the dates indicated:

 
| ** **    | ** ** | **As of**                   | ** ** |
|---------------|------------|----------------------------------|------------|
| ** **    | ** ** | **September 26, 2008** | ** ** | **September 30, 2007** | ** ** |
| ** **    | ** ** | **(in millions)**           | ** ** |
| Backlog:      |       |                             |       |   |   |
| Funded        |       | $                                | 354.6      |   | $ | 309.5 |   |
| Unfunded      |       | 1,729.5                          |       | 1,050.4 |   |
| Total Backlog |       | $                                | 2,084.1    |   | $ | 1,359.9 |   |

 

Each year, a significant portion of our revenues is derived from ourbacklog, and a substantial portion of our backlog represents work related to thecontinuation of services under existing contracts or projects.

 

We define backlog as the amount of revenues we expect to realize (i) overthe remaining base contract performance period and (ii) from the exerciseby the customer of option periods that we reasonably believe will be exercised,in each case from signed contracts in existence as of the measurement date. Wedo not include contract ceiling values, which represent the maximum amount ofcontract awards that could be awarded to all contractors under government-wideacquisition contracts (“GWACs”) or agency-specific indefinitedelivery/indefinite quantity (“ID/IQ”) contracts in our backlog calculation. Wealso do not include in backlog (i) the expected amount of revenues thatwould be realized if, and when, we were successful in the re-compete of signedcontracts in existence as of the measurement date or (ii) the expectedamount of revenues that would be realized from future unidentified growth onsigned contracts and task orders in existence as of the measurement date.

 

We define funded backlog as the portion of our backlog for whichfunding currently is appropriated and obligated to us under a signed contractor task order by the purchasing agency, or otherwise authorized for payment tous by a customer upon completion of a specified portion of work, less theamount of revenue we have previously recognized under the contract. Our fundedbacklog does not include the full potential value of our contracts becauseCongress often appropriates funds to be used by an agency for a particularprogram or contract on a yearly or quarterly basis, even though the contractmay call for performance over a number of years. As a result, contractstypically are only partially funded at any point during their term, and all orsome of the work to be performed under the contracts may remain unfunded unlessand until Congress makes subsequent appropriations and the procuring agencyallocates funding to the contract.

 

***Contract Mix***

 

We work with the federal government under contracts employing one ofthree types of price structures: cost-plus-fee, time-and-materials andfixed-price. Cost-plus-fee contracts are typically lower risk arrangements andthus yield lower profit margins than time-and-materials and fixed-price arrangements.Because the customer usually specifies the type of contract for a particularcontractual engagement, we generally do not influence the choice of contracttype. However, where we do have the opportunity to influence the contract type,and where customer requirements are clear, we prefer time-and-materials andfixed-price arrangements rather than cost-plus-fee arrangements becausetime-and-materials and fixed-price contracts, as compared with cost-plus-feecontracts, generally provides us with a greater opportunity to generate highermargins and provides the customer with a fixed value for services provided.

 

Our acquisition of Oberon in July 2008 and our successfulrecompete win in March 2008 of the contract with the Department of Stateto support passport production and services have resulted in an increase to ourpercentage of time-and-materials contracts and a corresponding reduction in thepercentage of cost-plus-fee contracts. The following table summarizes ourhistorical contract mix, measured as a percentage of total revenues, for theperiods indicated:

 
| ** **         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**   | ** ** |
|--------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **         | ** ** | **September 26, 2008** | ** ** | **September 30, 2007** | ** ** | **September 26, 2008** | ** ** | **September 30, 2007** | ** ** |
| Cost-plus-fee      |       | 30                               | %          | 49                               | %          | 32 | % | 49 | % |
| Time-and-materials |       | 55                               | %          | 35                               | %          | 51 | % | 35 | % |
| Fixed-price        |       | 15                               | %          | 16                               | %          | 17 | % | 16 | % |

 

***Headcount and LaborUtilization***

 

We generate revenues primarily from services provided by our employeesand subcontractors, with services provided by our employees generally yieldinghigher profits than services provided by our subcontractors. Our ability tohire and deploy additional qualified employees is a key driver of our abilityto generate additional revenues, and our successful deployment of existingemployees on direct-billable jobs is a key driver of our profitability.

 

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***Indirect Costs***

 

Indirect costs constitute a substantial portion of the costs associatedwith our performance of contracts. We carefully monitor the amount by which ouractual indirect costs under our contracts vary from those expected to beincurred, which we refer to as indirect expense variance. Increased indirectrates can adversely affect our ability to achieve attractive contract pricing,our profitability, and our competitive position, by resulting in unexpectedincreased costs to our customers.

 

***Days SalesOutstanding***

 

Days sales outstanding, or DSO, is a measure of how efficiently wemanage the billing and collection of our accounts receivable, our mostsignificant working capital requirement. For the three months ended September 26,2008, we reported DSO of 80 days, a decrease from 83 days for the three monthsended June 27, 2008. The decrease in DSO was primarily the result of loweraverage receivables balances and higher daily revenues during the quarter.

 

***Unbilled Receivables***

 

Unbilled receivables are comprised of work-in-process that will bebilled in accordance with contract terms and delivery schedules, as well asamounts billable upon final execution of contracts, contract completion,milestones or completion of rate negotiations. Because the billing of unbilledreceivables is contingent on those events, changes in the relative amount of unbilledreceivables have an impact on our working capital and liquidity.

 

Payments to us for performance on certain of our federal governmentcontracts are subject to audit by the DCAA and are also subject to governmentfunding. We provide a reserve against our receivables for estimated losses thatmay result from rate negotiations, audit adjustments and/or government fundingavailability. To the extent that actual adjustments due to rate negotiations,audit adjustments or government funding availability differ from our estimates,our revenue may be impacted. Because substantially all of our receivables comefrom contracts funded by the federal government, the likelihood of a materialloss on an uncollectible account from this activity is low.

 

**Critical Accounting Policies**

 

The discussion and analysis of our financial condition and results ofoperations is based on our consolidated financial statements, which have beenprepared in accordance with GAAP. The preparation of these condensedconsolidated financial statements requires management to make estimates andassumptions that affect reported amounts, and actual results may differ fromthe estimates. Our significant accounting policies are described in Note 2to our unaudited condensed consolidated financial statements included in thisreport. 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 on thepart of our management in their application, often as a result of the need tomake estimates about the effect of matters that are inherently uncertain, andare the most important to our financial condition and operating results.

 

***Revenue Recognition***

 

We recognize revenue under our contracts when a contract has beenexecuted, the contract price is fixed and determinable, delivery of services orproducts has occurred and collectibility is considered probable and can bereasonably estimated. We use a standard management process to determine whetherall required criteria for revenue recognition have been met, which includesregular reviews of our contract performance. This review covers, among othermatters, progress against a schedule, outstanding action items, effort andstaffing, quality, risks and issues, subcontract management, costs incurred,commitments and customer satisfaction. During this review, we determine whetherthe overall progress on a contract is consistent with the effort expended.

 

Contract revenue recognition inherently involves the use of estimates.Examples of estimates include the contemplated level of effort to accomplishthe tasks under the contract, the cost of the effort and an ongoing assessmentof our progress toward completing the contract. From time to time, as part ofour standard management process, facts develop that require us to revise ourestimated total costs and revenues. To the extent that a revised estimateaffects contract profit or revenue previously recognized, we record thecumulative effect of the revision in the period in which the facts requiringthe revision become known. The full amount of an anticipated loss on any typeof contract is recognized in the period in which it becomes probable and can bereasonably estimated.

 

Under cost-plus-fee contracts, revenues are recognized as costs areincurred and include an estimate of applicable fees earned. We consider fixedfees under cost-plus-fee contracts to be earned in proportion to the allowablecosts actually incurred in performance of the contract for level of effortcontracts. For completion type cost-plus-fee contracts, fixed fees are earnedin proportion to the percentage of work completed. For time-and-materialscontracts, revenues are computed by multiplying the number of directlabor-hours expended in performance of the contract by the contractual billingrates and 

 

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adding other billable direct and indirect costs. For fixed-pricecontracts, revenues are recognized as services are performed, using thepercentage-of-completion method, applying the cost-to-cost or units of deliverymethod, in accordance with ARB 45 and SOP 81-1.

 

For cost-plus-award fee type contracts, we recognize the expected feeto be awarded by the customer at the time such fee can be reasonably estimated,based on factors such as prior award experience and communication with thecustomer regarding performance, including any interim performance evaluationsrendered by the customer. For cost-plus-incentive fee type contracts, themethod of calculating the incentive fee is specified in the contract and it istypically based on measuring actual costs to perform the contract against atarget cost to perform the contract. We prepare periodic estimates to completethe contract and adjust the incentive fee as required based on the contractincentive fee formula.

 

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

 

Disputes occasionally arise in the normal course of our business due toevents such as delays, changes in contract specifications, and questions ofcost allowability 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 whenthe realization is probable and can be reliably estimated. Claims against usare recognized where a loss is considered probable and can be reasonablyestimated in amount.

 

***Contract CostAccounting***

 

As a contractor providing services primarily to the federal government,we must categorize our costs as either direct or indirect and allowable orunallowable. Direct costs are those costs that are identified with specificcontracts. These costs include labor, travel, subcontractor and consultantservices, third party materials we purchase under a contract and othernon-labor costs incurred in support of a contract. Indirect costs are thosecosts not identified with specific contracts. Rather, indirect costs areallocated to contracts in accordance with federal government rules andregulations. These costs typically include certain of our selling, general andadministrative expenses, fringe benefit expenses, overhead expenses anddepreciation and amortization costs. Direct and indirect costs that are notallowable under the Federal Acquisition Regulation or specific contractprovisions cannot be considered for reimbursement under our federal governmentcontracts. We must specifically identify these costs to ensure we comply withthese requirements. Our unallowable costs include a portion of our executivecompensation, certain employee morale activities, certain types of legal andconsulting costs, interest expense and the amortization of identifiedintangible assets, among others.

 

***Goodwill andIntangible Assets***

 

Goodwill represents the excess of cost over the fair value of nettangible and identifiable intangible assets of acquired companies. Inaccordance with SFAS No. 142,*Goodwilland Other Intangible Assets* (“SFAS No. 142”), we do notamortize goodwill. Rather, we test 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, we are required to perform an impairment test at least on anannual basis at any time during the fiscal year, provided that thetest is performed at the same time every year. An impairment loss would berecognized when the assets’ fair value is below their carrying value. Based onthe testing performed as of December 31, 2007, we determined that noimpairments existed as of December 31, 2007. Customer relationships areamortized on a straight-line basis over periods ranging from five to sevenyears. Non-competition agreements are amortized on a straight-line basis overperiods ranging from one to five years. Backlog and contracts are amortized ona straight-line basis over periods ranging from two to five years.

 

**Results of Operations**

 

Our historical financial statements reflect the operating results ofour acquisitions from the date of acquisition (April 1, 2007 for theacquisition of Techrizon and July 15, 2008 for the acquisition of Oberon).The following unaudited tables set forth the results of operations expressed indollars (in thousands) and as a percentage of revenues, for the periods below:

 

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| ** **                                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                     | ** ** | **September 26,**           | ** ** | **September 30,**         | ** ** | **September 26,** | ** ** | **September 30,** | ** ** |
| **Consolidated Statements of Income Data** | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues                                                       |       | $                                | 191,078    |                           | $          | 150,239 |   | $ | 363,645 |   | $ | 283,720 |   |
| Operating costs and expenses:                                  |       |                             |       |                           |       |   |   |   |   |
| Cost of revenues                                               |       | 159,925                          |       | 127,556                        |       | 305,684 |   | 239,879 |   |
| Selling, general and administrative                            |       | 12,224                           |       | 9,322                          |       | 22,883 |   | 18,750 |   |
| Amortization of deferred compensation                          |       | 62                               |       | 67                             |       | 125 |   | 142 |   |
| Depreciation and amortization                                  |       | 2,524                            |       | 1,702                          |       | 4,303 |   | 3,312 |   |
| Total operating costs and expenses                             |       | 174,735                          |       | 138,647                        |       | 332,995 |   | 262,083 |   |
| Operating income                                               |       | 16,343                           |       | 11,592                         |       | 30,650 |   | 21,637 |   |
| Other income (expense):                                        |       |                             |       |                           |       |   |   |   |   |
| Other income                                                   |       | 1                                |       | 6                              |       | 3 |   | 6 |   |
| Interest expense—net                                      |       | (1,759                           | )          | (1,138                         | )          | (2,171 | ) | (2,200 | ) |
| Total other expenses                                           |       | (1,758                           | )          | (1,132                         | )          | (2,168 | ) | (2,194 | ) |
| Income before taxes                                            |       | 14,585                           |       | 10,460                         |       | 28,482 |   | 19,443 |   |
| Provision for income taxes                                     |       | (5,857                           | )          | (4,125                         | )          | (11,437 | ) | (7,744 | ) |
| Net income                                                     |       | $                                | 8,728      |                           | $          | 6,335 |   | $ | 17,045 |   | $ | 11,699 |   |

 
| ** **                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                          | ** ** | **September 26,**           | ** ** | **September 30,**         | ** ** | **September 26,** | ** ** | **September 30,** | ** ** |
| **As a Percentage of Revenues** | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues                                            |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |
| Operating costs and expenses:                       |       |                             |       |                           |       |   |   |   |   |
| Cost of revenues                                    |       | 83.7                             |       | 84.9                           |       | 84.1 |   | 84.5 |   |
| Selling, general and administrative                 |       | 6.4                              |       | 6.2                            |       | 6.3 |   | 6.6 |   |
| Amortization of deferred compensation               |       | —                           |       | —                         |       | — |   | 0.1 |   |
| Depreciation and amortization                       |       | 1.3                              |       | 1.1                            |       | 1.2 |   | 1.2 |   |
| Total operating costs and expenses                  |       | 91.4                             |       | 92.3                           |       | 91.6 |   | 92.4 |   |
| Operating income                                    |       | 8.6                              |       | 7.7                            |       | 8.4 |   | 7.6 |   |
| Other income (expense):                             |       |                             |       |                           |       |   |   |   |   |
| Other income                                        |       | —                           |       | —                         |       | — |   | — |   |
| Interest expense—net                           |       | (0.9                             | )          | (0.8                           | )          | (0.6 | ) | (0.8 | ) |
| Total other expenses                                |       | (0.9                             | )          | (0.8                           | )          | (0.6 | ) | (0.8 | ) |
| Income before taxes                                 |       | 7.7                              |       | 6.9                            |       | 7.8 |   | 6.8 |   |
| Provision for income taxes                          |       | (3.1                             | )          | (2.7                           | )          | (3.1 | ) | (2.7 | ) |
| Net income                                          |       | 4.6                              | %          | 4.2                            | %          | 4.7 | % | 4.1 | % |

 

We generate revenues primarily from services provided by our employeesand subcontractors, with services provided by our employees generally yieldinghigher profits than services provided by our subcontractors. To a lesserdegree, we earn revenues through reimbursable travel and other reimbursabledirect and indirect costs to support the contractual effort and third-partyhardware and software that we purchase and integrate for customers as part ofthe solutions we provide.

 

Our most significant expense is cost of revenues, which includes thecosts of direct labor, subcontractors, materials, equipment, non-reimbursabletravel and an allocation of indirect costs (other than selling, general andadministrative expenses and depreciation). Indirect costs consist primarily offringe benefits, human resources, recruiting, training, other overhead andcertain other non-direct costs that are necessary to support direct labor. Thenumber and types of personnel, their salaries and other costs, can have asignificant impact on our cost of revenues.

 

Ourselling, general and administrative expenses include costs not directlyassociated with performing work for our customers. These costs include wagesplus associated fringe benefits, stock-based compensation charges, rent, traveland insurance. Among the functions covered by these expenses are sales,business development, contract administration, legal, finance, accounting,human resources, information technology and general management. Most of thesecosts are allowable costs under the cost accounting standards for contractingwith the federal government and are recoverable under cost-plus-fee contracts.

 

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

 

Certainrevenues and payments we receive are based on provisional billings and paymentsthat are subject to adjustment after audit. Federal government agencies havethe right to challenge our cost estimates and allocation methodologies with respectto government contracts. In addition, contracts with these agencies are subjectto audit and possible adjustment to give effect to unallowable costs undercost-plus-fee contracts or to other regulatory requirements affecting bothcost-plus-fee and fixed-price contracts.

 

***Comparison of Results of Operationsfor the Three Months Ended September 26, 2008 and September 30, 2007***

 

***Revenues.***  Our consolidated revenues increased $40.9million, or 27.2%, from $150.2 million for the three months ended September 30,2007, to $191.1 million for the three months ended September 26, 2008. Theincrease was primarily due to $10.8 million of increased revenues attributableto our contract with the U.S. Citizenship and Immigration Services, Departmentof Homeland Security (“USCIS”), $8.5 million of increased revenues attributableto engineering and technical support services, primarily for the U.S. Air Forceand the Defense Information Systems Agency (“DISA”), $6.5 million of increasedrevenues attributable to biometric software development, training and support,$4.4 million of increased revenues attributable to systems and softwareengineering services for the U.S. Army’s Communications-Electronics Life CycleManagement Command and Fires Center of Excellence (“Army CELCMC & FCE”),$4.4 million of increased revenues attributable to providing militaryintelligence training and operations support and $2.7 million of increasedrevenues attributable of operational intelligence for the U.S. Army. Thebalance of the increased revenues was primarily related to continued growthproviding information systems support to the U.S. Marine Corps.

 

***Cost of Revenues.***  Our cost of revenues increased $32.3million, or 25.4%, from $127.6 million for the three months ended September 30,2007, to $159.9 million for the three months ended September 26, 2008.This increase was primarily the result of the acquisition of Oberon as well as additionalcosts attributable to revenues associated with the increased services providedunder the contracts referred to above. Cost of revenues represented 83.7% ofrevenues for the three months ended September 26, 2008, as compared to84.9% of revenues for the three months ended September 30, 2007. Thisdecrease was primarily the result of a greater percentage of more profitabletime-and-material contracts.

 

***Selling, General and Administrative.***  Our selling, general andadministrative expense increased $2.9 million, or 31.1%, from $9.3 million forthe three months ended September 30, 2007, to $12.2 million for the threemonths ended September 26, 2008. This increase was primarily due to higher selling, general andadministrative expenses attributable to our Oberon acquisition and to higherSFAS 123(R) share-based payment expenses. Selling, general andadministrative expense represented 6.4% of revenues for the three months ended September 26,2008, as compared to 6.2% of revenues for the three months ended September 30,2007.  This increase was primarily aresult of Oberon’s higher selling, general and administrative expense as apercentage of revenues.

 

***Depreciation and Amortization.***  Our depreciation and amortizationexpense increased $0.8 million, or 48.3%, from $1.7 million for the threemonths ended September 30, 2007, to $2.5 million for the three months endedSeptember 26, 2008. The increase in depreciation and amortization wasprimarily due to the amortization of intangible assets associated with theacquisition of Oberon as well as depreciation expense associated with capitalexpenditures and leasehold improvements over the past year.

 

***Interest Expense, Net.***  Our net interest expense increased$0.7 million from $1.1 million for the three months ended September 30,2007, to $1.8 million for the three months ended September 26, 2008. Theincrease in net interest expense was primarily due to borrowings under ourSenior Credit Facility relating to the Oberon acquisition, partially offset bya lower overall borrowing rate.

 

***Provision for Income Taxes. ***Our effective tax rate increased by 0.8% from 39.4% for the threemonths ended September 30, 2007, to 40.2% for the three months ended September 26,2008.  The increase was primarily attributableto a higher overall effective state income tax rate.

 

***Net Income.***  Our net income increased $2.4 millionfrom $6.3 million for the three months ended September 30, 2007, to $8.7million for the three months ended September 26, 2008. The primary reasonsfor the increase in net income were higher revenues and increased operatingincome as well as improved margins primarily due to a larger percentage of moreprofitable time-and-material contracts.

 

***Comparison of Results of Operationsfor the Six Months Ended September 26, 2008 and September 30, 2007***

 

***Revenues.***  Our consolidated revenues increased $79.9million, or 28.2%, from $283.7 million for the six months endedSeptember 30, 2007, to $363.6 million for the six months endedSeptember 26, 2008. The increase was primarily due to $22.8 million ofincreased revenues attributable to our contract with the USCIS, $16.3 millionof increased revenues attributable to information technology lifecycle supportand logistics services under our prime contract with the U.S. Army FieldInstallation and Readiness Support Team, $9.9 million of increased revenuesattributable to systems and software engineering services for the Army CELCMC& FCE, $8.5 million of increased revenues attributable to engineering andtechnical support services, primarily for the U.S. Air Force and DISA, $6.5million of increased revenues attributable to biometric software development,training and support, $4.4 million of increased revenues attributable toproviding military intelligence training and operations support, $2.7 millionof increased revenues attributable of operational intelligence for the U.S.Army, $2.3 million of increased revenues attributable to information systemssupport provided to the U.S. Marine Corps, and $2.1 million of increasedrevenues attributable to contracts that include specialized engineering andtechnology services provided to the U.S. Army Program Office Executive Officefor Simulation, Training and Instrumentation. The balance of the increasedrevenues was primarily related to continued growth providing enterpriseintegration and operational support services for the Department of Defense.

 

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***Cost of Revenues.***  Our cost of revenues increased $65.8million, or 27.4%, from $239.9 million for the six months ended September 30,2007, to $305.7 million for the six months ended September 26, 2008. Thisincrease was primarily the result of the acquisition of Oberon as well as additionalcosts attributable to revenues associated with the increased services providedunder the contracts referred to above. Cost of revenues represented 84.1% ofrevenues for the six months ended September 26, 2008, as compared to 84.5%of revenues for the six months ended September 30, 2007. This decrease wasprimarily the result of a greater percentage of more profitabletime-and-material contracts.

 

***Selling, General and Administrative.***  Our selling, general andadministrative expense increased $4.1 million, or 22.0%, from $18.8 million forthe six months ended September 30, 2007, to $22.9 million for the sixmonths ended September 26, 2008. This increase was primarily due to higher selling, general andadministrative expenses attributable to our Oberon acquisition, and to higherSFAS 123(R) share-based payment expenses, higher bank fees associated withincreased banking operations, higher consultant costs, and higher recruitingcosts to expand our workforce.  Selling,general and administrative expenses represented 6.3% of revenues for the sixmonths ended September 26, 2008, as compared to 6.6% of revenues for thesix months ended September 30, 2007. This decrease was primarily theresult of continued realization of efficiencies in our corporateinfrastructure.

 

***Depreciation and Amortization.***  Our depreciation and amortization expenseincreased $1.0 million, or 29.9%, from $3.3 million for the six months ended September 30,2007, to $4.3 million for the six months ended September 26, 2008. Theincrease in depreciation and amortization was primarily due the amortization ofintangible assets associated with the acquisition of Oberon as well asdepreciation expense associated with capital expenditures and leaseholdimprovements over the past year.

 

***Interest Expense, Net.***  Our net interest expense decreasedslightly from the six months ended September 30, 2007 to the six monthsended September 26, 2008. The decrease was primarily due to a loweroverall interest rate, partially offset by increased interest expenseassociated with the borrowings under our Senior Credit Facility to finance theacquisition of Oberon.

 

***Provision for Income Taxes. ***Our effective tax rate increased by 0.4% from 39.8% for the six monthsended September 30, 2007, to 40.2% for the six months ended September 26,2008.  The increase was primarily attributableto a higher overall effective state income tax rate.

 

***Net Income.***  Our net income increased $5.3 millionfrom $11.7 million for the six months ended September 30, 2007, to $17.0million for the six months ended September 26, 2008. The primary reasonsfor the increase in net income were higher revenues and increased operatingincome as well as improved margins primarily due to a larger percentage oftime-and-material contracts.

 

**Liquidity and Capital Resources**

 

Asof September 26, 2008, we had approximately $13.5 million in availablecash. On July 15, 2008, we exercised, in part, the accordion optionfeature under the Senior Credit Facility to increase the aggregate commitmentunder the Revolver by $69.1 million. The exercise of the accordion featureincreased the amount of the lenders’ current aggregate commitment under theSenior Credit Facility from $186.5 million to $255.6 million, which as a resultincludes a $219.1 million Revolver and a $36.3 million Term Loan. Immediatelyfollowing the exercise of the accordion feature, we borrowed under the Revolverto fund the purchase of Oberon and to pay aggregate lender fees equal to $0.6million. All other terms of the Senior Credit Facility remained unchanged. Wehave both short-term and long-term liquidity requirements as described in moredetail below.

 

***Short-Term Liquidity Requirements.***  We generally consider our short-termliquidity requirements to consist primarily of funds necessary to finance thecosts of operations pending the billing and collection of accounts receivable.We expect to meet our short-term liquidity needs through existing cashbalances, cash provided by our operations and, if necessary, from borrowingsunder our Senior Credit Facility.

 

***Long-Term Liquidity Requirements.***  We generally consider our long-term liquidityrequirements to consist primarily of funds necessary to pay scheduled debtmaturities, non-recurring capital expenditures and the costs associated with 

 

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acquisitions that we may pursue. Historically, we have satisfied ourlong-term liquidity requirements through various sources of capital, includingcash provided by operations, equity offerings and borrowings under our SeniorCredit Facility.

 

We believe that these sources of capital will continue to be availableto us in the future to fund our long-term liquidity requirements. However, ourability to incur additional debt is dependent upon a number of factors,including our degree of leverage, the value of our unencumbered assets,borrowing restrictions imposed by existing lenders and the condition of thecredit markets as well as general market conditions. In addition, our abilityto raise funds through the issuance of equity securities is dependent upon,among other things, general market conditions and market perceptions about us.We will continue to analyze which source of capital is most advantageous to usat any particular point in time, but debt and equity financing may not beconsistently available on terms that are attractive, or at all.

 

We expect we will require additional borrowings, including borrowingsunder our Senior Credit Facility, to satisfy our long-term liquidityrequirements. Other sources of liquidity may be sales of equity securities.

 

***Cash Flows***

 

Accounts receivable represents our largest working capital requirement.We bill most of our customers monthly after services are rendered. Ouroperating cash flow is primarily affected by the overall profitability of ourcontracts, our ability to invoice and collect from our customers in a timelymanner, and our ability to manage our vendor payments.

 
| ** **                                | ** ** | **Six Months Ended**   | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | **September 26, 2008** | ** ** | **September   30, 2007** | ** ** |
| ** **                                | ** ** | **(in millions)**           | ** ** |
| Net cash provided by operating activities |       | $                                | 33.2       |   | $ | 0.7 |   |
| Net cash used in investing activities     |       | $                                | (172.9     | ) | $ | (32.3 | ) |
| Net cash provided by financing activities |       | $                                | 152.9      |   | $ | 18.8 |   |
|                                           |            |                                  |            |  |  |  |  |  |  |

 

Net cash provided by operating activities of $33.2 million for the six monthsended September 26, 2008 primarily reflected our net income plusdepreciation and amortization expenses and $2.8 million of share-based paymentexpense for that period, a $18.5 million decrease in accounts receivable and$2.2 million of income tax benefits from stock compensation, partially offsetby a $4.2 million decrease in accounts payable. For the six months ended September 30,2007, net cash provided by operating activities of $0.7 million consistedprimarily of net income plus depreciation and amortization expenses and a $6.6million increase in accrued expenses, partially offset by a $16.2 millionincrease in accounts receivable and a $3.6 million decrease in accountspayable.

 

Net cash used in investing activities of $172.9 million for the sixmonths ended September 26, 2008 consisted primarily of $167.8 million forthe purchase of Oberon and $5.1 million for leasehold improvements for a newfacility leased in Alexandria, Virginia. Net cash used in investing activitiesof $32.3 million for the six months ended September 30, 2007 consistedprimarily of $30.6 million for the purchase of Techrizon.

 

Net cash provided by financing activities of $152.9 million for the sixmonths ended September 26, 2008 consisted primarily of $152.2 million inborrowings under the revolving portion of our Senior Credit Facility to supportthe acquisition of Oberon and $0.8 million in proceeds from the exercise ofstock options. Net cash provided by financing activities of $18.8 million forthe six months ended September 30, 2007 consisted primarily of $18.5million in borrowings under the Revolver to support the acquisition ofTechrizon.

 

***Credit Facility andBorrowing Capacity***

 

On October 10, 2007, Stanley entered into an Amended and RestatedRevolving Credit and Term Loan Agreement with a group of lenders for whichSunTrust Robinson Humphrey, Inc. acted as sole book manager and leadarranger, SunTrust Bank acted as administrative agent and M&T Bank andBB&T Bank acted as co-documentation agents. The Amended Credit Agreementamended and restated the previous credit agreement entered into in February 2006.In connection with the Amended Credit Agreement, we paid fees of approximately$0.5 million.

 

The Amended Credit Agreement increased the amount of the lenders’aggregate commitment under the Senior Credit Facility from $87.0 million to$187.0 million, which includes a $150.0 million Revolver and a $37.0 millionTerm Loan. The Term Loan matures on January 31, 2012 and the Revolvermatures on October 31, 2012. The Amended Credit Agreement also increasedthe letter of credit commitment from $5.0 million to $10.0 million andincreased the swing line facility from $5.0 million to $20.0 million, both ofwhich are part of the Revolver and have the same maturity date as the Revolver.  The Amended Credit Agreement also eliminatedthe requirement to hedge a portion of the Company’s outstanding indebtednessunder its Senior Credit Facility.

 

On July 15, 2008, Stanley exercised, in part, the accordion optionfeature under the Senior Credit Facility to increase the aggregate commitmentunder the Revolver by $69.1 million.  The exercise of the accordionfeature increased the amount

 

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of the lenders’ current aggregate commitment under the Senior CreditFacility from $186.5 million to $255.6 million, which is comprised of a $219.1million Revolver and a $36.3 million Term Loan. Stanley paid aggregate lender fees equal to $0.6 million in connectionwith the exercise of the accordion feature.

 

Immediately following the exercise of the accordion feature under theSenior Credit Facility, we borrowed under the Revolver to fund the purchaseprice for our acquisition of Oberon.

 

Under the terms of the Amended Credit Agreement, we are entitled torequest another increase in the size of the Revolver by an amount not greaterthan $55.9 million in the aggregate. If any lender elects not to increase itscommitment under the Senior Credit Facility, we may designate another bank orother financial institution to become a party to the Senior Credit Facility.

 

The Amended Credit Agreement also contains a number of affirmative andrestrictive covenants, including limitations on mergers, consolidations anddissolutions; sales of assets; investments and acquisitions; indebtedness andliens; repurchases of shares of capital stock and options to purchase shares ofcapital stock; transactions with affiliates; sale and leaseback transactions;and restricted payments.

 

In addition, the Amended Credit Agreement provides that we are requiredto meet the following financial covenants:

 

·                  a fixed chargecoverage ratio as of the end of any fiscal quarter of not less than 1.35 to1.00, based upon the ratio of (i) consolidated EBITDA (as defined in theAmended Credit Agreement) less the actual amount paid by us and oursubsidiaries in cash on account of capital expenditures and taxes to (ii) consolidatedinterest expense for such period, scheduled principal payments required to bemade on consolidated total debt during such period and certain restrictedpayments paid during such period, in each case measured for the fourconsecutive fiscal quarters ending on or immediately prior to such date; and

 

·                  a maximumleverage ratio not greater than 3.75 to 1.00, based upon the ratio of (i) consolidatedtotal debt to (ii) consolidated EBITDA (as defined in the Amended CreditAgreement).

 

As of September 26, 2008, we had $36.3 million of Term Loanindebtedness and $152.2 million of Revolver indebtedness outstanding under ourSenior Credit Facility. As of September 26, 2008, our borrowingavailability under our $219.1 million Revolver was $66.7 million (includingoutstanding letters of credit). As of September 26, 2008, we were in compliance with allcovenants under our Senior Credit Facility.The obligations under our Senior Credit Facility are unconditionallyguaranteed by each of our existing and subsequently acquired or organizedsubsidiaries and secured subsidiaries and are secured on a first-priority basisby security interests (subject to permitted liens) in substantially all assetsowned by us and each of our subsidiaries, including the shares of capital stockof our subsidiaries, subject to certain exceptions.

 

**Capital Expenditures**

 

Our capital expenditures were $5.0 million and $1.7 million for the sixmonths ended September 26, 2008 and September 30, 2007, respectively.Substantially all of these expenditures consisted of leasehold improvements andpurchases of office equipment.

 

**Off-Balance Sheet Arrangements**

 

As of September 26, 2008, we do not have any off-balance sheetarrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

 

**Recently Adopted Accounting Pronouncements**

 

In September 2006, the FASB issued Statement of FinancialAccounting Standards No. 157,*FairValue Measurements* (“SFAS 157”). SFAS 157 provides guidance formeasuring the fair value of assets and liabilities. It requires additionaldisclosures related to the extent to which companies measure assets andliabilities at fair value and the information used to measure fair value. Afair value hierarchy was established to classify the inputs used in measuringfair value. In February 2008, the FASB issued FASB Staff Position(FSP) FAS 157-2 deferring the effective date of SFAS 157 to fiscal yearsbeginning after November 15, 2008 for nonfinancial assets and nonfinancialliabilities, except for items that are recognized or disclosed at fair value inthe financial statements on a recurring basis (at least annually). Effective April 1,2008 we categorized our financial assets and liabilities measured at fair valueby level in the hierarchy based on the priority of the inputs used in thevaluation technique to measure fair value. See Note 2 to the CondensedConsolidated Financial Statements in Item 1 for expanded disclosurerequirements. We are assessing the impact the adoption of SFAS 157 fornonfinancial assets and nonfinancial liabilities will have on our financialposition, results of operations or cash flows.

 

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**Recently Issued Accounting Standards**

 

In December 2007, the FASB issued Statement ofFinancial Accounting Standards No. 141 (revised 2007), *BusinessCombinations* (“SFAS  141R”). SFAS 141R moves closer to a fairvalue model by requiring the acquirer to measure all assets acquired and allliabilities assumed at their respective fair values at the date of acquisition,including the measurement of noncontrolling interests at fair value. TheStatement also establishes principles and requirements as to how the acquirerrecognizes and measures goodwill acquired in a business combination or a gainfrom a bargain purchase and determines what information to disclose to enableusers of the financial statements to evaluate the nature and financial effectsof the business combination. In addition, SFAS 141R significantly changesthe accounting for business combinations in a number of areas, including thetreatment of contingent consideration, preacquisition contingencies, in-processresearch and development, restructuring costs, and requires the expensing ofacquisition-related costs as incurred.

 

Theeffective date of SFAS 141R is for fiscal years beginning after December 15,2008. For transactions consummated after the effective date of SFAS 141R,prospective application of the new standard is applied. For businesscombinations consummated prior to the effective date of SFAS 141R, the guidancein SFAS 141 is applied.

 

InDecember 2007, the FASB issued Statement of Financial Accounting StandardsNo. 160, *Noncontrolling Interests in ConsolidatedFinancial Statements – An Amendment of ARB No. 51* (“SFAS 160”).SFAS 160 establishes new accounting and reporting standards for thenon-controlling interest in a subsidiary and for the deconsolidation of asubsidiary. SFAS 160 is effective for fiscal years beginning on or after December 15,2008. We do not currently expect the adoption of SFAS 160 to have a materialimpact on our consolidated financial statements.

 

InMarch 2008, the FASB issued Statement of Financial Account Standards No. 161,*Disclosure about Derivative Instruments and hedgingActivities – An Amendment of FASB Statement No. 133* (“SFAS 161”).  SFAS 161 expands and amends the disclosurerequirement for derivative instruments and hedging activities.  SFAS 161 is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008. We are in the process of determining what effect, if any, the applicationof the provisions of SFAS 161 will have on our financial position, results ofoperations or cash flows.

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Our principal exposure to market risk relates to changes in interestrates. From time to time, we enter into interest rate swap agreements toeffectively limit exposure to interest rate movements within the parameters ofour interest rate hedging policy. As of September 26, 2008, all of theoutstanding debt under our Senior Credit Facility, with the exception of thatportion covered by an interest rate swap, was subject to floating interest raterisk. In October 2006, we entered into an interest rate swap agreementcovering fifty percent of our term indebtedness under which the swap and termdebt maturities match. Even after giving effect to this agreement, we areexposed to risks due to fluctuations in the market value of this agreement andchanges in interest rates with respect to the portion of our Senior CreditFacility that is not covered by this agreement. A hypothetical increase in theinterest rate of 100 basis points would have increased our six month interestexpense on that portion of our outstanding debt not covered by the interestrate swap by $0.4 million.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

Asof September 26, 2008, under the supervision and with the participation ofour management, 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-15 of theSecurities Exchange Act of 1934, as amended, or Exchange Act. Based on thisevaluation, our chief executive officer and our chief financial officer haveconcluded that our disclosure controls and procedures are effective inproviding reasonable assurance that the information required to be disclosed inthis report has been recorded, processed, summarized and reported as of the endof the period covered by this report.  Inevaluating the disclosure controls and procedures, management recognized thatany controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectivesand management necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

 

**Changes in Internal Control over Financial Reporting**

 

Therehas not been any change in our internal control over financial reporting (asdefined in Rule 13a-15(f) of the Exchange Act) identified inconnection with the evaluation required by Rule 13a-15(d) under the ExchangeAct during the quarter ended September 26, 2008 that has materiallyaffected, or is reasonably likely to materially affect, those controls.

 

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**Limitations on the Effectiveness of Controls**

 

Ourmanagement, including our chief executive officer and chief financial officer,does not expect that our disclosure controls and procedures and internalcontrols over financial reporting will prevent all error and all fraud. Acontrol system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met, and our management has concluded that our disclosure controls andprocedures and internal controls over financial reporting were effective at areasonable assurance level as of September 26, 2008. Further, the designof a control system must reflect the fact that there are resource constraints,and the benefits of controls must be considered relative to their costs.Because of the inherent limitations in all control systems, no evaluation ofcontrols can provide absolute assurance that all control issues and instancesof fraud, if any, with the Company have been detected. These inherentlimitations include the realities that judgments in decision-making can befaulty and that breakdowns can occur because of simple error or mistake.Additionally, controls can be circumvented by the individual acts of somepersons, by collusion of two or more people or by management override of thecontrols.

 

Thedesign of any system of controls also is based in part upon certain assumptionsabout the likelihood of future events, and there can be no assurance that anydesign will succeed in achieving its stated goals under all potential futureconditions. Over time, a control may become inadequate because of changes inconditions or the degree of compliance with the policies or procedures maydeteriorate. Because of the inherent limitations in a cost-effective controlsystem, misstatements due to error or fraud may occur and may not be detected.

 

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**PART II:OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

Neither we, nor any of our subsidiaries, are currently subject to anymaterial legal proceedings, nor, to our knowledge, is any material legalproceeding threatened against us.

 

**ITEM 1A. RISK FACTORS**

 

Inaddition to the other information set forth in this report, you shouldcarefully consider the risks discussed in “Part I, Item1A.  Risk Factors” in our Form 10-K for the fiscal year ended March 31,2008. These risks and uncertainties have the potential to affect materially ourbusiness, financial condition, results of operation, cash flows and futureprospects.

 

Otherthan as described below, we do not believe that there have been any materialchanges to the risk factors previously disclosed in our Form 10-K for thefiscal year ended March 31, 2008.

 

·                  Effectiveas of September 24, 2008, we are party to a collective bargainingagreement (“CBA”) with the United Electrical, Radio and Machine Workers ofAmerica labor union, which sets forth the wages, benefits and workingconditions for our employees performing work on an engagement with USCIS at theCalifornia Service Center in Laguna Nigel, California. We have submitted theCBA to our customer for processing and, in turn, our customer has forwarded theCBA to the Department of Labor for approval of new wage determinations forcertain labor categories performing work under the contract.  Upon processing by the Department of Labor,we will submit an equitable price adjustment to the customer.  Until final approval of the new wagedeterminations and our equitable price adjustment, increased wages in certainlabor categories could negatively affect our profitability.

 

·                  TheUnited States and worldwide capital and credit markets have recentlyexperienced significant price volatility, dislocations and liquidity disruptions,which have caused market prices of many stocks to fluctuate substantially andthe spreads on prospective debt financings to widen considerably. Thesecircumstances have materially impacted liquidity in the financial markets,making terms for certain financings less attractive, and in some cases haveresulted in the unavailability of financing. Continued uncertainty in thecapital and credit markets may negatively impact our business, including ourability to access additional financing at reasonable terms, which maynegatively affect our ability to make future acquisitions. A prolonged downturnin the financial markets may cause us to seek alternative sources ofpotentially less attractive financing, and may require us to adjust ourbusiness plan accordingly. These events also may make it more difficult orcostly for us to raise capital through the issuance of our equity securities.The disruptions in the financial markets may have a material adverse effect onthe market value of our common stock and other adverse effects on our business.

 

**ITEM 2. UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

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

 

The Annual Meeting of the Company’s Stockholders washeld on August 13, 2008. The stockholders voted and approved the followingmatters:

 

*The election of ninedirectors to hold office until the 2009 Annual Meeting of Stockholders:*

 
| **Nominee**                               | ** ** | **Shares Voted For** | ** ** | **Votes  Withheld** | ** ** |
|-------------------------------------------|------------|--------------------------------|------------|---------------------|------------|
| Mr. Philip O. Nolan                  |       | 21,638,024                     |       | 607,574             |       |
| Mr. George H. Wilson                 |       | 21,646,830                     |       | 598,768             |       |
| Mr. William E. Karlson               |       | 21,646,777                     |       | 598,821             |       |
| Mr. Lawrence A. Gallagher            |       | 20,879,862                     |       | 1,365,736           |       |
| Mr. James C. Hughes                  |       | 21,753,615                     |       | 491,983             |       |
| Lt. General Richard L. Kelly, USMC (Ret.) |       | 21,770,562                     |       | 475,036             |       |
| Mr. Charles S. Ream                  |       | 21,770,665                     |       | 474,933             |       |
| Mr. John P. Riceman                  |       | 21,753,615                     |       | 491,983             |       |
| General Jimmy D. Ross, USA (Ret.)         |       | 21,753,515                     |       | 492,083             |       |

 

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*The ratification of theappointment of Deloitte & Touche LLP as independent registered publicaccounting firm for our fiscal year ending March 31, 2009:*

 
| ** **         | ** ** | **Number of Shares** | ** ** | ** **    | ** ** |
|--------------------|------------|--------------------------------|------------|---------------|------------|
| **Voted For** | ** ** | **Voted Against**         | ** ** | **Abstained** | ** ** |
| 22,184,817         |       | 54,397                         |       | 6,384         |       |

 

**ITEM 5. OTHER INFORMATION**

 

None.

 

**ITEM 6. EXHIBITS**

 

See the exhibit index.

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned.

 
|       | **STANLEY, INC.**                                     |
|------------|-------------------------------------------------------|
|       | ** **                                            |
| ** ** | ** **                                            |
|       | **/s/ PHILIP O. NOLAN**                               |
|       | Philip O. Nolan                                       |
|       | Chairman, President and Chief Executive Officer       |
|       | (Principal Executive Officer)                         |
|       | October 30, 2008                                 |
|       |                                                  |
|       |                                                  |
|       | **/s/ BRIAN J. CLARK**                                |
|       | Brian J. Clark                                        |
|       | Executive Vice President, Chief Financial Officer and |
|       | Treasurer                                             |
|       | (Principal Financial Officer)                         |
|       | October 30, 2008                                 |

 

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**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                 |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                                                      |
| 3.1                  |       | Amended and  Restated Certificate of Incorporation of Stanley, Inc. (incorporated by  reference to Exhibit 3.1 to the Company’s Form 10-K for the fiscal  year ended March 31, 2008)                                   |
|                 |       |                                                                                                                                                                                                                                            |
| 3.2                  |       | Amended and  Restated Bylaws of Stanley, Inc. (incorporated by reference to  Exhibit 3.2 to the Company’s Form 10-K for the fiscal year ended  March 31, 2008)                                                         |
|                 |       |                                                                                                                                                                                                                                            |
| 10.1                 |       | Amendment to  Amended and Restated Revolving Credit and Term Loan Agreement, dated  August 4, 2008 (incorporated by reference to Exhibit 10.10 to the  Company’s Form 10-Q for the fiscal quarter ended June 27, 2008) |
|                 |       |                                                                                                                                                                                                                                            |
| 31.1                 |       | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.*                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                            |
| 31.2                 |       | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.*                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                            |
| 32.1                 |       | Certification  of Chief Executive Officer and Chief Financial Officer pursuant to  Section 906 of The Sarbanes-Oxley Act of 2002.*                                                                                                         |

 

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*Filed herewith

 

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